A2 Micro notes

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20 Terms

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Scarcity
Is the basic economic problem and it is caused by unlimited wants and limited resources.
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Needs
Are goods and services without which we cannot survive – ‘necessities’; e.g. food and drink, shelter, warmth, clothing, medical care. Needs are assumed to be limited.
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Wants
Are goods and services that we desire but which are net necessary for survival – ‘luxuries’; e.g. motor cars, mobile phones, foreign holidays. Wants are assumed to be unlimited.
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Economic Goods

Are scarce: i.e. they are limited in supply. Resources have to be used to produce them; e.g. motor cars, health care. Have an opportunity cost

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Free Goods

Are not scarce: i.e. they are unlimited in supply. Resources do not have to be used to produce them; e.g. fresh air, sunshine, the ‘countryside’. Have no opportunity cost

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Sustainability
Is ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’ (Brundtland Commission, 1987)
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Opportunity Cost

Is the value of any economic choice in terms of the next best alternative foregone as a result of making that choice. Factors of Production- are the economic resources used to produce goods and services: land (natural resources), labour (human resources), capital (man-made resources) and enterprise (risk bearing). Note – free goods do not use any resources and have zero opportunity cost.

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Primary Production
‘Extracts’ raw materials from nature; e.g. agriculture, forestry and fishing; mining and quarrying.
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Secondary Production
Processes or manufactures raw materials into semi-finished and finished products; e.g. manufacturing; energy and water supply; construction.
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Tertiary Production
Is services that provide support to all stages of the production process, as well as being directly consumed; e.g. distribution and hospitality; transport and communications; financial and business services; estate management; public and other services
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Consumer Goods

Are bought by households and they satisfy wants directly; e.g. goods such as food and clothing.

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Capital Goods-
Are bought by firms and they satisfy wants indirectly by producing other goods and services; e.g. machine tools, factories, office space.
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The Division of Labour
Is where the production of goods and services is broken down into a series of specialised tasks. Each worker only carries out a small part of the overall production process; e.g. motor cars on a production line.
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Specialisation
Is where individuals, businesses and whole economies are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others.
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Money
Is anything that is generally accepted in exchange for goods and services or in settlement of a debt.
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The Production Possibility Curve (PPC)
Shows the combination of goods and services that an economy could produce if all of its resources – capital and labour – were fully employed and assuming a constant state of technology.
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Pareto-efficiency
Occurs where it is impossible to make one person better off without making another person worse off: i.e. the economy is on the PPC.
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Diminishing Returns
Occurs where an increase in the amount of labour coupled with a fixed amount of capital and land leads to an increase in the output of goods, initially at an increasing rate and then at a decreasing rate. This is the Law of Diminishing Returns.
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Economic Growth
Is an increase in the actual and the potential output of goods and services produced by an economy. It can be shown by a rightward shift in the production possibility curve.
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Production

Any economic activity that leads to a flow of goods and services for which people are willing and able to pay.