Unit 1, Basic economic ideas and resource allocation

The fundamental economic problem

The situation of the relative scarcity of resources in relation to the unlimited wants and needs of people

Factors of Production

Resources or inputs available in an economy that are used in the production of goods and services

Opportunity cost

The cost of the next best alternative foregone when a choice is made.

What to Produce

Which goods and services, as well as how much of them to produce

How to Produce

How to get the maximum usage out of the resources available

For whom to produce?

Which individuals or groups will receive the goods and services produced and how to allocate them based on needs and preferences.

Land (FoP)

The natural resources used in production, e.g. soil, minerals, water, rewarded with rent

Enterprise (FoP)

The factor of production that involves the organization of the other factors of production and assumption of risks in creating goods or services, rewarded with profit.

Labour (FoP)

The human effort used in production, including physical and mental work, rewarded with wages.

Capital

The man-made resources used in production, such as machinery, tools, and buildings, rewarded with interest.

Positive statement

Factual statements about the economy that do not include a value judgement and can be proven with empirical evidence

Normative statement

Statements that express what ought to be in the economy based on personal opinions or value judgements, and which cannot be proven

Short run

Time period in which a firm can change at least one, but not all factor inputs

Long run

Time period in which all factors of productions are variable, but with a constant, such as the state of technology

Very long run

Time period in which all factors of production, as well as the state of the economy and technology is variable

Ceteris Paribus

A Latin phrase meaning "all other things being equal," used in economics to isolate the relationship between two variables by holding all other variables constant.

Physical Capital

Tangible assets used in production, such as machinery and buildings.

Human capital

The skills, knowledge, and experience possessed by an individual or workforce that contribute to economic productivity.

Specialisation

The process by which individuals, firms and economies concentrate on producing those goods and services where they have an advantage over others

Division of labour

When a manufacturing process is split into a sequence of tasks, leads to specialisation and greater output per worker but can also lead to dissatisfaction

Market economy

An economic system that is controlled by the market forces of supply and demand, with minimal or no government intervention

Command / planned economy

An economic system in which the government or a central authority makes all significant economic decisions, with high levels of government intervention

Mixed economy

An economic system that combines elements of both a market economy and a command economy (with a private and public sector), where both market forces and government intervention play roles in decision-making.

Private sector

The part of an economy under private ownership

Public sector

The part of an economy under government ownership

Productive Possibility Curve (PPC)

A graphical representation that shows the maximum possible output combinations of two goods or services that can be produced within a given economy, considering fixed resources and technology.

Shift to the right of the PPC (meaning)

Indicates an increase in an economy's productive capacity, often due to growth in resources or improvements in technology.

Shift to the left of the PPC (meaning)

Indicates a decrease in an economy's productive capacity, often due to a decline in resources or negative technological changes.

Productive capacity

The maximum output that can be produced when all resources are used fully

Excludability

The property of a good or service that allows owners to prevent others from using it without permission.

Rivalry

Where consumption by one person of a good or service reduces the availability of the good or service for others

Non-rival

Where consumption by one person does not reduce consumption by someone else

Private goods

Goods that are both excludable and rival in consumption, meaning that owners can restrict access and consumption by others reduces availability.

Public goods

Goods that are non-excludable and non-rival in consumption, meaning that one person's use does not diminish another's use and access cannot be restricted.

Free goods

Goods that are not scarce and have zero opportunity cost

Quasi-public good

a good that has some but not the full characteristics of a public good

Free rider problem

occurs when individuals benefit from resources, goods, or services without paying for them, leading to under-provision of those goods.

Merit good

A good that is thought to be desirable for consumers but which in underprovided by the market due to information failure

Demerit good

A good that is thought to be undesirable for consumers but which is overprovided by the market due to information failure

Information failure

A situation where consumers do not have full or complete information when making decisions about a good or service, leading to suboptimal choices and market failures.