1.1 Economic Methodology and the Economic Problem

Allocative Efficiency

When economic resources are utilised to produce the combination of goods and services that maximise economic welfare

Allocative price function

Prices allocate resources away from markets with excess supply to markets with excess demand

Capital/producer goods

goods used in the production of other goods

Choice

Selecting one of multiple alternatives when deciding how to allocate scarce resources

Consumer good

Goods consumed by households & individuals, used to satisfy needs and wants.

Economic Welfare

The economic satisfaction/well-being of an individuals/households/groups in an economy

Factors of Production

Inputs of the production process, such as land, labour, capital and enterprise

Finite Resources

Non-renewable resources that becomes increasingly scarce

Fundamental Economic Problem

Deciding how to best allocate scarce resources to maximise overall economic welfare

Imperfect Information

When individuals lack the information to make the best decision

Incentive price function

Prices create incentives for people to adjust their economic transactions

Need

Something necessary for human survival e.g food, shelter

Normative Statement

Statements including value judgements that cannot be easily proved/disproved

Opportunity Cost

Loss of other alternatives due to selecting one of a set of options

Positive Statement

Statements including facts that can be proved/disproved

PPF (Production Possibility Frontier)

A curve displaying the various possible combinations of two products that can be produced with finite resources

Rationing price function

Prices rise to ration demand for goods

Renewable resource

Restorable resource that can be replenished

Scarcity

Resulting from the concept of infinite wants and needs, yet limited resources

Signalling price function

Prices provide information to sellers and buyers, influencing economic decisions

Trade

Buying and selling of goods and services

Want

Something desirable, yet not necessary