All definitions

wants

desires for goods and services

resources

factors used to produce goods and services

the economic problem

unlimited wants exceeding finite resources

scarcity

a situation where there is not enough to satisfy everyone’s wants

economic good

a product which requires resources to produce it and therefore has an opportunity cost

free good

a product which does not require any resources to make it and so does not have an opportunity cost

factors of production

the economic resources of land, labour, capital and enterprise

land

gifts of nature available for production

labour

human effort used in producing goods and services

capital

human made goods used in production

consumer goods

goods and services purchased by households for their own satisfaction

enterprise

risk bearing and key decision making in business

occupationally mobile

capable of changing use

geographically immobile

incapable of moving from one location to another

mobility of labour

the ability of labour to change where it works or in which occupation

mobility of capital

the ability to change where capital is used or in which occupation

mobility of enterprise

the ability to change where enterprise is used or in which occupation

entrepreneur

a person who bears the risks and makes the key decisions in a business

labour force

people in work and those actively seeking work

productivity

the output per factor of production in an hour

labour productivity

output per worker hour

output

goods and services produced by the factors of production

investment

spending on capital goods

gross investment

total spending on capital goods

depreciation

the value of capital goods that have worn out or become obsolete

net investment

gross investment minus depreciation

negative net investment

reduction in the number of capital goods caused by some obsolete and worn out capital goods not being replaced

opportunity cost

the next best alternative foregone when making a decision

production possibility curves

a curve that shows the maximum output of two types of products and combinations of those products that can be produced with existing resources and technology

microeconomics

the study of the behaviour and decisions of households and firms, and the performance of individual markets

macroeconomics

the study of the whole economy

market

an arrangement which brings buyers into contact with sellers

economic agents

those who undertake economic activities and make economic decisions

private sector

firms owned by shareholders and individuals

economic system

the institutions, organisations and mechanisms that influence economic behaviour and determine how resources are allocated

planned economic system

an economic system where the government makes the crucial decisions, land and capital are state-owned and resources are allocated by directives

directives

state instructions given to state-owned enterprises

mixed economic system

an economy in which both the private and public sectors play an important role

market economic system

an economic system where consumers determine what is produced, resources are allocated by the price mechanism and land and capital are privately owned

price mechanism

the way the decisions made by households and firms interact to decide the allocation of resources

capital - intensive

the use of a high proportion of capital relative to labour

labour - intensive

the use of a high proportion of labour relative to capital

demand

the willingness and ability to buy a product

supply

the willingness and ability to sell a product

market equilibrium

a situation where demand and supply are equal at the current price

market disequilibrium

a situation where demand and supply are not equal at the current price

market demand

total demand for a product

aggregate

the addition of individual components to arrive at a total amount

extension in demand

a rise in the quantity demanded caused by a fall in the price of the product itself

contraction in demand

a fall in the quantity demanded caused by a rise in the price of the product itself

changes in demand

shifts in the demand curve

increase in demand

a rise in demand at any given price, causing the demand curve to shift to the right

determinants of demand (CATPIS)

- price of complement - advertising - trends / fashions / tastes - price - not a determinant - income - price of substitutes

decrease in demand

a fall in demand at any given price, causing the demand curve to shift to the left

normal goods

a product whose demand increases when income increases and decreases when income falls

inferior goods

a product whose demand decreases when income increases and increases when income falls

substitute

a product that can be used in place of another

complement

a product that is used together with another product

ageing population

an increase in the average age of the population

birth rate

the number of live births per thousand of the population in a year

market supply

total supply of a product

extension in supply

a rise in the quantity supplied caused by a rise in the price of the product itself

contraction in supply

a fall in the quantity supplied caused by a fall in the price of the product itself

change in supply

changes in supply conditions causing shifts in the supply curve

increase in supply

a rise in supply at any given price, causing the supply curve to shift to the right

decrease in supply

a fall in supply at any given price, causing the supply curve to shift to the left

unit cost

the average cost of production. It is found by dividing total cost by output

improvements in technology

advances in the quality of capital goods and methods of production

direct taxes

taxes on the income and wealth of individuals and firms

indirect taxes

taxes on goods and services

tax

a payment to the government

subsidy

a payment by a government to encourage the production or consumption of a product

equilibrium price

the price where demand and supply are equal

excess supply

the amount by which supply is greater than demand (surplus)

disequilibrium

a situation where demand and supply are not equal

excess demand

the amount by which demand is greater than supply (shortage)

price elasticity of demand

a measure of the responsiveness of the quantity demanded to a change in price

elastic demand

when the quantity demanded changes by a greater percentage than the change in price

inelastic demand

when the quantity demanded changes by a smaller percentage than the change in price

perfectly elastic demand

when a change in price causes a complete change in the quantity demanded

perfectly inelastic demand

when a change in price has no effect on the quantity demanded

unit elasticity of demand

when a change in price causes and equal change in the quantity demanded, leaving total revenue unchanged

price elasticity of supply

the measure of the responsiveness of the quantity supplied to a change in price

elastic supply

when the quantity supplied changes by a greater percentage than the change in price

inelastic supply

when the quantity supplied changes by a smaller percentage than the change in price

perfectly inelastic supply

when a change in price has no effect on the quantity supplied

perfectly elastic supply

when a change in price causes a complete change in quantity supplied

unit PES

when a change in price causes an equal percentage change in the quantity supplied

public sector

the part of the economy controlled by the government

state-owned enterprises

organisations owned by the government which sell products

privatisation

the sale of public sector assets to the private sector

price mechanism

the system by which the market forces of demand and supply determine prices

market failure

market forces resulting in an inefficient allocation of resources

causes of market failure

- free riders - consumers and private sector firms only take into account the costs and benefits to themselves - monopoly seller

free rider

someone who consumes a good or service without paying for it

allocative efficiency

when resources are allocated to produce the right products in the right quantities

productive efficiency

when products are produced at the lowest possible cost and making full use of resources

dynamic efficiency

efficiency occurring over time as a result of investment and innovation

advantages of the market economic system

- very responsive to changes in consumer demand, consumers determine what is produced - consumers can choose which products to buy and which firms to buy from - quality may be higher, competitive pressure on firms causes them to want higher profit from higher quality products

third parties

those not directly involved in producing or consuming a product