1.1 Nature of Economics - Basic Concepts/Definitions

Question 1

Scarcity

Answer 1

Where wants for a product exceed the amount available.
Inevitable consequence of man’s innate desire to have more (unlimited wants), leads to need for rationing system, like prices (scarce goods have higher prices).

Question 2

Factor of Production (FOP)

Answer 2

A productive resource eg. land, labour, capital, enterprise.

Question 3

Capital Goods

Answer 3

Man-made aids to production eg. machinery or building

Question 4

Consumer Goods

Answer 4

Goods used by households.
They can be consumer durable goods (toys, cutlery) or consumer non-durable goods (food, shampoo)

Question 5

Enterprise

Answer 5

The risk-taking role undertaken by owners of a business as they combine other factors of production in the pursuit of profit.
Also, a key factor of production in a market economy.

Question 6

Human Capital

Answer 6

The ability of workers to add value to production.
Also, a way of likening the factor of production of labour to capital.

Question 7

Renewable resources

Answer 7

Category of natural resources that can naturally renew themselves fast enough to replenish stocks of such resources used up in economic extraction. eg. fish stocks, water, solar and wind power, timber

Question 8

Non-renewable resources

Answer 8

Category of natural resources that will not naturally renew themselves fast enough to prevent economic extraction, which therefore leads to a fall in stocks over time. eg. oil and coal.

Question 9

Investment

Answer 9

Spending by firms on new capital stock or repair of existing stock.

Question 10

Depreciation (of capital)

Answer 10

The rate at which capital loses value over time.
Occurs due to wear and tear or by technological obsolescence, meaning gross investment must exceed depreciation for capital stock to increase.

Question 11

Opportunity cost

Answer 11

The value/benefit of the next best preferred option forgone.

Question 12

Production Possibility Frontier (PPF)

Answer 12

The combinations of two goods which an economy is capable of producing using all its resources in the most efficient way.

Question 13

Specialisation

Answer 13

Where a factor of production is devoted to a specific job in the production process

Question 14

Division of labour

Answer 14

Where labour specialises in the performance of a particular part of the production process.

Question 15

Money

Answer 15

Whatever is generally acceptable in exchange for goods and services or labour.

Question 16

Positive Economics

Answer 16

The study of propositions which can be verified by numerical data from the real world.

Question 17

Normative Economics

Answer 17

The study of propositions which cannot be verified by numerical data from the real world and require value judgements. (They can’t be proved true or false)

Question 18

Economic Systems

Answer 18

The institutional means for deciding how scarce resources are allocated in an economy eg. free market, mixed, command

Question 19

Mixed Economy

Answer 19

Where resource allocation is undertaken by state planning and market forces, depending on the product.
The government address the problems of market failure, otherwise markets function with minimal intervention.

Question 20

Capitalist/Free Market Economy

Answer 20

Where markets determine resource allocation with minimal state intervention.
The state usually protects private property with a judicial system.

Question 21

Command/Planned Economy

Answer 21

Where resources are allocated according to centralised state planning.

Question 22

Invisible Hand

Answer 22

Where resources are allocated by the decentralised decision making of consumers and producers acting through markets, without any centralised/state planning.

Question 23

Consumer Sovereignty

Answer 23

The production of goods is directed by consumer demand.
A key advantage of free market systems since resources are not wasted on what isn’t wanted and firms compete by cutting costs leading to productive efficiency.

Question 24

Laissez Faire

Answer 24

Where governments do not interfere with the functioning of markets. Each person is free to pursue their own economic self-interest within the law

Question 25

Rationing

Answer 25

Key benefit of the price mechanism/free market system where scarce goods go to whoever values them most (only those who are willing to meet the market price).

Question 26

Incentives

Answer 26

Key benefit of the price mechanism/free market system where economic agents are able to respond to the information contained in market prices eg. consumers are encouraged to cut consumption when products get more expensive and seek a substitute.

Question 27

Signalling

Answer 27

Key benefit of the price mechanism/ free market system where entrepreneurs are incentivised to shift production away from products with declining profits towards products with rising profits, or where workers are incentivised to move jobs to where wage rates are rising.