1.1 Nature of Economics - Basic Concepts/Definitions Flashcards
Scarcity
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).
Factor of Production (FOP)
A productive resource eg. land, labour, capital, enterprise.
Capital Goods
Man-made aids to production eg. machinery or building
Consumer Goods
Goods used by households.
They can be consumer durable goods (toys, cutlery) or consumer non-durable goods (food, shampoo)
Enterprise
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.
Human Capital
The ability of workers to add value to production.
Also, a way of likening the factor of production of labour to capital.
Renewable resources
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
Non-renewable resources
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.
Investment
Spending by firms on new capital stock or repair of existing stock.
Depreciation (of capital)
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.
Opportunity cost
The value/benefit of the next best preferred option forgone.
Production Possibility Frontier (PPF)
The combinations of two goods which an economy is capable of producing using all its resources in the most efficient way.
Specialisation
Where a factor of production is devoted to a specific job in the production process
Division of labour
Where labour specialises in the performance of a particular part of the production process.
Money
Whatever is generally acceptable in exchange for goods and services or labour.
Positive Economics
The study of propositions which can be verified by numerical data from the real world.
Normative Economics
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)
Economic Systems
The institutional means for deciding how scarce resources are allocated in an economy eg. free market, mixed, command
Mixed Economy
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.
Capitalist/Free Market Economy
Where markets determine resource allocation with minimal state intervention.
The state usually protects private property with a judicial system.
Command/Planned Economy
Where resources are allocated according to centralised state planning.
Invisible Hand
Where resources are allocated by the decentralised decision making of consumers and producers acting through markets, without any centralised/state planning.
Consumer Sovereignty
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.
Laissez Faire
Where governments do not interfere with the functioning of markets. Each person is free to pursue their own economic self-interest within the law
