Basic Economic Ideas and Resource Allocation Flashcards
Opportunity cost
The benefit that is foregone from choosing one use of scarce resources over the next best alternative use of those same resources.
Basic Economic Problem
Resources are scarce and human wants are infinite. There are not enough resources in the world to produce all the goods and services to satisfy all our needs and wants.
Ceteris Paribus
Assuming all other conditions remain the same, other things being equal
3 Basic questions of Economics
- What will be produced?
- How will it be produced?
- Who will it be produced for?
Decision making at the margin
The assumption that people make decisions based on marginal changes. The margin is the change in a variable caused by an increase of one unit of another variable.
Short run
The period of production for when at least one factor of production is fixed.
Long run
The period of production for when all factors of production are variable. No factor of production is fixed.
Positive statement
Objective statements that can be tested by referring to available evidence.
Normative statement
Subjective statements which contain a value judgement or opinions.
Factors of production
The scarce resources (inputs) used to make things that people want or need (outputs). These factors are Capital, Land, Labour, Entrepreneurship
Enterprise
Skills possessed by successful entrepreneurs: business know-how and the ability to organise productive activities. An entrepreneur is a person with enterprise that is willing to take risks and decisions necessary to organise scarce resources into firms to produce goods and services.
Capital
Human-made resources including machinery, tools and factory buildings, used in the production of other goods and services.
Land
All natural resources used to produce other goods and services
Labour
Human effort used up in productive activities
Free Market economy
An economy where goods and services are distributed solely based on market forces of demand and supply by consumers and producers. Associated with capitalist economy
Mixed economy
An economy with elements of market system and planned economy. The economy functions based on the market system with some planning by the government to overcome market failures. Some resources are owned and controlled by private individuals and firms while others are owned and controlled by the government.
Planned or Command economy
An economy where production and distribution of goods and services are planned by a central planner usually the government. Associated with communist economy.
Production Possibility Curve (PPC)
The PPC shows all the possible combinations of two goods that an economy is able to produce with its existing resources and technology if they are fully and efficiently used.
What are the 4 functions of money?
- Medium of exchange
- Measure of Value/Unit of Account
- Store of value
- Standard of deferred payment
Bartering
The act of swapping items in exchange for other items through a process of bargaining and negotiation.
Double coincidence of wants
A person that wants to trade an item through bartering must find another person that wants the item he is willing to give. Two people engaged in a trade must both want what the other person is offering.
Cash
The most liquid form of money like notes and coins. These can be used immediately to buy goods and services.
Bank deposits
Cash that people put into banks as savings.
Cheques
An order to a bank to pay a stated sum from the drawer’s account, written on a specially printed form.
Near money
Non-cash assets that are highly liquid and easily converted to cash. Near money can also be referred to as quasi-money or cash equivalents. Examples of near money assets include savings accounts, certificates of deposit (CDs), foreign currencies, and money market accounts
Liquidity
Liquidity refers to the ease with which an asset can be converted into ready cash without affecting its market price.
Free goods
Goods that we may need or want that are unlimited in supply.
Economic goods
Goods produced to satisfy consumer needs or wants.
Private goods
Goods and services that are produced by the private sector.
Public goods
Goods and services that are not produced by the private sector due to the lack of a profit motive and has to be provided by the government. For example, street lighting, national defense.
Merit goods
Goods and services that have positive externalities and are usually under-consumed in a market economy. For example, education, healthcare.
Demerit goods
Goods and services that have negative externalities and are usually over-consumed in a market economy. For example, cigarettes, driving a car, gambling
An increase in productive capacity
An outward shift in a PPC resulting from an increase in the quantity and/or quality of the resources available to an economy.
A decrease in productive capacity
An inward shift in a PPC resulting from a decrease in the quantity and/or quality of the resources available to an economy.
Inefficient allocation of resources
Occurs when factor resources are not fully or effectively used in an economy. Production will be at a point below the PPC. More output could be produced if existing resources were better utilised.
