Defininitions Flashcards
Capital
Man-made aids to production
Enterprise
The risk-taking role undertaken by owners of a business as they combine other factors of production in the pursuit of profit
Investment
Spending by firms on new capital stock or repair of existing stock
Opportunity Cost
The next best alternative forgone when an economic decision is made
Production Possibility Frontier
All combinations of total output which an economy is capable of producing using all it’s resources in the most efficient way
Productive Efficiency
When a firm operates at minimum average total cost, producing the maximum possible output from inputs into the production process
Allocative Efficiency
This is achieved in an economy when it is not possible to make anyone better off without making someone worse off, or you cannot produce more of one good without making less of another
Positive Statement
Statements that can be tested against real-world data
Normative Statements
Opinions that require value judgements to be made
Specialization
Where a factor of production is devoted to a specific job in the production process
Division of Labor
Where labor specializes in the performance of a particular part of the production process
Demand
The quantity of a good consumers are willing and able to buy at a given price per period
Supply
The quantity of a good producers are willing and able to sell at a given price per period
Market
Institution where buyers are in contact with sellers to arrange sale of goods
Equilibrium
The price at which demand is equal to supply and there is no tendency or change
Ceteris Paribus
All other factors remaining constant
Disequilibrium
A situation within the market where supply does not equal demand
Joint Demand
When demand for one good involves demand for another good (complement). Eg bacon and eggs
Joint supply
Where the production of one good also results in the production of another
Derived demand
Demand for a factor or good/service which is not demanded for itself but for what it can provide
Composite Demand
Where a good is demanded for two or more separate uses
Elasticity of demand
The responsiveness of quantity demanded to a change in price
Income elasticity of demand
The responsiveness of quantity demanded to a change in income
Cross elasticity of demand
The responsiveness of quantity demanded of one good to a change in price of another
Elasticity of supply
The responsiveness of quantity supplied to a change in price
Normal good
Good whose demand rises as income rises
Inferior good
Good whose demand falls as income rises
Substitute good
Goods that can be used as alternatives to another good
Indirect tax
Tax levied on the sale of goods
Subsidy
Government payment to producer for production of goods intended to lower the market price
Mixed Economy
Where resource allocation is undertaken by state planning and market forces.
Free market economy
Where markets determine resource allocation with minimal state intervention.
Command economy
Where resources are allocated according to centralized state planning
Laissez faire
Where government does not interfere with the functioning of markets
Market failure
The failure of the market to allocate resources efficiently
Minimum price
A guaranteed price at which producers can sell at their output
Maximum price
Price above which producers or consumers cannot legally trade
Buffer stock scheme
An intervention system that aims to limit the fluctuations of the price of a commodity
Tariff
Tax levied on import
Economies of scale
The gains in efficiency from expanding the scale of production
Monopoly
A single seller in the market or industry
Public good
A good with non-excludability and non-rivalry
Merit good
A good which consumers under consume at market prices because they underestimate the long term benefits to themselves
Demerit good
A good which consumers over consume at market prices because they underestimate the long term harm to themselves
Negative externality
The negative spill over effect to the third party not involved in the economic transaction
Positive externality
The positive spill over effect on the third party not involved in the economic transaction
Government failure
When government intervention causes inefficiency in resource allocation
