Definitions Flashcards
Production
The transformation of inputs into outputs by firms in order to earn profit (or to meet some other objective).
Consumption
The act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services.
Factors of production (or resources)
The inputs into the production of goods and services: labour, land and raw materials, and capital.
Labour
All forms of human input, both physical and mental, into current production.
Land and raw materials
Inputs into production that are provided by nature: e.g. unimproved land and mineral deposits in the ground.
Capital
All inputs into production that have themselves been produced: e.g. factories, machines and tools.
Scarcity
The excess of human wants over what can actually be produced to fulfil these wants.
Macroeconomics
The branch of economics that studies economic aggregates (grand totals): e.g. the overall level of prices, output and employment in the economy.
Aggregate demand
The total level of spending in the economy.
Aggregate supply
The total amount of output in the economy.
Microeconomics
The branch of economics that studies individual units: e.g. households, firms and industries. It studies the interrelationships between these units in determining the pattern of production and distribution of goods and services.
Inflation
A general rise in the level of prices throughout the economy.
(Annual) Rate of inflation
The percentage increase in the level of prices over a 12-month period.
Balance of trade
Exports of goods and services minus imports of goods and services. If exports exceed imports, there is a ‘balance of trade surplus’ (a positive figure). If imports exceed exports, there is a ‘balance of trade deficit’ (a negative figure).
Recession
A period where national output falls for two or more successive quarters.
Unemployment
The number of people of working age who are actively looking for work but are currently without a job. (Note that there is much debate as to who should officially be counted as unemployed.)
Demand-side policy
Government policy designed to alter the level of aggregate demand, and thereby the level of output, employment and prices.
Supply-side policy
Government policy that attempts to alter the level of aggregate supply directly.
Opportunity cost
The cost of any activity measured in terms of the best alternative forgone.
Rational choices
Choices that involve weighing up the benefit of any activity against its opportunity cost so that the decision maker successfully maximises their objective: i.e. happiness or profits.
Marginal costs
The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
Marginal benefits
The additional benefits of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
Rational decision making
Doing more of an activity if its marginal benefit exceeds its marginal cost and doing less if its marginal cost exceeds its marginal benefit.
Economic efficiency
A situation where each good is produced at the minimum cost and where individual people and firms get the maximum benefit from their resources.
Productive efficiency
A situation where firms are producing the maximum output for a given amount of inputs, or producing a given output at the least cost.
Allocative efficiency
A situation where the current combination of goods produced and sold gives the maximum satisfaction for each consumer at their current levels of income. Note that a redistribution of income would lead to a different combination of goods that was allocatively efficient.
Equity
A distribution of income that is considered to be fair or just. Note that an equitable distribution is not the same as an equal distribution and that different people have different views on what is equitable.
Production possibility curve
A curve showing all the possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed.
Increasing opportunity costs of production
When additional production of one good involves ever-increasing sacrifices of another.
Investment
The production of items that are not for immediate consumption.
Barter economy
An economy where people exchange goods and services directly with one another without any payment of money. Workers would be paid with bundles of goods.
Market
The interaction between buyers and sellers.
Centrally planned or command economy
An economy where all economic decisions are taken by the central authorities.
Free-market economy
An economy where all economic decisions are taken by individual households and firms and with no government intervention.
Mixed economy
An economy where economic decisions are made partly by the government and partly through the market. In practice all economies are mixed.
Informal sector
The parts of the economy that involve production and/or exchange, but where there are no money payments.
Subsistence production
Where people produce things for their own consumption.
Input–output analysis
This involves dividing the economy into sectors, where each sector is a user of inputs from and a supplier of outputs to other sectors. The technique examines how these inputs and outputs can be matched to the total resources available in the economy.
Price mechanism
The system in a market economy whereby changes in price in response to changes in demand and supply have the effect of making demand equal to supply.
