Definitions Intro

Question 1

Economics

Answer 1

Economics is the study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants.

Question 1

Scarcity

Answer 1

Scarcity is the situation in which available resources, or factors of production, are finite, whereas wants are infinite. There are not enough resources to produce everything that human beings need and want.

Question 2

Opportunity Cost

Answer 2

The concept of opportunity cost, or the value of the next best alternative that must be sacrificed to obtain something else, is central
to the economic perspective of the world, and results from the scarcity that forces choices to be made.

Question 2

Production Possibilities Curve (/Frontier)

Answer 2

The production possibilities curve (or frontier) represents all combinations of the maximum amounts of two goods that can be produced by an economy, given its resources and technology, when there is full employment of resources and efficiency in production. All points on the curve are known as production possibilities.

Question 3

Circular Flow of Income

Answer 3

The circular flow of income shows that in any given time period (say a year), the value of output produced in an economy is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output.

Question 4

Positive Economics

Answer 4

Positive economics is the study of economics based on the scientific method, used to arrive at knowledge about the economic world. It includes descriptions, models, hypotheses, theories and laws.

Question 5

Normative Economics

Answer 5

Normative economics forms the basis of judgements about what economic goals and economic policies ought to be. It is based on value judgements, because it identifies important economic problems that should be addressed and prescribes what should be done to solve them.

Question 6

Equity vs Equality

Answer 6

Equity means fairness whereas equality means being the same.

Question 7

Adam Smith (Invisible Hand)

Answer 7

Adam Smith is best known for the idea that the self-interested behaviour of decision-makers without government intervention results in competitive markets that give rise to a more efficient use of resources and greater output, thus benefitting society. This is known as the invisible hand of the market.

Question 8

19th Century Utilitarianism

Answer 8

Classical economists developed the philosophy of ethics known as utilitarianism, according to which an action is right if it promotes the most happiness for the largest number of people.

Question 9

Utility & Marginal Utility

Answer 9

In the 19th century, the concept of utility, underlying utilitarianism, referring to the satisfaction derived from consuming something, was combined with the concept of marginal, meaning extra or additional, leading eventually to marginal utility as the basis of a theory of value that determines prices of goods and services. It forms the basis of rational consumer behaviour that is used to the present day in microeconomics.

Question 10

Say’s Law

Answer 10

According to Say’s Law, supply creates its own demand, a theory that claims that the economy tends toward full employment in the absence of any government intervention.

Question 11

Choice

Answer 11

One of the key concepts of this course; economics is a study of choices, or selecting among alternatives, due to the scarcity of resources. One of the key concepts of this course

Question 12

Efficiency

Answer 12

One of the key concepts of this course; involves making the best possible use of scarce resources to avoid waste; may refer to producing at the lowest possible cost, or producing what consumers mostly want (see allocative efficiency).

Question 13

Allocative Efficiency

Answer 13

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers. The condition for allocative efficiency is given by MSB = MSC (marginal social benefit = marginal social cost or P = MC (price is equal to marginal cost); alternatively it is when social surplus is maximum.

Question 14

Equity

Answer 14

One of the key concepts of this course; is the condition of being fair or just; should be contrasted with the term ‘equality’. Often used in connection with income distribution, in which case it is usually interpreted to mean income equality (though this is only one possible interpretation of equity).

Question 15

Economic well-being

Answer 15

One of the key concepts of this course; refers to levels of prosperity, economic satisfaction and standards of living among the members of a society. One of the key concepts of this course

Question 16

Sustainability

Answer 16

One of the key concepts of this course; refers to maintaining the
ability of the environment and the economy to continue to produce and satisfy needs and wants into the future for future generations; depends crucially on the preservation of the environment over time. Related to the concept of sustainable development, meaning ‘Development which meets the needs of the present without compromising the ability of future generations to meet their own needs’ (according to the Brundtland Commission). One of the key concepts of this course

Question 17

Change

Answer 17

One of the key concepts of this course; change is important in economics in the study of both economic theory as well as in real world events. One of the key concepts of this course

Question 18

Interdependence

Answer 18

One of the key concepts of this course; refers to the idea that economic decision-makers interact with and depend on each other; arises from the fact that no one is self-sufficient. One of the key concepts of this course

Question 19

Intervention

Answer 19

One of the key concepts of this course; typically refers to government intervention, meaning that the government becomes involved with the workings of markets..

Question 20

Resources/FOPs

Answer 20

All resources, or inputs (land, labour, capital, entrepreneurship) used to produce goods and services.

Question 21

Land

Answer 21

A factor of production which includes all natural resources: land and agricultural land, as well as everything that is under or above the land, such as minerals, oil reserves, underground water, forests, rivers and lakes. Natural resources are also called ‘gifts of nature’ or ‘natural capital’.

Question 22

Labour

Answer 22

A factor of production, which includes the physical and mental effort that people contribute to the production of goods and services.

Question 23

Capital

Answer 23

One of the factors of production, which itself has been produced (it does not occur naturally), also known as ‘physical capital’, including machinery, tools, equipment, buildings, etc. Other types of capital include ‘human capital’, or the skills, abilities, knowledge and levels of good health acquired by people; ‘natural capital’, or everything that traditionally has been included in the factor of production ‘land’; and ‘financial capital’, or purchases of financial instruments such as stocks and bonds.

Question 24

Entrepreneurship

Answer 24

One of the factors of production, involving a special human skill that includes the ability to innovate by developing new ways of doing things, to take business risks and to seek new opportunities for opening and running a business. Entrepreneurship organises the other three factors of production (land, labour and capital) and takes on the risks of success or failure of a business.

Question 25

Human Capital

Answer 25

The skills, abilities and knowledge acquired by people, as well as good levels of health, all of which make them more productive; considered to be a kind of ‘capital’ because it provides a stream of future benefits by increasing the amount of output that can be produced in the future.

Question 25

Free good

Answer 25

A good that is not scarce and therefore has no opportunity cost.

Question 26

What/how much to produce

Answer 26

One of the three basic economic questions; refers to the choice that must be made in response to the question what particular goods and services an economy is to produced and in what quantities.

Question 27

How to produce

Answer 27

One of the three basic economic questions; refers to the choice that must be made in response to the question of what combinations of resources and what types of technologies to use in order to produce goods and services.

Question 28

For whom to produce

Answer 28

One of the three basic economic questions; refers to the choice that must be made in response to the question of income or wealth distribution among a population.

Question 29

Resource Allocation

Answer 29

Assigning available resources, or factors or production, to specific uses chosen among many possible and competing alternatives; involves answering the ‘what to produce’ and ‘how to produce’ basic economic questions.

Question 30

Distribution of Income

Answer 30

Concerned with how much of an economy’s total income different individuals or different groups in the population receive, and involves answering the ‘for whom’ basic economic question.

Question 31

Government Intervention

Answer 31

The practice of government to intervene (interfere) in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.

Question 32

Free Market Economy

Answer 32

An ‘ideal type’ of economy based on the market approach to making economic decisions; involve private sector ownership and decision-making, and price rationing; to be contrasted with a planned economy.

Question 33

Planned Economy

Answer 33

An economy where all economic decision-making is carried out by government planning (based on command and control methods); rather than reliance on prices determined in markets; to be contrasted with a free market economy.

Question 34

Mixed Economy

Answer 34

An economy that combines the command approach (government decision-making) with the market approach (private sector decisionmaking) to resource ownership, decision-making and rationing.

Question 35

Rationing

Answer 35

A method used to apportion or divide something up between its interested users; in economics it refers to the method used to make resource allocation and output/income distribution decisions.

Question 36

Model

Answer 36

A simplified representation of something in the real world, showing only the important aspects of the real world being investigated, ignoring unnecessary details.

Question 37

Production Possibilities

Answer 37

All possible combinations of the maximum amounts of two goods that can produced by an economy, given fixed and unchanging resources and technology, when there is full employment of resources and efficiency in production.

Question 38

Actual growth (PPC)

Answer 38

In the context of the production possibilities (PPC) model, it is growth that occurs due to reduction of unemployment or improvement in efficiency of resource use, resulting in a movement of a point inside the PPC to a point closer to the PPC in the northeast direction.

Question 39

Growth in Production Possibilities

Answer 39

In the context of the production possibilities (PPC) model, it is growth that occurs due to reduction of unemployment or improvement in efficiency of resource use, resulting in a movement of a point inside the PPC to a point closer to the PPC in the northeast direction.

Question 40

Injections

Answer 40

In the circular flow of income model, refer to the entry into income flow of funds corresponding to investment, government spending or exports.

Question 41

Leakages

Answer 41

In the circular flow of income model, refers to the withdrawal from the income flow of funds corresponding to savings, taxes or imports

Question 42

Imports

Answer 42

Goods or services produced in other countries that are bought
and brought into the domestic economy.

Question 43

Exports

Answer 43

Goods or services that are sold to other countries.

Question 44

Logic

Answer 44

A method of reasoning which involves making a series of statements each of which is true if the preceding statement is true.

Question 45

Hypothesis

Answer 45

An educated guess, usually about a causeand-effect relationship about an event, usually used to make predictions of real-world events by use of empirical evidence; hypotheses that have not been refuted (rejected) by the evidence may be used to build theories.

Question 46

Empirical Evidence

Answer 46

Real-world information, observations and data that we acquire through our senses and experience.

Question 47

Theory

Answer 47

A general explanation of a set of interrelated events, usually (though not always) based on several hypotheses that have been tested successfully tire to explain why certain events happen.

Question 48

Refutation

Answer 48

In the sciences and social sciences it is the idea that it must be possible to refute or disprove a hypothesis or a theory by subjecting it to empirical testing.

Question 49

Positive Economics

Answer 49

The body of economics based on positive statements, which are about things that are, were or will be. Positive statements may be true or false so they can be refuted. They form the basis of theories and models that try to explain economic events. To be contrasted with normative economics.

Question 50

Normative Economics

Answer 50

The body of economics based on normative statements, which involve beliefs, or value judgements about what ought to be. Normative statements cannot be true or false; they cannot be refuted, they can only be assessed relative to beliefs and value judgements. Normative economics forms the basis of economic policies; to be contrasted with positive economics.

Question 51

Laissez-faire

Answer 51

A French expression meaning let it do, referring to a free market economy without government intervention, such as was advocated by Adam Smith. According to this idea a free market economy left on its own will be highly efficient.

Question 52

Classical Economics

Answer 52

Economic ideas of the nineteenth century; a main feature was the idea that markets working on their own according to the principles of supply and demand could solve all major economic problem, including unemployment and recession, and allocate resources efficiently.

Question 53

Karl Marx

Answer 53

A German philosopher who developed a theory predicting the collapse of capitalism and its replacement by communism, highly regarded for his insights into how capitalism works.

Question 54

John Maynard Keynes

Answer 54

(1883-1946) A British economist; one of his ideas that he is famous for is that an economy left on its own will not necessarily lead to full employment on its own, thus requiring government intervention.

Question 55

Behavioural Economics

Answer 55

A relatively new branch of economics strongly influenced mainly by psychology, but also by sociology and neuroscience based on the idea that human behaviour is far more complex than the assumptions of rational consumer choice.

Question 56

Circular Economy

Answer 56

The idea that goods should be produced in such a way that they can be repaired rather than thrown out; they would be made out of biological materials so that once discarded they can go back to the biosphere and prevent pollution of the planet.