Economics Unit 1 Definitions

Question 1

The Economic Problem

Answer 1

The co-existence of scarce resources and infinite wants requires choices (about what, how and for whom, to produce)to achieve an efficient allocation of scarce resources.

Question 2

Scarcity

Answer 2

When there is a limited amount of something in relation to the quantity of human wants

Question 3

Economic Goods

Answer 3

Goods which have an opportunity cost and suffer from the problem of scarcity/basic economic problem

Question 4

Free Goods

Answer 4

Goods with no opportunity cost, since there is no scarcity of the good; they are not traded

Question 5

Needs

Answer 5

Requirements necessary for individuals’ survival

Question 6

Wants

Answer 6

Something people desire to have but isn’t necessary for survival

Question 7

Factors of Production

Answer 7

Resources used in the production process; inputs into production

Question 8

Land

Answer 8

One of the four factors of production; natural resources such as oil, coal, wheat, physical space

Question 9

Labour

Answer 9

One of the four factors of production; all human effort, physical and mental used in the production of goods and services

Question 10

Capital

Answer 10

One of the four factors of production; man-made goods which can be used in the production process(eg. machines)

Question 11

Enterprise

Answer 11

One of the four factors of production; Risk takers(entrepreneurs) who organise the other economic resources(FoP) to facilitate production, bearing the risk of doing so

Question 12

Normative Statements

Answer 12

Subjective statements based on value judgements and opinions; cannot be proven or disproven

Question 13

Positive Statements

Answer 13

Objective statements which can be tested with factual evidence to be proven or disproven

Question 14

Rationalisation

Answer 14

Decision-making that leads to economic agents maximising their utility

Question 15

Incentives

Answer 15

Something which motivates an individual to make a decision and behave a certain way

Question 16

Maximisation

Answer 16

Consumers aim to generate the greatest utility possible, firms aim to generate the highest profits possible

Question 17

Resource Allocation

Answer 17

How resources are distributed among producers and how goods and services are distributed among consumer

Question 18

Market Economy

Answer 18

An economy where the market mechanism allocates resources so consumers make decisions about what is produced

Question 19

Mixed Economy

Answer 19

Both the free market mechanism and the government allocate resources

Question 20

Planned Economy

Answer 20

All factors of production are allocated by the state, so they decide what, how and for whom to produce goods

Question 21

Economic Efficiency

Answer 21

When resources are allocated optimally, so every consumer benefits and waste is minimised

Question 22

Productive Efficiency

Answer 22

When resources are used to give the maximum possible output at the lowest possible cost, MC = AC

Question 23

Allocative Efficiency

Answer 23

When resources are allocated to the best interests of society, when there is maximum social welfare and maximum utility, P = MC

Question 24

Opportunity Cost

Answer 24

The next best alternative forgone when an economic decision is made

Question 25

PPC(Production Possibility Curve)

Answer 25

Depicts the maximum productive potential of an economy, using a combination of two goods and resources, when resources are fully and efficiently employed

Question 26

Trade-off

Answer 26

When one thing is lost to gain something else