Economics Unit 1 Definitions Flashcards
The Economic Problem
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.
Scarcity
When there is a limited amount of something in relation to the quantity of human wants
Economic Goods
Goods which have an opportunity cost and suffer from the problem of scarcity/basic economic problem
Free Goods
Goods with no opportunity cost, since there is no scarcity of the good; they are not traded
Needs
Requirements necessary for individuals’ survival
Wants
Something people desire to have but isn’t necessary for survival
Factors of Production
Resources used in the production process; inputs into production
Land
One of the four factors of production; natural resources such as oil, coal, wheat, physical space
Labour
One of the four factors of production; all human effort, physical and mental used in the production of goods and services
Capital
One of the four factors of production; man-made goods which can be used in the production process(eg. machines)
Enterprise
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
Normative Statements
Subjective statements based on value judgements and opinions; cannot be proven or disproven
Positive Statements
Objective statements which can be tested with factual evidence to be proven or disproven
Rationalisation
Decision-making that leads to economic agents maximising their utility
Incentives
Something which motivates an individual to make a decision and behave a certain way
Maximisation
Consumers aim to generate the greatest utility possible, firms aim to generate the highest profits possible
Resource Allocation
How resources are distributed among producers and how goods and services are distributed among consumer
Market Economy
An economy where the market mechanism allocates resources so consumers make decisions about what is produced
Mixed Economy
Both the free market mechanism and the government allocate resources
Planned Economy
All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
Economic Efficiency
When resources are allocated optimally, so every consumer benefits and waste is minimised
Productive Efficiency
When resources are used to give the maximum possible output at the lowest possible cost, MC = AC
Allocative Efficiency
When resources are allocated to the best interests of society, when there is maximum social welfare and maximum utility, P = MC
Opportunity Cost
The next best alternative forgone when an economic decision is made
PPC(Production Possibility Curve)
Depicts the maximum productive potential of an economy, using a combination of two goods and resources, when resources are fully and efficiently employed
Trade-off
When one thing is lost to gain something else
