Key Terms Flashcards
Scarcity
Economic resources are limited relative to society’s desire for goods and services
Economic good
A good or service whose production requires the use of scarce resources
Free good
A good or service which can be enjoyed without the need to use scarce resources
Opportunity cost
The opportunity cost of choosing a good or service is the benefit that would have been enjoyed from the best alternative
Production possibility cure
The maximum output of combinations of goods and services that can be produced through the full and efficient employment of society’s economic resources. It represents society’s fill productive potential at any point in time.
Investment
The production of additional units of capital, thereby increasing society’s total economic resources. Economic talk of investment in both capital equipment and human capital.
Specialisation
Productive activity by individuals, firms and countries focusing upon a narrow range of output. Specialisation by labour is known as the division of labour
Comparative advantage
An economic agent enjoys a comparative advantage in a productive activity where the opportunity cost is relatively low
Market
An arrangement whereby buyers and sellers come into contact and engage in trade. There are product markets for goods and services, and also factor markets for factors on production
Demand
The quantity of a product that a consumer is willing and able to buy in a period of time.
Supply
The quantity of a product that a firm is willing and able to produce in a period of time
Income effect of a price change
The effect on quantity demanded of a price change causing consumer real income to change
Substitution effect of a price change
The effect on quantity demanded of a price change causing relative prices to change
Marginal utility
The additional utility enjoyed when a consumer increases quantity demanded by a single unit
Consumer surplus
The utility received by. Consumer over and above the price that has been paid for a product
Giffen good
A product where price and quantity demanded are positively related
Equilibrium market price
The price at which the planned demand of consumers and the planned supply by firms are equal.
Disequilibrium market price
A market price that gives rise to either excess demand or excess supply, with the planned demand of consumers not equal to the planned supply of firms
Rationing function of the price mechanism
The process whereby a rising market price will eliminate any excess demand
Signalling function of the price mechanism
The process whereby the price of the product communicates information to consumers and firms about value for money / profit opportunities
Incentive function of the price mechanism
The process where by the price of a product generates opportunities for consumers and firms to increase their utility by changing demand and supply decisions
Substitute goods
Two goods are substitutes if they are in competitive demand and a consumer considers them to be alternatives.
Cross elasticity of demand is positive
Complementary goods
Two goods are complements if they are in joint demand and a consumer uses them in combination
Cross elasticity of demand is negative
Derived demand
Where the demand in a product market gives rise to a related demand for factors of production to make the product
Joint supply
A situation where 2 or more products are produced simultaneously
Composite demand
A situation where a factor of production is in demand from more than one product market, so they greater supply of it in making one product inevitably reduces the supply available to make the other product.
Normal good
Products with a positive income elasticity of demand, with rising income causing rising demand.
Inferior good
Products with a negative income elasticity of demand, with rising income causing falling demand
Indirect taxation
Taxation imposed of goods and services, which raises the cost of production for firms and shifts the supply curve to the left
Subsidy
Money paid to firms by the government, which reduces the cost of production for firms and shifts the supply curve to the right
Normative statements
Statements that are essentially value judgements and incapable of being declared true or false by reference to any empirical evidence
Positive statements
Statements that are capable of being tested against empirical evidence and declared either true or false
Government failure
A situation in which government intervenes in a free market and either fails to improve efficiency
Non-excludable
It is impossible to prevent free-riders consuming the good despite not having paid for it
Non-rivalrous
Consumption by one person does not reduce the ability of other people to consume the good, so all consumers can enjoy the good simultaneously
Economies of scale
Factors that reduce the average cost of production as a firm increases its volume of production, thereby increasing productive efficiency in a market
Merit good
A product which is under-consumed in a free market
Demerit good
A product which is overconsumption in a free market
Factors of production
Society’s economic resources, compromising land, labour, capital and enterprise
