Key Terms

Question 1

Scarcity

Answer 1

Economic resources are limited relative to society’s desire for goods and services

Question 2

Economic good

Answer 2

A good or service whose production requires the use of scarce resources

Question 3

Free good

Answer 3

A good or service which can be enjoyed without the need to use scarce resources

Question 4

Opportunity cost

Answer 4

The opportunity cost of choosing a good or service is the benefit that would have been enjoyed from the best alternative

Question 5

Production possibility cure

Answer 5

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.

Question 6

Investment

Answer 6

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.

Question 7

Specialisation

Answer 7

Productive activity by individuals, firms and countries focusing upon a narrow range of output. Specialisation by labour is known as the division of labour

Question 8

Comparative advantage

Answer 8

An economic agent enjoys a comparative advantage in a productive activity where the opportunity cost is relatively low

Question 9

Market

Answer 9

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

Question 10

Demand

Answer 10

The quantity of a product that a consumer is willing and able to buy in a period of time.

Question 11

Supply

Answer 11

The quantity of a product that a firm is willing and able to produce in a period of time

Question 12

Income effect of a price change

Answer 12

The effect on quantity demanded of a price change causing consumer real income to change

Question 13

Substitution effect of a price change

Answer 13

The effect on quantity demanded of a price change causing relative prices to change

Question 14

Marginal utility

Answer 14

The additional utility enjoyed when a consumer increases quantity demanded by a single unit

Question 15

Consumer surplus

Answer 15

The utility received by. Consumer over and above the price that has been paid for a product

Question 16

Giffen good

Answer 16

A product where price and quantity demanded are positively related

Question 17

Equilibrium market price

Answer 17

The price at which the planned demand of consumers and the planned supply by firms are equal.

Question 18

Disequilibrium market price

Answer 18

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

Question 19

Rationing function of the price mechanism

Answer 19

The process whereby a rising market price will eliminate any excess demand

Question 20

Signalling function of the price mechanism

Answer 20

The process whereby the price of the product communicates information to consumers and firms about value for money / profit opportunities

Question 21

Incentive function of the price mechanism

Answer 21

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

Question 22

Substitute goods

Answer 22

Two goods are substitutes if they are in competitive demand and a consumer considers them to be alternatives.
Cross elasticity of demand is positive

Question 23

Complementary goods

Answer 23

Two goods are complements if they are in joint demand and a consumer uses them in combination
Cross elasticity of demand is negative

Question 24

Derived demand

Answer 24

Where the demand in a product market gives rise to a related demand for factors of production to make the product

Question 25

Joint supply

Answer 25

A situation where 2 or more products are produced simultaneously

Question 26

Composite demand

Answer 26

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.

Question 27

Normal good

Answer 27

Products with a positive income elasticity of demand, with rising income causing rising demand.

Question 28

Inferior good

Answer 28

Products with a negative income elasticity of demand, with rising income causing falling demand

Question 29

Indirect taxation

Answer 29

Taxation imposed of goods and services, which raises the cost of production for firms and shifts the supply curve to the left

Question 30

Subsidy

Answer 30

Money paid to firms by the government, which reduces the cost of production for firms and shifts the supply curve to the right

Question 31

Normative statements

Answer 31

Statements that are essentially value judgements and incapable of being declared true or false by reference to any empirical evidence

Question 32

Positive statements

Answer 32

Statements that are capable of being tested against empirical evidence and declared either true or false

Question 33

Government failure

Answer 33

A situation in which government intervenes in a free market and either fails to improve efficiency

Question 34

Non-excludable

Answer 34

It is impossible to prevent free-riders consuming the good despite not having paid for it

Question 35

Non-rivalrous

Answer 35

Consumption by one person does not reduce the ability of other people to consume the good, so all consumers can enjoy the good simultaneously

Question 36

Economies of scale

Answer 36

Factors that reduce the average cost of production as a firm increases its volume of production, thereby increasing productive efficiency in a market

Question 37

Merit good

Answer 37

A product which is under-consumed in a free market

Question 38

Demerit good

Answer 38

A product which is overconsumption in a free market

Question 39

Factors of production

Answer 39

Society's economic resources, compromising land, labour, capital and enterprise