Micro Theme 1 Key Terms Flashcards
Behavioural
economics
Research that adds elements of psychology to traditional models in an attempt
to better understand decision-making by investors, consumers and other
economic participants.
Ceteris paribus
To simplify analysis, economists isolate the relationship between two variables
by assuming ceteris paribus – i.e. all other influencing factors are held
constant
Economic
assumptions
In his 1953 essay titled “The Methodology of Positive Economics, Milton
Friedman explained why economists need to make assumptions to provide
useful predictions. Friedman understood economics couldn’t use the scientific
method as neatly as chemistry or physics, but he still saw the scientific method
as the basis. Friedman stated economists would have to rely on “uncontrolled
experience rather than on controlled experiment.”
Economic model
A simplified representation of economic processes. This representation can be
used to gain a better understanding of the theory.
Microeconomics
Study of economics at the level of the individual firm, industry or
consumer/household
Unintended
consequences
Outcomes that are not the ones foreseen and intended by a purposeful action.
In government intervention in markets there is usually at least one and often
many unintended consequences partly because economics is a social science
and we cannot predict accurately how producer and consumers will react.
Normative
statements
Normative statements express an opinion about what ought to be. They are
subjective statements - i.e. they carry value judgments. For example, the level of
duty on petrol is unfair and unfairly penalizes motorists.
Positive statement
Objective statements that can be tested or rejected by referring to the available
evidence. Positive economics deals with objective explanation. For example: “A rise
in consumer incomes will lead to a rise in the demand for new cars.” Or “A fall in the
exchange rate will lead to an increase in exports overseas.”
Value judgement
A view of the rightness or wrongness of something, based on a personal view
Barter
The practice of exchanging one good or service for another without using money.
Basic economic
problem
There are infinite wants but finite factor resources with which to satisfy them.
Capital goods
Producer or capital goods such as plant (factories) and machinery and equipment
are useful not in themselves but for the goods and services they can help produce
in the future. Distinguished from “financial capital”, meaning funds which are
available to finance the production or acquisition of real capital.
Constraints
Limits to what we can afford to consume – we have to operate within a budget and
therefore must make choices from those sets that are feasible/affordable. There is
always a set of conceivable things that are actually available, and another set of
that are not.
Economic agent
A participant in an economic system – be it a consumer, business or the
government.
Entrepreneur
An entrepreneur is an individual who seeks to supply products to a market for a rate
of return (i.e. a profit). Entrepreneurs will often invest their own financial capital in a
business and take on the risks associated with a business investment.
Factor incomes
Factor incomes are the rewards to factors of production. Labour receives wages
and salaries, land earns rent, capital earns interest and enterprise earns profit.
Factors of
production
Factors of production are the inputs available to supply goods and services:
Land - Natural resources available for production
Labour - The human input into the production process
Capital - goods used in the supply of other products e.g. technology, factories and
specialized machinery
Enterprise - Entrepreneurs organise factors of production and take risks
Know-how - Information required to develop, produce and bring products to the
market.
Finite resources
There are only a finite number of workers, machines, acres of land and reserves of
oil and other natural resources on the earth. By producing more for an everincreasing population, we may destroy the natural resources of the planet.
Free goods
Free goods do not use up any factor inputs when supplied. Free goods have a
zero-opportunity cost i.e. the marginal cost of supplying an extra unit of a free good
is zero.
Inputs
Labour, capital and other resources used in the production of goods and services
Interest
Interest is the reward to the ownership of capital.
Land
Natural resources available for production.
Labour
Physical and mental effort by humans
Manufacturing
The use of machines, tools and labour to make things for use or sale. The is most
commonly applied to industrial production, in which raw materials are transformed
into finished goods on a large scale.
Needs
Humans have many different types of wants and needs - economic, social and
psychological. A need is essential for survival; food satisfies hungry people. A want
is something desirable but not essential to survival e.g. cola quenches thirst.
Non-renewable
resources
Non-renewable resources are resources which are finite and cannot be replaced.
Minerals, fossil fuels and so on are all non-renewable resources.
Rationing
Rationing is a way of allocating scarce goods and services when market demand
exceeds available supply. There are many ways of rationing including by price, by
consumer income, by assessment of need, by education level and by age, gender,
nationality.
Opportunity cost
The cost of any choice in terms of the next best alternative foregone
Renewable
resources
Renewable resources (in theory) are replaceable if the rate of extraction of the
resource is less than the natural rate at which the resource renews. Examples of
renewable resources are solar energy, oxygen, biomass, fish stocks and forestry.
Rent
Rent is income typically associated with the ownership of land, but which can also
include rental income from leasing out other assets such as cars, capital
equipment.
Scarcity
Scarce means limited. There is only a limited amount of resources available to
produce the unlimited amount of goods and services we desire.
Allocative
efficiency
Allocative efficiency occurs when the value that consumers place on a good or
service (reflected in the price they are willing and able to pay) equals the cost of the
resources used up in production.
Capital goods
Producer or capital goods such as plant (factories) and machinery and equipment
are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from “financial capital”, meaning funds which are available to finance the production or acquisition of real capital
Concave
production
possibility frontier
A concave PPF is “bowed outwards”. This means there is a rising marginal
opportunity cost as you produce more of one good. This is because there is
imperfect factor mobility. E.g. labour/land/capital is more suited towards the
production of one good than another.
Consumer goods
Goods bought and used by consumers and households. They are the end result of
manufacturing.
Economic
efficiency
Economic efficiency is about making best or optimum use of our scarce resources
among competing ends so that economic and social welfare is maximised over
time.
Economic growth
An increase in the productive potential of a country – shown by an outward shift of
the production possibility frontier.
Pareto efficiency
In neoclassical economics, an action done in an economy that harms no one and
helps at least one person. A situation is Pareto efficient if the only way to make one
person better off is to make another person worse off.
Production
possibility frontier
A boundary that shows the combinations of two or more goods and services that
can be produced using all available factor resources efficiently.
