Tutor2u Glossary Theme 1 Flashcards
Behavioural economics
1.1.1 - Economics as a social science
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
1.1.1 - Economics as a social science
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
1.1.1 - Economics as a social science
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
1.1.1 - Economics as a social science
A simplified representation of economic processes. This representation can be used to gain a better understanding of the theory.
Microeconomics
1.1.1 - Economics as a social science
Study of economics at the level of the individual firm, industry or consumer/household.
Unintended consequences
1.1.1 - Economics as a social science
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
1.1.2 - Positive and normative economic statement
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
1.1.2 - Positive and normative economic 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
1.1.2 - Positive and normative economic statement
A view of the rightness or wrongness of something, based on a personal view.
Barter
1.1.3 - The economic problem
The practice of exchanging one good or service for another without using money.
Basic economic problem
1.1.3 - The economic problem
There are infinite wants but finite factor resources with which to satisfy them.
Capital goods
1.1.3 - The economic problem
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
1.1.3 - The economic problem
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
1.1.3 - The economic problem
A participant in an economic system – be it a consumer, business or the government.
Entrepreneur
1.1.3 - The economic problem
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
1.1.3 - The economic problem
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
1.1.3 - The economic problem
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
1.1.3 - The economic problem
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 ever increasing population, we may destroy the natural resources of the planet.
Free goods
1.1.3 - The economic problem
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
1.1.3 - The economic problem
Labour, capital and other resources used in the production of goods and services.
Interest
1.1.3 - The economic problem
Interest is the reward to the ownership of capital.
Land
1.1.3 - The economic problem
Natural resources available for production
Labour
1.1.3 - The economic problem
Physical and mental effort by humans.
Manufacturing
1.1.3 - The economic problem
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
1.1.3 - The economic problem
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
1.1.3 - The economic problem
Non-renewable resources are resources which are finite and cannot be replaced. Minerals, fossil fuels and so on are all non-renewable resources.
Opportunity cost
1.1.3 - The economic problem
The cost of any choice in terms of the next best alternative foregone.
Rationing
1.1.3 - The economic problem
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
Renewable resources
1.1.3 - The economic problem
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
1.1.3 - The economic problem
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
1.1.3 - The economic problem
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
1.1.4 - Production possibility frontiers
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
1.1.4 - Production possibility frontiers
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
1.1.4 - Production possibility frontiers
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
1.1.4 - Production possibility frontiers
Goods bought and used by consumers and households. They are the end result of manufacturing.
Economic efficiency
1.1.4 - Production possibility frontiers
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
1.1.4 - Production possibility frontiers
An increase in the productive potential of a country – shown by an outward shift of the production possibility frontier
Pareto efficiency
1.1.4 - Production possibility frontiers
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
1.1.4 - Production possibility frontiers
A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently.
Productive potential
1.1.4 - Production possibility frontiers
The amount of output an economy could produce if all of its resources were fully and efficiently employed.
Trade-off
1.1.4 - Production possibility frontiers
A trade-off implies that choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.
Adam Smith
1.1.5 - Specialisation and the division of labour
One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith’s discussion of the advantages of division of labour remains a potent idea.
Alienation
1.1.5 - Specialisation and the division of labour
A sociological term to describe the estrangement many workers feel from their work, which may reduce their motivation and productivity. It is sometimes argued that alienation is a result of the division of labour because workers are not involved with the satisfaction of producing a finished product, and do not feel part of a team.
Division of labour
1.1.5 - Specialisation and the division of labour
The specialization of labour in specific tasks, intended to increase productivity.
Measure of value
1.1.5 - Specialisation and the division of labour
A function of money where it can be used to judge the value of a good or service.
Medium of exchange
1.1.5 - Specialisation and the division of labour
Money is any asset that is widely acceptable as a medium of exchange when buying goods and services in markets. It facilitates transactions between buyer and seller.
Method of deferred payment
1.1.5 - Specialisation and the division of labour
A function of money that allows a system of making payments at a later date.
Money
1.1.5 - Specialisation and the division of labour
Money is defined best by what money does. Money – in its various forms – fulfils various key functions including a medium of exchange, a unit of account, a store of value and a standard of deferred payment.
Specialisation
1.1.5 - Specialisation and the division of labour
A method of production where a business or area focuses on the production of a limited scope of products or services to gain greater productive efficiency.
Standard of deferred payment
1.1.5 - Specialisation and the division of labour
A function of money - the accepted way, in a given market, to settle a debt.
Store of value
1.1.5 - Specialisation and the division of labour
A function of money in that it can be used to save and be exchanged at a later time
Unit of account
1.1.5 - Specialisation and the division of labour
A function of money, a nominal unit of measure or currency used to value/cost products, assets (e.g. houses), debts, incomes and spending.
Adam Smith
1.1.6 - Types of economies
One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith’s discussion of the advantages of division of labour remains a potent idea.
Capitalist economy
1.1.6 - Types of economies
An economic system organised along capitalist lines uses market-determined prices to guide our choices about the production and distribution of goods. One key role for the state is to maintain the rule of law and protect private property.
Command economy
1.1.6 - Types of economies
An economic system where most factor resources are allocated by the government, with few officially sanctioned private markets (e.g. ex-Soviet bloc countries prior to their transition into market economies, modern-day North Korea and Venezuela).
Consumer sovereignty
1.1.6 - Types of economies
Consumer sovereignty exists when an economic system allows scarce resources to be allocated to producing goods and services that reflect the wishes of consumers. Sovereignty can be distorted by the effects of persuasive or misleading advertising.
Economic planning
1.1.6 - Types of economies
Government policies aimed at influencing trends in the economy.
Economic system
1.1.6 - Types of economies
An economic system is a network of organisations used to resolve the problem of what, how much, how and for whom to produce
Free market
1.1.6 - Types of economies
System of buying and selling that is not under the control of the government, and where people can buy and sell freely, or an economy where free markets exist, and most companies and property are not owned by the state.
Friedrich Hayek
1.1.6 - Types of economies
An Anglo-Austrian economist and philosopher best known for his criticisms of the Keynesian welfare state. His approach stems from the Austrian school of economics and emphasises the limited nature of knowledge. 1899 – 1992
Karl Marx
1.1.6 - Types of economies
A German philosopher, economist and political theorist. He was a hugely influential thinker and co-authored the pamphlet ‘The Communist Manifesto’ which was published in 1948 and asserted that all human history has been based on class struggles, but that these would ultimately disappear with the victory of the proletariat. 1818 – 1883.
Mixed economy
1.1.6 - Types of economies
Where resources are partly allocated by the market and partly by the government
Planned economy
1.1.6 - Types of economies
In a planned economy, decisions about what to produce, how much to produce and for whom are decided by central planners working for the government rather than allocated using the price mechanism.
Transition economies
1.1.6 - Types of economies
Transition economies are involved in a process of moving from a centrally planned economy to a mixed or free market economy.
Behavioural economics
1.2.1 - Rational decision making
Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.
Incentives
1.2.1 - Rational decision making
Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.
Income
1.2.1 - Rational decision making
Income represents a flow of earnings from using factors of production to generate an output of goods and services. For example, wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital.
Invisible hand
1.2.1 - Rational decision making
Adam Smith - one of the founding fathers of modern economics, described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society’s best interest.
Market incentives
1.2.1 - Rational decision making
Signals that motivate economic actors to change their behaviour perhaps in the direction of greater economic efficiency.
Profit maximisation
1.2.1 - Rational decision making
The assumption that producers wish to produce an output that will create maximum profit levels.
Rational choice
1.2.1 - Rational decision making
Rational choice involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs.
Utility
1.2.1 - Rational decision making
Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service.
Utility maximisation
1.2.1 - Rational decision making
The assumption that consumers behave rationally in allocating their limited budget between different products so as to maximise total satisfaction from their purchases.
Consumer goods and services
1.2.2 - Demand
Consumer goods and services help satisfy our needs and wants directly
There is a sub-division between:
* Consumer durables: Products that provide a steady flow of satisfaction / utility over their working life (e.g. a washing machine or using a smartphone).
* Consumer non-durables: Products that are used up in the act of consumption e.g. drinking a coffee or turning on the heating)
* iii) Consumer services: E.g. a hair cut or ticket to a show or sporting event.
Demand
1.2.2 - Demand
Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.