Economics: Concerned with the production of goods and services, and the consumption of these goods

and services. Every country whether rich or poor has to make choices and is confronted with the key
economic problem of scarcity.

A GOOD is an object people want that they can touch or hold. ASERVICE is an action that a
person does for someone else. Examples:Goods are items you buy, such as food, clothing,
toys, furniture, and toothpaste.

Resources
The basic kinds of resources used to produce goods and services: land or natural resources,
human resources (including labor and entrepreneurship), and capital.
Labor
The quantity and quality of human effort available to produce goods and services.

Entrepreneurship
A characteristic of people who assume the risk of organizing productive resources to produce
goods and services; a resource.
Free good Item of consumption (such as air) that is useful to people, is naturally in
abundant supply, and needs no conscious effort to obtain it. In contrast, an
economic good is scarce in relation to its demand and human effort is required to
obtain it.
Scarcity: A situation where unlimited wants exist but the resources available to meet them are limited.

Allocation The systematic distribution of a limited quantity resources over various

time periods, products, operations, or investments

Opportunity Cost: Cost measured in terms of the next best alternative forgone

Social science a subject within the field of social science, such as economics or politics

Model .Graphical, mathematical (symbolic), physical, or verbal representation or simplified

version of a concept, phenomenon, relationship, structure, system, or an aspect of the real
world
Assumptions
Beliefs or statements presupposed to be true.
Positive Statement: A statement that can be verified by empirical observation i.e. Brazil has the largest
income gap in Latin America.

Normative Statement: a value judgement about what ought or should happen, i.e. more money
should be spent on teacher’s salaries and less on WMD’s
Macroeconomics: The branch of economics which studies the working of the economy as a whole, or
large sections such as all households, all business and government. The focus is on aggregate situations
such as economic growth, inflation, unemployment, distribution of income and wealth, and external
viability.

Microeconomics: The branch of economics that studies individual units i.e. sections of households,
firms and industries and the way in which they make economic decisions.

Technology the application of scientific knowledge for practical purposes, especially in industry

Production Possibilities Model

A table or graph that shows the full employment capacity of an economy in the form of possible
combinations of two goods, or two bundles of goods, that could be produced with a given
amount of productive resources and level of technology.
law of increasing costs is a principle that states that once all factors of production (land, labor,
capital) are at maximum output and efficiency, producing more will cost more than average. As
production increases, the opportunity cost does as well.

Resource allocation is the assignment of available resources to various uses. In the context
of an entire economy, resources can beallocated by various means, such as markets or
central planning.

An economic system is a system of production and exchange of goods and services as well
as allocation of resources in a society.

Capitalism an economic and political system in which a country's trade and industry are
controlled by private owners for profit, rather than by the state.

Communism a theory or system of social organization in which all property is owned by the
community and each person contributes and receives according to their ability and needs.

Market An actual or nominal place where forces of demand and supply operate, and where
buyers and sellers interact (directly or through intermediaries) to trade goods, services, or
contracts or instruments, for money or barter.

The circular flow model of income is a neoclassical economic model depicting how
money flows through the economy. In the most simple version, the economy is modeled as
consisting only of households and firms. Moneyflows to workers in the form of wages, and
money flows back to firms in exchange for products.

Demand: is the quantity which buyers are willing to purchase of a particular good or service at a given
price over a given period of time, all things being equal.

Quantity demanded is the quantity of a commodity that people are willing to buy at a particular
price at a particular point of time
 Law of demand: consumers will demand more of a good at a lower price and less at a higher price,
ceteris paribus – this is an inverse relationship

Substitution Effect' The idea that as prices rise (or incomes decrease) consumers will replace
more expensive items with less costly alternatives.

income effect is the change in an individual's or economy's income and how that change
willimpact the quantity demanded of a good or service.

The five determinants of demand are:

1. Price of the good or service.
1. Prices of related goods or services. These are either complementary, which are things
that are usually bought along with the product in demand. They could also be
substitutes for the product in demand.

2. Income of those with the demand.

3. Tastes or preferences of those with the demand.

4. Expectations. These are usually about whether the price will go up.
Normal Goods: Goods where demand increases as income increases eg cars in the PI.
Inferior Goods: Goods where demand falls as income increase i.e. buses in Manila… but many gray
areas i.e. in many MDC’s (The Netherlands) bikes are considered a normal good as people become
aware of environmental and health issues whereas in China bikes would now be an inferior good)

Complements: Two good that consumed together. A change in the price of one will have an inverse
effect on demand and price of the other.

Substitutes: Goods that can be used for the same purpose and are in competitio0n with one another,
and are therefore alternatives for each other. Substitutes will have positive cross elasticity of demand

A change in demand is when the whole curve shifts and achange in quantity
demanded is movement along thedemand curve due to a change in price.

Change in quantity demanded A movement along a given demand curve caused by a

change in demand price. The only factor that can cause a change in quantity demanded
is price. A related, but distinct, concept is a change in demand.

Supply: The quantity which sellers are willing to sell of a particular good or service at a given price at a
given point in time.

Change in quantity supplied A term used in economics to describe the amount of goods or
services that are supplied at a given market price. Graphically, the amount of goods or
services supplied lies at any point along the supply curve in a price versus quantity plane
Change in supply A term used in economics to describe when the suppliers of a given
good or service have altered their production or output.
Determinants of supply

Factors of Production:
Land: natural resources, i.e trees, ocean, fertile land, minerals, sunshine

Labor: human resources, physical or mental

Capital: capital resources, man-made resources used in the production process i.e. machines in
a factory

Enterprise: organizing the above three in the production of goods or services

Utility: Benefits or satisfaction gained from consuming goods and services – hard to measure but we
assume consumers make decisions based on maximizing utility.

Opportunity Cost: Cost measured in terms of the next best alternative forgone.

Monopoly: where is there is only one dominant firm in the industry – remember they don’t have to
control 100%, example: Microsoft is a monopoly – sometimes hard to define. A bus company may have
a monopoly over bus travel in a city but not all forms of transport – extent of monopoly power depends
on the closeness of substitutes

Law of supply: Suppliers will supply more of a good at a higher price and less at a lower price all things
being equal – a positive relationship.

Elasticity: the measure of responsiveness in one variable when another changes.

Perfectly Inelastic: Means that one variable is unresponsive to changes in another. Change in price will
have no effect on change in quantity demanded or quantity supplied

Perfectly elastic: Means that one variable is unresponsive to changes in another. Any change in price
results in supply or demand falling to zero.

Fixed factor/costs: an input that cannot be increased in supply within a given time period
(short-run)
e.g. existing factory

Variable factor/costs: an input that can be increased in supply within a given time period
(long-run)
e.g. raw materials or electricity
Short-run: the period of time when at least one factor is fixed
– this will vary depending on the industry
e.g. shipping company may take 3 years to build a new ship, whereas a farmer might be able to
buy new land and plant within a year

Law of diminishing returns: when one or more factors are fixed, there will come a point
beyond which the extra output from additional units of the variable factor will diminish

Fixed costs: total costs that do not vary with the amount of output produced

Variable costs: total costs that do vary with the amount of output produced

Total cost: the sum of total fixed costs and total variable costs
TC = TFC + TVC

Average cost: total costs per unit of output: AC = TC

Q

Average fixed cost: total fixed costs per unit of output:

AFC = TC - TVC

Average variable costs: AVC = TVC

Q
Marginal cost: the cost of producing one more unit of output

Long-run: the period of time long enough for all factors to be variable
Total Revenue: firms total earnings from a specified level of sales within a specified period
TR = P x Q

Profit: TR – TC

Profit maximization: where MC=MR and the greatest gap between TR and TC

Normal Profit: returns or earnings needed to keep a firm operating

- this profit is needed to cover fixed and variable costs as well as opportunity cost
– part of cost structure so therefore included in total cost
– an element of risk factor is also part of supernormal profit

Monopoly: where is there is only one dominant firm in the industry

– remember they don’t have to control 100% e.g. Microsoft is a monopoly
– sometimes hard to define. A bus company may have a monopoly over bus travel in a city but
not all forms of transport – extent of monopoly power depends on the closeness of substitutes

Duopoly: When there are only two firms in an industry

Macroeconomic definition: The branch of economics which studies the working of the economy as a
whole. It involves aggregates that concern economic growth, unemployment, inflation, distribution of
wealth and income and external stability.

Monopsony: Single buyer with considerable control over demand and prices.

Total revenue: Total revenue in economics refers to the total receipts from sales of a given
quantity of goods or services. It is the total income of a business and is calculated by
multiplying the quantity of goods sold by the price of the goods.

Marginal Profit: In microeconomics, marginal revenue (R') is the additional revenue that will be
generated by increasing product sales by one unit. It can also be described as the
unit revenue the last item sold has generated for the firm.

Profit: a financial gain, especially the difference between the amount earned and the amount
spent in buying, operating, or producing something.

Economic profit: When the existing price level of a firm exists over the average cost then a firm
will earn super profit (Price>Average cost)

Normal Profit: The level of profits which is regarded as usual in any economy. When the price
level of a firm is equal to average cost then a firm will earn normal profit.

Economic loss is a term of art which refers to financial loss and damage suffered by a person
such as can be seen only on a balance sheet rather than as physical injury to the person or
destruction of property.

Accounting Profit' A company's total earnings, calculated according to Generally

Accepted Accounting Principles (GAAP), and includes the explicit costs of doing business,
such as depreciation, interest and taxes.

profit maximization is the short run or long run process by which a firm determines the price
and output level that returns the greatest profit.

marginal profit is the difference between the marginal revenue and the marginal cost of
producing one additional unit of output.

Profit Maximization. The monopolist's profit maximizing level of output is found by equating
its marginal revenue with its marginal cost, which is the same profit maximizing condition that
a perfectly competitive firm uses to determine its equilibriumlevel of output.

Break even point: The term breakeven point is used to mean that the company makes no profit no loss.