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Economics Summary
Economics Summary
Definitions
Capital goods: human made good used in production of other goods and services
External costs: harmful effects on third parties. Social costs – private costs
Trade in good balance: value of exports of goods/revenue earned from exports minus value of imports
of goods/ expenditure on imports of goods
Demerit goods: a product which is more harmful to consumers than they realize/ the government
considers is more harmful. It is over-consumed/overproduced it creates external costs
Cyclical unemployment: workers without jobs due to lack or fall in total demand leaving more people
unemployed than there are job vacancies usually during a recession/downturn
Labor force: those who are economically active. they are able and willing to work
Enterprise: risk bearing, setting up owning a business, key decision making, organization of other factors
of production, profit is the reward
Birth rate: the number of births per thousand of the population in a year
Maximum price: a price that producers cannot charge above/ a price ceiling set by the government
Economic good: there is an opportunity cost involved in producing the good as it takes resources to
produce it
Economic problem: wants exceeding resources, unlimited wants, while only having limited resources
Multinational: a company that produces in more than one country, has its head quarters in another
country, it operates in many countries
Monetary policy: a decision on any two of interest rates, money supply, and the exchange rates
Current account surplus: credit items on exports, income and current transfers exceed debit items on
imports, income and current transfers
Economic problem: wants exceeding resources, wants are unlimited but resources are limited so it is
necessary for choices to be made
Multinational company: a company that produces in more than one country. has its head quarters in
another country, it operates in many countries
Monterey policy: decisions on interest rates money supply and the exchange rates
Current account surplus: credit items on exports, income and current transfers exceed debit items on
imports, income and current transfers
Gross domestic product: total output in or of an economy or country over a given time period
Current account deficit of the balance payments: imports greater than exports. The composition of the
current account in terms of trade in goods/visible, trade in services/invisibles income and/or current
transfers is negative
Deflation: a fall in the general price level, rise in the value of money, rise in the purchasing power of
money
Capital: any human made good that is used to produce other goods and services they are aids to
production, such as offices, factories, tools, machinery
Specialization: the concentration on particular tasks, activities and products carried out by individuals.
Concentration on what can be done best can be applied to firms and regions and countries as well
Death rate: the number of deaths per 1000 of the population per year
Production: is the total output per period of time, eg, per hour, day, week, month or year
Absolute poverty: a situation where certain people do not receive enough income to meet even basic
needs, such as food and shelter numerical value e.g $1.25
Tax: a payment/finance to the government/local authority example e.g. sales tax income tax
Capital intensive: an industry which has amount of capital/machinery compared with the amount of
other factors e.g. Labor employed
Unemployment: people without jobs who are willing and able to work
Inflation: a sustained/over rime rise in the price level
Regulation: rules/laws/controls which are designed to influence the behavior of firm’s people
Private limited companies: in the private sector sells shares to known individuals’ shareholders have
limited liability shareholder vote for a board of directors
Horizontal integration: merger takeover between firms producing the same product at the same stage of
production
Regressive tax: a tax that takes higher proportion of the income of the poor
Mixed economy: an economy with a private sector and a public sector some prices determined by
market forces and some by the government
Resources: factors of production used to produce goods and services such as land labor capital and
enterprise
Medium of exchange: a form of money that is used to buy and sell products generally accepted
Consumer price index: a measure of the change in the price level rate of inflation
Fertility rate: average number of children a women give birth to. The number of children born per 1000
women of childbearing age
Developed country: a country with a high GDP per head/high income a country with high living
standards/long life expectancy/high savings ratio/high levels of education/high levels of health care/ a
high proportion of workers employed in the tertiary sector/high productivity
Export quota: a limit on the quantity/value that can be exported/designed to keep products in the
country/designed to keep domestic prices low
Inelastic supply: occurs when a change in price results in a smaller percentage change in prices supply
PES<1
Perfectly inelastic supply: occurs when a change in price has no effect on supply PES=0 represented by a
vertical curve
Complements:
Chapter one
Resources including workers and machinery are scarce. This means that they are in limited supply
The economic problem of not being able to satisfy everyone’s wants arises because of scarcity
The economic problem: unlimited wants exceeding finite resources, due to scarcity
More goods and services are being produced today than ever before, but the growth of wants is
exceeding the growth of economic resources.
People have to choose which products to buy, which subjects to study, what jobs to do and which
products to produce shows that there are insufficient resources
The vast majority of goods and services are economic goods. This means that it takes resources to
produce them and so they are in limited supply.
Economic good: there is an opportunity cost in producing it, as it takes resources to produce it for
example a carpet
A carpet is an economic good. The material and labor used to produce it could have been used to make
another good.
Free goods: no opportunity cost in producing it as it does not require any resources to make it. For
example, sunshine
Some people think that free goods mean products which do not have to be paid this is not true because
in economics free goods do not take resources to produce it
Water in river is a free good however once the water is processed for drinking or used for irrigation of
fields it becomes an economic good
Chapter two
factors of production: the economic resources of land labor capital and enterprise they are used to
produce goods and services, they are in limited supply
land is any natural resource used in production, can be renewable or non-renewable, found beneath the
land such as coal, or what is found on land such as rainforests and seas and what is found in them for
example fish
to attract foreign tourists, a travel company will make use of the water in swimming pools, good climate
and beaches in the holiday
labor the human effort used in producing a good or service, can be manual or mental such as a road
sweeper and a bank manager
human capital is the education, training, and expertise the workers have gained, the more human
capital workers have the more they produce
capital/capital goods: human made good used to produce other goods or services/ used in production
i.e., factories
consumer goods: goods or services purchased by households for their own satisfaction such as food
difference between capital goods and consumer goods is that capital goods are not purchased for
personal use but for what they can produce
to be able to tell the difference between capital and consumer goods we must consider who is the user
and what the purpose of its use. a computer will be a capital good if it’s used by an insurance company
to process claims since it’s producing a service, however if it is used by a person to play games then it’s a
consumer good
enterprise: risk bearing in setting up/ owning a business, key decision-making role, organizes the other
factors of production with profit is the reward usually carried out by entrepreneurs
entrepreneurs bear the risk of losing their money if their business fails. they also decide what to produce
by taking into account consumer demand and how to produce it. some of the risks faced by any business
can be insured against, for example, fire, or flood. however, other risks have to be borne by
entrepreneurs because some events are not anticipated, based on past events, so cannot be insured
against. these include the uninsurable risk of other firms brining out rival products and the rising cost of
production
the two key tasks of entrepreneurs can be carried out by shareholders and the managing director of a
large company. shareholders run the risk of losing their money if the company were to go out of
business while the managing director takes production decisions and organizes the factors of production
most land is occupational mobile, so it can be used for a number of purposes, capable of changing use,
for example land which is used for farming can be used to build houses
land is geographically mobile, cannot be moved from one location to another. some forms of land can
be moved to a certain extent i.e., the course of rivers can be diverted
the mobility of labor is the ability of labor to change where it works or in which occupation. some find it
difficult to move from one area to another, geographically immobile, while others find it difficult to
change the type of job to another type, occupationally immobile
differences in the price and availability of housing in different area and countries, workers who lose their
jobs in poor areas may not be able to take up jobs in rich areas because they cannot afford housing
differences in educational systems in different areas and countries, if it disrupts children’s education
worker may be reluctant to move
restrictions on the movement of workers, necessary to obtain a visa to work in another country and
these can be in limited supply
mobility of capital the ability to change where capital is used or in which occupation, it varies according
to the type of capital goods. Some types of capital goods can be transferred from one part of the
country to another. For example, a photocopier can be used by a bank in one area can be sold to then
used by a bank to another area. A coal mine and a dock are fixed in position so are geographically
immobile. They are also occupationally immobile since their use cannot be changed, as they have been
for a specific purpose.
The mobility of enterprise is the ability to change where enterprise is used or in which occupation,
enterprise moves when the people who carry out the functions move. The mobility of enterprise
depends on the mobility of entrepreneurs.
Entrepreneurs a person who bears the risks and makes the key decisions in a business
Enterprise is the most mobile factor of production. The skills involved in being an entrepreneur can be
applied in every industry. Someone who has borne uncertain risks and organized factors of production in
one industry can do it another industry. Enterprise is also geographically mobile, someone who has been
successful in starting up and running a business in one country is likely to be successful is likely to be
successful in another country also.
It is important to remember that immobility is the opposite of mobility, so if u know the causes of an
increase in immobility of a factor of production it is easy to work out the causes of an increase in
mobility of that factor. For example, if a reduction in training will cause an increase in occupational
immobility of labor, an increase in training will increase the mobility of labor
The amount of physical land in existence does not change much with time. There is a certain degree of
soil erosion which reduces the supply of agriculture land, but also a certain amount of land reclamation
which increases its supply. Other natural resources, however, can change quite significantly. Rainforests
are currently declining at a rapid rate.
Some natural resources are renewable whilst others are non-renewable. Renewable resources, for
example wind power, are replaced by nature and can be used again and again. In contrast, non-
renewable, for example gold and oil, are reduced by use. There is a risk that renewable resources can be
turned into non-renewable resources if they are over exploited, that is used at a faster rate than they
are replenished. Over-fishing and the hunting of wildlife can diminish numbers to a point where they
cannot be restored
Stopping firms from polluting rivers, can improve the purity of rivers and health of fish that live in rivers.
Providing good drainage can increase the yield from fruit trees
The number of workers available and the number of hours they work are two key factors that influence
the quantity of labor
The size of the population, the larger the population the more workers there are likely to be
The age structure of the population, a country with a high proportion of people of working age will have
more workers than a country with the same population size, but a higher proportion of people too
young or too elderly to work
The retirement age, the higher the retirement age, the more potential workers there will be
The school leaving age, raising school leaving age would reduce the number of workers
Attitude to working women, countries where it is acceptable for women to work have more workers to
draw on
Labor force: those who are economically active. Those willing and able to work. The employed and the
unemployed. This is also known as the workforce or working population.
Those of working age are people between the school leaving age and the retirement age. However,
some may be in full-time education some may have retired, and some may be sick or disabled
As with all factors of production, it is not just the quantity of labor, which is important, but also the
quality. More can be produced with the same number of workers if the workers become more skilled.
An increase in productivity, including labor productivity, is a major cause of an increase in a country’s
output
Improvements in education
Reduction in working hours/ length of working day keeping workers fresher enabling them to
concentrate more
Improvements in working conditions raising motivation enabling workers to work harder and
concentrate more
The quantity of capital is influenced by investment and tends to increase with time. Every year some
capital goods physically wear out or become outdated and some machinery may be replaced by newer
more efficient models
Depreciation/capital consumption: the value of capital goods that have worn out or become obsolete
Net investment: the value if the extra capital made. Gross investment minus depreciation.
Example if a country produces $200 million capital goods one year and there is a depreciation of $70
million, net investment is $130 million. The country will have more capital goods. These additional
capital goods will allow it to produce more goods and services
Occasionally, gross investment may be lower than depreciation. this means that some of the capital
goods taken out of use are not replaced this is said to be negative net margin
Negative net investment: a reduction in the number of capital goods caused by some obsolete and
worn-out capital goods not being replaced
When economists refer to capital, they mean human made goods such as machinery and office buildings
that are used to produce other products. don’t confuse money and capital.
Advances in technology enable capital goods to produce a higher output and a better-quality output.
The development of robotics in car production has significantly increased the number of cars that a car
factory can produce
Lower taxes on firms and a reduction in government regulations may encourage more people to set up
their own businesses
A disproportionate number of immigrants become entrepreneurs, these are the people who had to
drive to leave their home country in search of a better life and this drive often leads them to become
entrepreneurs in the new country
The quality of enterprise can be improved if entrepreneurs receive better training, better education,
better healthcare and gain more experience. Very successful entrepreneurs have often set up businesses
in the past some of which may have failed. The knowledge and understanding they have gained for
example the products people would like to buy and the best sources of raw materials, can help them
make a successful business
For bearing uncertain risks and organizing the other factors of production entrepreneurs earn profit
Chapter three
It is important that we consider the alternatives, particularly the best alternative to make the right
decisions
Example: if we have to choose which dictionary to buy first, we take the price into account, and the one
with the widest and most accurate informative coverage. The closer the two dictionaries are in price the
harder the choice will be
People need to carefully consider their preferences for the jobs available. For instance, the wage paid,
chances of promotion the working conditions and the job satisfaction to be gained from each job.
In deciding what to produce, private sector firms will tend to choose the option which will give them
maximum profit. They will also take into account the demand for different products and the cost of
producing those products
Government has to carefully consider its expenditure of tax revenue on various things. If it decides to
spend more on education, the opportunity cost involved may be a reduced expenditure on health care.
It could raise tax revenue to spend more on education, however the opportunity cost will be put on the
taxpayers. To pay higher taxes, people may have to give up the opportunity to buy certain products or to
save
As resources are used to produce economic goods, their production involves opportunity cost. Nor
resources are used to produce free goods and so they require no opportunity cost
Production possibility curve: a curve that shows the maximum output of two types of products and
combination of those products that can be produced with existing resources and technology
While a ppc shows what is the maximum amount that can currently be produced, a production point
shows what is being produced or what may be produced in the future
Any point inside the curve means there is not full use of resources
A point anywhere on the curve means that maximum use is being made of resources. This is an efficient
output. There are not enough resources to produce outside the limit set by the PPC therefore it is
currently not attainable
A movement along PPC shows that resources are being reallocated. It also shows the opportunity cost of
that decision
Figure 4.4 shows a country initially deciding to produce 80 units of manufactured goods and 75 units of
agricultural goods. If it then decides to produce 100 units of agricultural goods, it will have to switch
resources away from producing manufactured goods. The diagram shows the reduction of output of
manufactured goods to 60 units. In this case, the opportunity cost of producing 25 extra units of
agricultural goods is 20 units of manufactured goods
PPCs are usually bowed outwards. This is because the best resources are used first to produce a
particular type of products.
In the less common situation where resources are equally suited to producing both types of products,
the opportunity cost remains constant. In this case the PPC is shown as a straight line
The PPC will shift to the right if there is an increase in the quantity or quality of resources. For example,
if there is an increase in the size of the labor force, the maximum output that a country can produce will
increase
A shift to the left of the PPC will be caused by a reduction in the quantity or quality of resources
A shift to the right of the PPC increases a country’s productive potential. It will be capable of producing
more. This is referred to as potential economic growth. To take advantage of this increased capacity, the
extra or better-quality resources have to be employed. Output increases, a rise in a country’s output is
actual economic growth
Chapter 5: -
Microeconomic: is the study of the behavior and decisions of households firms and the performance of
individual markets
Microeconomics topics include changes in the earnings in a particular occupation and changes in the
output in the car industry
Macroeconomics topic include changes in the number of people employed in the economy and changes
in the country’s output