Economics keywords

Ch-1 Scarcity, choice and opportunity cost

Fundamental economic problem: scare resources but unlimited wants;
sometimes called as the basic economic problem
Resources: inputs available for the production of goods and services
Wants: the goods and services that people may like to have but are not
always realized
Needs: Things that are necessary for survival, such as food
Scarcity: a situation in which wants and needs are greater than the
resources available
Choice: resources are scarce so individuals, firms and governments
have to consider alternatives
Factors of production: resources or inputs available in an economy that
are used in the production of goods and services
Firm: any business that hires factors of production to produce goods and
services
Opportunity cost: the cost expressed in terms of the next best alternative
that is foregone when a choice is made
Ch-2 Economic methodology
Macroeconomics: study of an economy or a group of economies
Microeconomics: the study of individual markets (households and firms)
Model: a simplified view of reality used to explain economic problems
and issues
Positive statement: statement that is based on facts or actual evidence
Normative statement: a statement that is based on the economist’s
opinion or value judgement and which cannot be proven
Ceteris paribus: a Latin phrase meaning ‘other things equal’ or ‘other
things are unchanged’; used by economists to model the effect of one
change at a time
Short run: time period when a firm can change at least one but not all
factor inputs
Long run: time period when all factors of production are variable but with
a constant, such as the state of technology
Very long run: time period when all key inputs into production are
variable
Economic law: an economic theory put forward by economists
Ch-3 Factors of production
Entrepreneur: an individual who seeks out new business opportunities
and is willing to take risks
Land: a factor of production; natural resources in an economy
Labour: a factor of production; human resources available in an
economy
Capital: a factor of production; a physical resource made by humans that
aids the production of goods and services
Enterprise: a factor of production; enterprise involves organizing
production and taking risks
Primary sector: production that takes place in agriculture, fishing,
forestry, mining, quarrying and oil extraction
Secondary sector: production that takes place in manufacturing,
construction and energy
Tertiary sector: production that takes through the provision of services
Low income countries: economies where income per head was $1025 or
less in 2018 (World Bank)
Lower middle-income countries: economies where income per head was
$1026 to $3995 in 2018 (World Bank)
Upper middle-income countries: economies where income per head was
$3995 to $12375 in 2018 (World Bank)
High income countries: economies where income per head was $12376
and more in 2018 (World Bank)
Physical capital: factors of production such as machinery, buildings and
infrastructure
Economic growth: in the short run, an increase in a country’s output and
in the long run, an increase in a country’s productive potential
Human capital: the value of labour to the productive potential (future
growth) of an economy
Specialization: the process by which individuals, firms and economies
concentrate on producing those goods and services where they have an
advantage over others
Division of labour: where a manufacturing process is split into a
sequence of individual tasks
Enterprise culture: an economy in which taking a risk in the production of
new products is encouraged in the hope of making a profit
Ch-4 Resource allocation in different economic systems
Allocative mechanism: a method of taking decisions about different uses
that can be made of factors of production
Transitional economy: an economy that was previously a command or
planned economy and which is now allowing a greater degree of scope
for market forces to operate
Economic system: the way in which production is organized and choices
are made in an economy
Market economy: an economic system where most decisions are taken
through the market mechanism e.g. Us, Singapore, Hong Kong, etc.
Planned economy: an economic system where resources are state
owned and allocated by a central body e.g. Cuba, North Korea, etc.
Mixed economy: an economic system where both market forces and
government are involved in resource allocation decisions e.g. India,
South Korea, etc.
Market mechanism: resource allocation decisions are taken by individual
producers and consumers with no government intervention; also known
as price mechanism
Productive resources: resources that are available to be used
Private sector: that part of an economy under private ownership
Public sector: that part of an economy under government ownership
Privatization: where there is a change in ownership from the public to the
private sector
Emerging economy: one that is making quick progress towards
becoming a high-income economy
Asian tiger economy: export-led, high growth economies in Asia
Ch-5 Production possibility curve
Production possibility curve (PPC): a simple representation of the
maximum level of output that an economy can achieve, given its current
resources and state of technology; may be referred to as a production
possibility frontier
Trade-off: what is involved in deciding whether to give up one good for
another good
Productive capacity: the maximum output that can be produced when all
resources are used fully
Ch-6 Classification of goods and services
Excludability: where is it possible to stop someone from consuming a
good or service
Rivalry: where consumption by one person of a good or service reduces
the availability of the good or service for others
Non-rival: where consumption by one person does not reduce
consumption by someone else
Private goods: good that are consumed by one person and not available
to anyone else
Free goods: goods that are not scarce and have zero opportunity cost
Public good: a good that is non-excludable and non-rival
Non-excludable: a situation where it is not possible to stop anyone else
from using a good
Pure public good: good which is both non-excludable and non-rival
Quasi-public good: good that has some but not the full characteristics of
a public good
Free rider: someone who does not pay to use a public good
Merit good: a good that is thought to be desirable for consumers but
which is underprovided by the market because of information failure
Demerit good: a good that is thought to be undesirable for consumers
but which is overprovided by the market because of information failure
Information failure: a situation where consumers do not have full or
complete information when making decisions
Government expenditure: the total of all spending by a governments
Non-rejectability: where individuals cannot actually avoid the
consumption of a public good, even if they want to
Market imperfection: a feature of a market which does not perform
perfectly because of a failure to make an optimal use of resources,
necessitating government intervention
Market failure: a market imperfection which gives rises to an allocation of
scarce resources which is not as efficient as it might otherwise have
been
Ch-7 Demand and supply curves
Price mechanism: the means of allocating resources in a market
economy
Consumers: individuals or households who buy goods and services for
their own use or for others
Market: where buyers and sellers get together to trade
Demand: the quantity of a product that consumers are willing and able to
buy at different prices per period of time other things equal, ceteris
paribus
Law of demand: a law (or theory) which states that there is an inverse
relationship between the quantity demanded of a product and the price
of the product, ceteris paribus
Demand curve (D): a line plotted on a graph that represents the
relationship between the quantity demanded and the price of a product
Demand schedule: the data from which a demand curve is drawn on a
graph
Derived demand: where demand for the components of a product or for
workers arises from demand for the final product
Change in quantity demanded: where demand for a product changes as
a result of a change in the price of the product; change in quantity
demanded is shown by a movement along a demand curve
Extension in demand: when the quantity demanded of a product
increases as a result of a fall in the price of the product, shown by a
movement down the demand curve
Contraction in demand: when the quantity demanded of a product
decreases as a result of a rise in the price of the product, shown by a
movement up the demand curve
Change in demand: where there is a change in the conditions of
demand, i.e. something other than a change in the price of the product;
this is shown by a shift of a demand curve
Composite demand: the demand for a product that can be used for more
than one purpose
Alternative demand: a situation where two items are substitutes [i.e. one
will be consumed or other]; an example is tea and coffee
Supply chain: all the stages of a product’s progress from raw materials,
production and distribution until it reaches the consumer
Supply: the quantity of a product that producers are willing and able to
sell at different prices within a time period, other things equal, ceteris
paribus
Supply curve (S): a line plotted on a graph that represents the
relationship between the quantity supplied and the price of the product
Supply schedule: the data from which a supply curve is drawn on a
graph
Notional demand: where buyers may want to buy a product but which is
not always backed up by the ability to pay
Effective demand: demand that is supported by the ability to pay
Market demand: the total amount demanded by consumers
Normal goods: where the quantity demanded increases as income
increases
Inferior goods: where the quantity demanded increases as income
decreases
Substitute: an alternative good
Complement: a good consumed with another
Joint demand: when two goods are consumed together
Subsidies: direct payments made by governments to producers of goods
and services
Indirect tax: a tax levied on goods and services, such as a general sales
tax
Extension of demand or supply: an increase in the quantity demanded or
quantity supplied
Contraction of demand or supply: a decrease in the quantity demanded
or quantity supplied
Ch-8 Price elasticity, income elasticity and cross elasticity of
demand
Elasticity: a numerical measure of responsiveness of one variable
following a change in another variable, ceteris paribus or other things
equal
Elastic: where the relative change in the quantity demanded is greater
than the change in price, income, or price of substitutes and
complements
Inelastic: where the relative change in quantity demanded is less than
the change in price, income or price of substitutes and complements
Price elasticity of demand (PED): measures of the responsiveness of the
quantity demanded for a product following a change in the price of the
product
Price elastic: when the relative change in the quantity demanded is
greater than the change in price of the product
Price inelastic: when the relative change in quantity demanded is less
than the change in price of the product
Perfectly inelastic: where a change in price has no effect on the quantity
demanded
Perfectly elastic: where all that is produced is sold at a given price
Unit elasticity: where the change in price is relatively the same as the
change in quantity demanded
Necessity good: a type of normal good with a YED that is close to zero
Superior good: a good with a YED greater than 1
Income elasticity of good (YED): measures the responsiveness of the
quantity demanded for a product following a change in income
Cross elasticity of demand (XED): measures the responsiveness of the
quantity demanded for one product following a change in the price of
another product
Ch-9 Price elasticity of supply
Price elasticity of supply (PES): a numerical measure of the
responsiveness of the quantity supplied to a change in the price of the
product
Price elastic supply: the quantity supplied responds more than
proportionately to a change in its price
Price inelastic supply: the quantity supplied responds less than
proportionately to a change in its price
Ch-10 the interaction of demand and supply
Equilibrium: a situation where there is no tendency to change in a market
Disequilibrium: a situation where demand and supply are not equal in a
market
Equilibrium price: the price where demand and supply are equal, where
the market clears
Equilibrium quantity: the amount that is traded at the equilibrium price
Changes in demand (or supply): when there is a shift in the demand
(supply) curve due to a change in factors other than price of the product
Excise duties: a specific tax that is levied on goods such as cigarettes
Ad valorem tax: a tax that is charged as a given percentage of the price
Derived demand: where the demand for a good or service depends upon
the use that can be made from it
Joint supply: when two items are produced together
Rationing: where a producer limits the supply of products in the market
to ensure the products remain exclusive
Signalling: where decisions taken by buyers or sellers are determined by
price
Transmission of preferences: the automatic way in which the market
allows the wants of consumers to be made known to producers
Incentive: where low or high prices influence consumption and
production by encouraging buyers to consume and sellers to produce
Ch-11 Consumer and producer surplus
Consumer surplus: the difference between the price a consumer is
willing to pay for a product and its market price
Producer surplus: the difference between the price a producer is willing
to accept and what is actually paid
Ch-12 Reasons for government intervention in markers
Market failure: when the free market does not make the best use of
scarce resources
Ch-13 Methods and effects of government intervention in markets
Incidence: the extent to which the tax burden is borne by the producer or
the consumer or both
Maximum price: a price that is fixed; the market price must not exceed
this price; sometimes called a price ceiling
Minimum price: a price that is fixed; the market price must not go below
the price; sometimes called a price floor
Buffer stock scheme: a type of commodity agreement designed to limit
price fluctuations
Ch-14 Addressing income and wealth inequality
Wealth: a stock of assets that has been built up over time
Gini coefficient: a numerical measure of income inequality
Informal economy: part of the economy that is not regulated, protected
or taxed by the government
Minimum wage: the least amount an employer can legally pay one of its
workers; it is usually expressed as a wage rate per hour
Transfer payment: a payment made by the government to certain
members of the community who may be unable to work or are in need of
assistance
Progressive tax: one where the rate of taxation rises more than
proportionately to the rise in income
Inheritance tax: a progressive tax on an inheritance or gift
Capital tax: a progressive tax paid annually on the difference between
the buying and selling price of an asset