1. Normative statements: statements that cannot be supported or refuted
because it is a value judgement.
2. Positive statements: statements that can be supported or refuted by
evidence.
3. Scarcity: a situation in which economic agents’ unlimited wants exceed
what can be produced by limited resources.
4. Free goods: goods that are unlimited in supply and therefore have no
opportunity cost.
5. Economic goods: goods that are scarce because their use has an
opportunity cost.
6. Renewable resources: resources, such as fish stocks or forests, that can
be exploited over and over again because they have the potential to
renew themselves.
7. Non-renewable resources: resources, such as coal or oil, which once
exploited cannot be replaced.
8. Opportunity cost: the benefits of the next best alternative that are given
up.
9. Fixed capital: economic resources, such as factories and hospitals, that
are used to transform working capital into goods and services.
10. Working or circulating capital: resources that are in the production
system waiting to be transformed into goods or other materials before
being finally sold to the consumer.
11. Capital goods: goods that are used in the production of other goods,
such as factories, offices, roads and equipment.
12. Consumer goods: goods and services that are used by people to satisfy
their needs and wants.
13. Production possibility frontier: a curve that shows the maximal
combinations of two goods which an economy can produce when it
fully and efficiently utilises its existing resources.
14. Division of labour means that the way a good or service is produced is
divided into a number of tasks that are performed by different workers,
instead of all the tasks being done by the same person.
15. Specialisation is the production of a limited range of goods by an
individual, firm or country in co-operation with others so that together
a complete range of goods is produced.
16. Functions of money: medium of exchange, store of value, unit of
account, standard of deferred payments
17. Financial market: where brings together buyers and sellers to exchange
financial produces.
18. The role of financial market:
to facilitate saving
to make funds available to businesses and individuals
to facilitate the exchange of goods and services
to provide forward markets in commodities and currencies
to provide a market for equities
19. Command economy: an economic system where government, through
a planning process, allocates resources in society.
20. Free market economy: an economic system that resolves the basic
economic problems mainly through the market mechanism.
21. Mixed economy: an economy where both the free-market mechanism
and the government planning process allocate significant proportions
of total resources.
22. Utility: the satisfaction or benefit derived from consuming a good.
23. Marginal utility is the benefit of consuming an extra unit
24. Rationality: Neo-classical economics assumes that consumers are
rational, who aim to maximise their own utility or economic welfare.
25. Law of diminishing marginal utility: the value or utility that individual
consumers gain from the last product consumed falls as the greater the
number consumed.
26. Consumer surplus: The difference between how much buyers are
prepared to pay for a good and what they actually pay.
27. Producer surplus: The difference between the market price which firms
receive and the price at which they are prepared to supply.
28. Price elasticity of demand (PED): the responsiveness of changes in
quantity demanded to changes in price.
Formula: percentage change in quantity demanded/percentage change
in price.
29. Demand is price elastic if the value of elasticity is greater than one,
meaning that a percentage change in price will bring about an even
larger percentage change in quantity demanded.
30. Demand is price inelastic if the value of elasticity is less than one,
meaning that a percentage change in price will bring about a smaller
percentage change in quantity demanded.
31. Demand is of unitary elasticity if the value of elasticity is exactly one,
meaning that a percentage change in price will lead to an exact and
opposite change in quantity demanded.
32. Income elasticity of demand (YED): the responsiveness of changes in
quantity demanded to changes in income.
Formula: percentage change in quantity demanded/percentage change
in income.
33. Normal good: A good where demand increases when income increases.
34. Inferior good A good where demand falls when income increases.
35. Cross elasticity of demand (XED): the responsiveness of changes in
quantity demanded of one good to changes in the price of another.
36. Formula: percentage change in quantity demanded of good X
/percentage change in price of good Y
37. Complementary goods are products which are used together.
38. Substitute goods are two alternative goods that could be used for the
same purpose.
39. Price elasticity of supply (PES): the responsiveness of changes in
quantity supplied to changes in price.
Formula: percentage change in quantity supplied/percentage change in
price.
40. Supply is price elastic if the value of elasticity is greater than one,
meaning that a percentage change in price will bring about an even
larger percentage change in quantity supplied.
41. Supply is price inelastic if the value of elasticity is less than one,
meaning that a percentage change in price will bring about a smaller
percentage change in quantity supplied.
42. Market equilibrium: a situation where quantity demanded is equal to
quantity supplied. When the market is in equilibrium, there is no
tendency for prices to change. We say the market-clearing price has
been achieved.
43. Equilibrium price: The price at which there is no tendency to change
planned purchase are equal to planned sales.
44. Excess demand: Where demand is greater than supply.
45. Excess supply: Where supply is greater than demand.
46. Incentive function: Price acts as incentives to motivate decision-makers
to respond to the information.
47. Signalling function: Price acts as a signal communicate information to
decision-makers.
48. Rationing function: the changes in price distributes scarce goods to
those consumers who value them most highly.
49. An indirect tax is a tax on expenditure, the two major indirect taxes are
value added tax and excise duties.
50. Ad Valorem tax: Tax levied as a percentage of the value of the good.
51. A unit tax: The amount of tax charged changes with the amount or
volume of the goods purchased.
52. Subsidy: A grant given which lowers the price of a good, usually
designed to encourage production or consumption of a good.
53. Market failure: Where resources are inefficiently allocated due to
imperfections in the working of the market mechanism.
54. Externality: The difference between social costs or benefits and private
costs or benefits.
55. An external cost occurs when producing or consuming a good or
service imposes a cost (negative effect) upon a third party.
56. An external benefit occurs when producing or consuming a good
causes a benefit to a third party.
57. Public good is a good which has two characteristics, non-rivalry and
non-excludability. Non-rivalry means that consumption by one
economic agent does not reduce the amount available for consumption
by others. Non-excludability means that once provided, it is impossible
to prevent any economic agent from consuming the good.
58. Free-rider problem means a person or organization that receives
benefits that other have paid or without making any contribution.
59. Information failure/gap: where buyers or sellers or both do not have the
information that is available to make a decision.
60. Moral hazard: when an economic agent makes a decision in their own
best interest knowing that there are potential negative risks, and that if
problems result, the cost will be partly paid by other economic agents.
61. Principal-agent problem occurs when the goals of principals, those who
would gain or lose from a decision, are different from agents, those
making decisions on behalf of the principal. For example, shareholders
(principals) and managers (agents), or children (principals) and parents
(agents).
62. Market bubble refers to a sustained rise in the prices of financial assets
such as housing and equities which takes values will above long-run
sustainable levels.
63. Speculation means buying or selling something in the expectation of a
future price change and a profit.
64. Asymmetric information: where buyers and sellers have different
amounts of information, with one group having more information than
the other.
65. A maximum price is the highest amount that a producer may legally
charge for a good or service, which is set below the market equilibrium
price.
66. A minimum price is the lowest amount that a producer may legally
charge for a good or service, which is set above the market equilibrium
price.
67. Government failure occurs when government intervention leads to a
net welfare loss compared to the free market solution.
68. Rent-seeking: the use of political power by an economic agent to
influence the distribution of resources for their own benefit at the
expense of others without creating any extra wealth for society.
69. Tradable pollution permit: a permission issued, usually by a
government, to allow a fixed amount of pollution to be created; this
permit can be used by the owner or sold to another firm.