Key terms

• economics

  studies the economic behaviour of individuals and groups and the economic relationships between individuals and groups
• positive statement

  a statement of fact that can be scientifically tested to see if correct or not. can also be falsified
• normative statement

  a statement that includes a value judgement and includes ethical or moral judgements
• need

  something that is necessary for human survival e.g food, clothing, warmth or shelter
• want

  something that is desirable but not necessary for human survival e.g phone
• command economy / planned economy

  an economy in which government officials or planners allocate economic resources to firms and other productive enterprises
• market economy

  an economy in which goods and services are purchased through the price mechanism in a system of markets
• mixed economies

  an economy that contains both a large market sector and a large non-market sector in which the planning mechanism operates
• land

  all the natural resources
• labour

  the workforce
• capital

  machinery/tools and the stock of manufactured resources (raw materials, semi-finished goods, and finished goods)
• enterprise

  the individual who seeks out profitable opportunities
• opportunity cost

  the cost of giving up the next best alternative
• productive efficiency

  occurs when it is possible to produce more of one good without producing less of another. for a firm it occurs when the ATC of production is minimised
• production possibility frontier

  a curve depicting the various combinations of two products (or types of products) that can be produced when all the available resources are fully and efficiently employed
• allocative efficiency

  occurring when economic activity results in the best combinations of goods or services being produced, and available to be consumed, taking into account consumers' preferences
• resource allocation

  the process through which the available factors of production are assigned to produce different goods and services e.g how many of society's economic resources are devoted to supplying different products like food, cars, healthcare and defence
• factors of production

  inputs into the production process
• economic growth

  the increase in the potential level of real output the economy can produce over a period of time
• rational behaviour

  people try to make decisions in their self-interest or to maximise their private benefit
• untilty theory

  total utility and marginal utility and diminishing marginal utility
• utility


  the satisfaction or economic welfare an individual gains from consuming a good or service
• marginal utility

  the ADDITIONAL welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service
• asymmetric information

  when one party to a market transaction possesses less information relevant to the exchange than the other
• behavioural economics

  a method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions
• bounded rationality

  when making decisions, individuals' rationality is limited by the information they have, the limitations of their minds, and the finite amount of time available in which to make decisions
• bounded self-control

  where individuals have limited self-control to act rationally in their own interest
• thinking fast

  refers to making decisions quickly and little effort is used to analyse the situation (automatic thinking). decisions are intuitive and instinctive
• thinking slow

  known as reflective thinking. concentration and mental effort are both required to work through a problem before a decision can be made
• bias

  to disregard opposing views and to allow personal opinions/prejudices to influence a judgement
• cognitive bias

  a systematic error in thinking that affects the decisions and judgements that people make
• confirmation bias

  the tendency to seek only information that matches what one already believes
• rule of thumb

  thinking shortcuts, or informed guesses, that individuals use to make decisions to save time and effort
• availability bias

  occurs when individuals make judgments about the likelihood of future events according to how easy it is to recall examples of similar events
• anchoring bias

  the human tendency when making decisions to rely too heavily on the first piece of information offered. individuals use an initial piece of information when making subsequent judgements
• social norms

  forms or patterns of behaviour considered acceptable by a society or group within that society
• nudges

  factors which encourage people to think and act in particular ways. Nudges try to shift group and individual behaviour in ways which comply with social norms
• altruism

  act to promote someone else's wellbeing , even though we may suffer a cost
• maximising theory

  economic agents only act in a way to maximise their net benefit
• fairness

  the quality of being impartial, just, or free of favouritism. It can mean treating people equally, sharing with others, giving others respect and time, and not taking advantage of them