unit 1

• Economic problem


  Unlimited wants versus limited resources.
• Scarcity


  Limited resources available to meet unlimited wants.
• Production possibility frontier

  Graph showing maximum production combinations of two goods.
• Opportunity cost


  Value of the next best alternative forgone.
• Trade-offs


  Choosing one option over another due to scarcity.
• Product market


  Market for buying and selling goods/services.
• Factor market


  Market for buying and selling production factors.
• Competitive market


  Many buyers/sellers; prices set by supply/demand.
• Non-competitive market

  Few firms with power to set prices.
• Monopoly market


  Single firm dominates the market.
• Capital goods


  Man-made resources used in production.
• Market economy


  Resource owners make decisions based on self-interest.
• Enterprise

  Business ideas and management skills.
• Land


  Natural resources from the environment.
• Labour


  Physical and mental effort in production.
• Normal goods


  Demand increases with consumer income rise.
• Inferior goods

  Demand decreases as consumer income rises.
• Marginal costs


  Cost of producing one additional unit.
• Marginal benefits


  Additional benefits from consuming one more unit.
• Complementary goods


  Goods that are used together.
• Supplementary goods


  Goods serving similar purposes but different products.
• Positive economics


  Objective statements that can be tested.
• Normative economics

  Subjective statements based on judgment.
• Elasticity of demand


  Responsiveness of quantity demanded to price changes.
• Market equilibrium


  Point where supply equals demand.
• Shortage


  Demand exceeds supply at current price.
• Surplus


  Supply exceeds demand at current price.
• Elasticity coefficient


  Measures sensitivity of demand/supply to price changes.
• Cross elasticity


  Demand response for one good to another's price change.
• Income elasticity


  Demand response to changes in consumer income.
• Coefficient


  Eab> 0 ; positive cross elasticity, substitute goods
• elasticity Formula

  % ∆ in quantity ÷ % ∆ in income
• Substitute goods


  demand and price move in the same direction
• Example of substitute goods


  Eg. butter price increase, margarine demand increase
• Example of complementary goods


  Eg. car price increases, petrol demand decreases
• Independent goods


  price of one good doesn't affect the demand of another good
• Elasticity of Demand


  Relatively elastic
• Elasticity of Supply


  Relatively elastic
• Market efficiency


  Everyone gets a fair share of the goods and services that are produced
• Efficiency


  The most optimal way to allocate resources without creating large loss in the market