definitions

• • The basic economic problem: unlimited wants exceeding finite resources
  • Scarcity: a situation where there is not enough to satisfy everyone's wants
  • Economic good: a product requiring resources to produce it and having an opportunity cost
  • Free good: a product not requiring resources to make it and so does not have an opportunity cost
• Capital/Capital goods: human-made goods used in production

  • Consumer goods: goods and services purchased by households for their own satisfaction
  • Entrepreneur: a person who bears the risks and makes key decisions in a business
• Mobility of labour: the ability of labour to change where it works or in which occupation

  • Mobility of capital: the ability to change where capital is used or in which occupation
  • Mobility of enterprise: the ability to change where enterprise is used or in which occupation
• Labour force: people in work and those actively seeking work

  • Productivity: the output per factor of production in an hour
  • Output: goods and services produced by the factors of production
• Investment: spending on capital goods

  • Gross investment: total spending on capital goods
  • Depreciation (capital consumption): the value of capital goods that have worn out or become obsolete
  • Net investment: gross investment minus depreciation
• Opportunity cost: the next best alternative forgone while making an economic decision

  • Production possibility curve: shows the maximum output of two types of products and combinations that can be produced with existing resources and technology
• The Allocation of Resources:

  • Microeconomics: the study of the behaviour and decisions of households and firms and the performance of individual markets
  • Macroeconomics: the study of the whole economy
  • Market: an arrangement bringing buyers into contact with sellers
• Economic systems:

  • Planned economic system: government makes crucial decisions, land and capital are state-owned
  • Mixed economic system: both private and public sectors play an important role
  • Market economic system: consumers determine what is produced, resources allocated by the price mechanism, land and capital are privately owned
• Market equilibrium: a situation where demand and supply are equal at the current price

  • Market disequilibrium: a situation where demand and supply are not equal at the current price
  • Demand: the willingness and ability to buy a product
• Supply: the willingness and ability to sell a product

  • Market supply: total supply of a product
  • Unit cost: the average cost of production, found by dividing the total cost by the output
• Improvements in technology: advances in the quality of capital goods and methods of production

  • Direct taxes: taxes on the income and wealth of individuals and firms
  • Indirect taxes: taxes on goods and services
• Price elasticity of demand (PED): a measure of the responsiveness of the quantity demanded to a change in price

  • Price elasticity of supply (PES): a measure of the responsiveness of the quantity supplied to a change in price
• Market failure: market forces resulting in an inefficient allocation of resources

  • Allocative efficiency: resources allocated to produce the right products in the right quantities
  • Productively efficient: products produced at the lowest possible cost and make full use of resources
• Merit goods: products under-consumed if left to market forces, generating positive externalities

  • Demerit goods: products over-consumed if left to market forces, generating negative externalities
  • Public good: a non-rival and non-excludable product needing to be financed by taxation
• Monopoly: a single seller

  • Mixed economic system: an economy where both private and public sectors play an essential role
  • Rationing: a limit on the amount that can be consumed
• Microeconomic Decision Makers:

  • Money: generally acceptable as a means of payment
  • Commercial banks: aim to make a profit by providing banking services to households and firms
  • Central bank: a government-owned bank providing banking services to the government and commercial banks
• Disposable income: income left after income tax has been deducted and state benefits received

  • Wealth: a stock of assets, including money held in bank accounts, shares in companies, government bonds, cars, and property
• Rate of interest: a charge for borrowing money and a payment for lending money

  • Average propensity to consume (APC): the proportion of household disposable income spent
  • Consumption: expenditure by households on consumer goods and income
• Savings ratio: the proportion of household disposable income saved

  • Average propensity to save (APS): the proportion of household disposable income saved
  • Mortgage: a loan to help buy a house
• Earnings: the total pay received by a worker

  • Wage rate: a payment an employer contracts to pay a worker, the basic wage a worker receives per unit of time or output
• National minimum wage (NMW): a minimum rate of wage for an hour's work, fixed by the government for the whole economy

  • Elasticity of demand for labour: a measure of the responsiveness of demand for labour to a change in the wage rate
  • Elasticity of supply of labour: a measure of the responsiveness of the supply of labour to a change in the wage rate
• Specialisation: the concentration on particular products or tasks

  • Division of labour: workers specialising in particular tasks
  • Trade union: an association representing the interests of a group of workers
• Collective bargaining: representatives of workers negotiating with employers' associations

  • Industrial action: workers disrupting production to pressure employers to agree to their demands
  • Industry: a group of firms producing the same product
• Primary sector: industries extracting natural resources

  • Secondary sector: manufacturing and construction industries
  • Tertiary sector: industries providing services
• Quaternary sector: knowledge-based service industries

  • Internal growth: an increase in the size of a firm from enlarging existing plants or opening new ones
  • External growth: an increase in the size of a firm from merging or taking over another firm
• Horizontal merger: merger of firms producing the same product and at the same stage of production

  • Vertical merger: merger of firms producing the same product but at a different stage of production
• Public corporation: a business organisation owned by the government designed to act in the public interest

  • Money: an item generally acceptable as a means of payment
• Commercial banks: banks aiming to make a profit by providing a range of banking services to households and firms

  • Central bank: a government-owned bank providing banking services to the government and commercial banks
• Liquidity: being able to turn an asset into cash quickly without a loss

  • Disposable income: income left after income tax has been deducted and state benefits received
  • Wealth: a stock of assets, including money held in bank accounts, shares in companies, government bonds, cars, and property
• Savings ratio: the proportion of household disposable income that is saved

  • Average propensity to save (APS): the proportion of household disposable income that is saved
  • Mortgage: a loan to help buy a house
• Earnings: the total pay received by a worker

  • Wage rate: a payment which an employer contracts to pay a worker, the basic wage a worker receives per unit of time or unit of output
• Specialisation: the concentration on particular products or tasks

  • Division of labour: workers specialising in particular tasks
  • Trade union: an association which represents the interests of a group of workers
• Collective bargaining: representatives of workers negotiating with employers' associations

  • Industrial action: when workers disrupt production to put pressure on employers to agree to their demands
  • Industry: a group of firms producing the same product
• Primary sector: industries which extract natural resources

  • Secondary sector: manufacturing and construction industries
  • Tertiary sector: industries which provide services
• Quaternary sector: knowledge-based service industries

  • Internal growth: an increase in the size of a firm resulting from enlarging existing plants or opening new ones
  • External growth: an increase in the size of a firm resulting from merging or taking over another firm
• Horizontal merger: the merger of firms producing the same product and at the same stage of production

  • Vertical merger: the merger of firms producing the same product but at a different stage of production
• Public corporation: a business organisation owned by the government designed to act in the public interest
• Microeconomic Decision Makers:

  • Money: an item generally acceptable as a means of payment
  • Commercial banks: banks aiming to make a profit by providing a range of banking services to households and firms
  • Central bank: a government-owned bank providing banking services to the government and commercial banks
• Money: an item generally acceptable as a means of payment

  • Commercial banks: banks aiming to make a profit by providing a range of banking services to households and firms
  • Central bank: a government-owned bank providing banking services to the government and commercial banks
• External growth is an increase in the size of a firm resulting from merging or taking over another firm