♡ Economic Definitions ♡

• Allocative efficiency


  This occurs when the available economic resources are used to produce the combination of goods and services that best matches peoples' tastes and preferences.
• Division of labour


  The specialisation of individuals through the separation of tasks in the production process and their allocation to different groups of workers.
• Factors of production


  Inputs into the production process namely land, labour, capital and enterprise.
• Normative statement


  A statement that includes a value judgement, is subjective and therefore cannot be refuted just by looking at the evidence.
• Opportunity cost


  The next best alternative foregone whenever an economic decision is made. It is also the gradient of the PPF.
• Positive statement


  A statement which is value free, objective and can be empirically tested to see whether or not it is correct.
• Productive efficiency


  This occurs when it is impossible for an economy to produce more of one good without producing less of another. The economy would be operating somewhere on its PPF.
• Production


  A process, or set of processes, that converts inputs (factors of production) into outputs (goods or services).
• Production possibility frontier (PPF) or Production possibility boundary (PPB)

  A curve showing the alternative combinations of two goods (or types of good) than an economy can produce when all the available resources are fully and efficiently employed.
• Productivity


  Output per unit of input per time period.
• Scarcity


  Linked to the fundamental economic problem scarcity is the result of finite resources in the economy being unable to produce enough goods and services to fulfil society's infinite wants.
• Specialisation


  This occurs when an economic agent chooses to concentrate on producing a particular good or service and then trades with others in order to survive.
• Capital good


  A good which is used in the production of other goods or services. Also known as a producer good.
• Complementary good


  A good which is in joint demand or is demanded at the same time as the other good e.g. hot dog and bun.
• Competing supply


  Raw materials that are used to produce one good cannot be used to produce another good e.g. wheat for flour or for biofuel.
• Composite demand


  Demand for a good which has more than one use e.g. land for housing or a factory.
• Condition of demand


  A determinant of demand, other than price, that shifts the demand curve.
• Condition of supply


  A determinant of supply, other than price, that shifts the supply curve.
• Consumer good


  A good which is consumed by individuals and households to satisfy their wants and needs.
• Consumer surplus


  The difference between the maximum price which a consumer is willing and able to pay for a good and the actual price they have to pay in the market. It is the area below the demand curve and above the equilibrium price line.
• Contraction of demand or supply

  A movement along the demand or supply curve.
• Cross elasticity of demand

  The percentage change in the quantity demanded of Good A divided by the percentage change in the price of Good B.
• Derived demand


  An indirect demand for a good or service (e.g. labour) which is an input into the production of another good (e.g. cars).
• Demand (effective demand)


  The quantity of a good or service that consumers are willing and able to buy at given prices in a given time period.
• Elasticity


  The proportionate responsiveness of one variable (e.g. quantity demanded) with respect to a proportionate change in another variable (e.g. price).
• Equilibrium price


  The price at which planned demand for a good or service exactly equals planned supply for that good or service.
• Expansion of demand or supply

  A movement along the demand or supply curve.
• Income elasticity of demand

  The percentage change in quantity demanded divided by the percentage change in income.
• Inferior good


  A good for which demand rises as income falls and demand falls as income rises.
• Joint supply


  When one good is produced another good is also produced from the same raw materials e.g. beef and leather.
• Law of Demand


  The inverse relationship between price and quantity demanded.
• Law of Supply


  The positive correlation between price and quantity supplied.
• Market


  A voluntary meeting of buyers and sellers where both parties are willing to participate in an exchange.
• Normal good


  A good for which demand increases when income rises and demand falls when income falls.
• Price elasticity of demand

  measures the responsiveness of the quantity of a good or service that is demanded to a change in its price.
• Price (market) mechanism


  This is the means by which millions of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses.
• Privatisation


  The transfer of assets, including firms and industries, from the public sector to the private sector.
• Producer surplus


  The difference between the minimum price for which a firm is willing and able to sell a good or service and the actual price which they receive in the market. It is the area above the supply curve and below the equilibrium price line.
• Substitute good


  A good in competing demand i.e. which can be purchased instead of another good e.g. butter and margarine.
• Supply


  The quantity of a good or service that firms are willing to sell at given prices in a given time period.