Micro Definitions

• Allocative efficiency


  When economic resources are utilised to produce the combination of goods and services that maximise economic welfare
• Allocative price function

  Prices allocate resources away from markets with excess supply to markets with excess demand
• Capital

  Producer goods
• Capital/producer goods

  Goods used in the production of other goods
• Ceteris paribus

  All other things being held constant
• Choice

  Selecting one of multiple alternatives when deciding how to allocate scarce resources
• Consumer good


  Goods consumed by households & individuals, used to satisfy needs and wants
• Economic welfare


  The economic satisfaction/wellbeing of individuals/households/groups in an economy
• Enterprise


  The ability to utilise factors of production effectively
• Factors of production


  • Land
  • Labour
  • Capital
  • Enterprise
• Finite resource


  Non-renewable resource that becomes increasingly scarce
• Fundamental economic problem


  Deciding how to best allocate scarce resources to maximise overall economic welfare
• Imperfect information


  When individuals lack the information to make the best decision
• Incentive price function


  Prices create incentives for people to adjust their economic transactions
• Infrastructure

  Facilities required for an economy to function
• Labour


  Workers with human capital
• Land


  Natural physical materials, as well as space for fixed capital
• Need


  Something necessary for human survival, e.g. food, shelter
• Normative statement


  Statements including value judgements, that cannot be easily proved/disproved
• Opportunity cost


  Loss of other alternatives due to selecting one of a set of options
• Pareto efficiency


  State of resource allocation, where in order to make an economic agent better off, another agent is made worse off
• Positive statement


  Statements including facts, that can easily be proved/disproved
• Production possibility frontier


  A curve displaying the various possible combinations of two products that can be produced with finite resources
• Rationing price function


  Prices rise to ration demand for goods
• Renewable resource


  Restorable resource that can be replenished
• Scarcity


  Resulting from the concept of infinite wants and needs, yet limited resources
• Signalling price function


  Prices provide information to sellers and buyers, influencing economic decisions
• Trade


  Buying and selling of goods and services
• Value judgements

  Statements that are subjective and based on opinion rather than factual evidence
• Want


  Something desirable, yet not necessary for human survival
• Altruism


  The selfless and disinterested concern towards the wellbeing of others
• Anchoring bias


  Individuals tend to rely on the first piece of information they are given
• Asymmetric information


  When one party (buyers or sellers) has more information than the other in an economic transaction
• Availability bias


  Individuals base the likeliness of future events occurring on past events
• Behavioural economics


  Branch of economics that incorporates psychological insights to understand human economic decision making
• Bounded rationality


  Individuals' inability to make rational economic decision making due to imperfect information, time constraints and limited mental processing ability
• Bounded self control


  Individuals' inability to make rational economic decision making due to inability to control themselves
• Choice architecture


  A framework illustrating the effects of presenting choices in different ways
• Economic man (Homo economicus)


  A hypothetical person who behaves in exact accordance with their rational self-interest
• Heuristics


  Rules of thumb