definitions

• Free goods


  Goods that are not scarce and therefore available without limits. Zero opportunity cost e.g. Air
• Economic goods


  A consumable item that is useful to people but scarce in relation to its demand
• Opportunity cost


  The value of the next best alternative foregone
• Positive statement


  An objective statement that can be tested, amended or rejected by referring to available evidence
• Normative statement


  A value judgement that is a subjective statement of opinion rather than a fact that can be tested
• Needs vs Wants

  Needs are defined as goods or services that are required and cannot be done without. Wants are goods or services that are not a necessity but we desire/wish for
• Cost-benefit principle

  Every purchase is a trade-off
• Rational decision makers

  An assumption that economic agents weigh the marginal benefit that one receives from a good or service against its marginal cost
• Economic agents


  Decision makers that have effects on the economy of a country by buying selling, producing, investing, taxing, etc. Government, firms and households
• Government

  Elected representative of the consumers that should act on behalf of the people. The government must decide whether or not to intervene in the economy or leave it as is.
• Firms


  An organisation that uses factors of production alongside each other in order to produce output. They produce goods and services demanded by consumers
• Households

  A group of consumers that buy goods and services. They also supply their labour to firms to produce goods and services in order to earn the income needed to purchase g+s
• Factors of production

  The available resource inputs used in the production process of g+s (Capital, Enterprise, Land and Labour)
• Capital


  Man made aids for production; goods used to make other goods
• Entrepreneurship

  The willingness of an entrepreneur/individual to take risks and organise production. An entrepreneur is someone who bears the risk of a business and organises production
• Labour


  The human resource that is available in the economy; the quantity and quality of human resources
• Land

  The natural resources available in the economy; the quantity and quality of natural resources
• Factor payments/rewards

  Capital=Interest

  Enterprise=Profits

  Labour=wages

  Land=rent
• A model


  A simplified representation of reality used to create hypotheses about economic decisions and events
• Production


  Any economic activity that leads to a flow of goods and services for which people are willing and able to pay
• Production possibility frontier

  A curve showing the maximum quantities of different combinations of goods and services that can be produced in a set time period given the available resources and current state of technology
• Law of diminishing returns

  As a firm adds variable factors of production(usually labour) to fixed capital, the marginal returns that the firm gains will gradually begin to decrease
• Consumer good

  A finished good that is sold for consumption
• Capital good


  Ant tangible asset that an organisation uses to produce goods or services such as office buildings, machinery etc.
• Specialisation


  Where individuals, businesses and whole economies are not self-sufficient but concentrate on producing certain goods and services, then trading their surplus.
• Division of labour


  The assignment of different parts of a manufacturing process or task to different specialised people in order to improve efficiency
• Productivity


  Output of a good or service, per factor of production, per period of time
• Functions of money

  A medium of exchange-it should be accepted universally for the payment of goods, services and debt

  Unit of account-It allows the value of goods, services and other assets to be compared so that the prices of products reflect the value that society places on them

  Standard of deferred payment-Money can be used to pay back debt

  Store of value-It must be possible to use for future transactions and so it must be non-diminishable
• Resource allocation


  The way in which a society's factors of production are divided amongst their alternative uses
• Objectives of households

  Households make decisions about how to allocate expenditure based on the utility they derive from consuming a good or service
• Objectives of firms

  Firms make decisions about what to produce and how much to produce (how to use their factors of production) in order to receive a return/profit for their endeavours.
• Objectives of the government

  Government's objectives are to maximise social welfare and will do this through decision making regarding taxation to fund public expenditure, enforcement of laws and regulation that provide a system for the market to work in. May aim to achieve 'macroeconomic performance indicators
• Utility maximisation


  The aim of trying to achieve the highest level of satisfaction possible from the consumption/production of a good
• Profit maximisation


  The aim of trying to achieve the highest levels of profit possible
• Incentives for households

  Their decisions will depend on the benefits gained form consumption relative to the costs involved. Both including the price and the opportunity cost of consumption A04: Time delays may mean consumers may take time to respond to changes in price and firms may take time to respond to consumer's changes in tastes. Workers may also not seek the highest wage possible as they may do a job to fulfil a sense of vocation or for the non-pecuniary benefits.
• Incentives for firms

  Firms decisions will depend on the potential profits that supplying a product can create. EG. if the price of a product rises, a firm has an incentive to provide more of it assuming that this increases the return they can make from producing it. A04: Not all firms are profit maximisers
• Incentives for governments

  Governments base their decisions on how they can further meet the political ideals of those in power, which are typically based on improving people's quality of life. A04: Government officials may be driven by self interest and not what is best for society
• Market economy


  An economy in which the market forces of demand and supply determine the allocation of resources
• Centrally planned economy


  An economy in which the state determines the allocation of resources
• Mixed economy


  An economy in which both the market forces of supply and demand, and also the intervention of the state, determine the allocation of resources