Chapter1: Basic Economics Ideas

Terms Definition

Economics Is the study of how a society uses its scarce

resources to satisfy its wants.

Resources Inputs available for the production of goods

and services.
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Wants Needs that are not always realized.

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Consumer goods Are goods used by households or end users

to satisfy wants.

Capital goods Are goods that are not sold to end users.

Final goods Are goods that does not require to change

into another goods.

Intermediate goods Are goods that are going to be change in a

production.

Scarcity Is a situation in which wants and needs are in

excess of the resources available.
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Choice Underpins the concept that resources are

scarce so choices have to be made by
consumers,firms and governments.
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Opportunity cost Is the cost expressed in terms of the best

alternative that is forgone.
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Consumer sovereignty Consumer rule the what decision.

Microeconomics Involves analyzing decisions ‘at the margin’.

Short run Time period when a firm can only change

some and not all factor inputs.
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Long run Time period when all factors of productions

are variable.
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Very long run Time period when all key inputs into
production are available.
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Fundamental economics problem Scarce resources relative to unlimited wants.

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Factors of production Anything that is useful in the production of

goods and services.
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Positive statement One that is based on empirical or actual
evidence.
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Normative statement One that is subjective about what should

happen.
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Land Natural resources in an economy.

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Durable goods A good that yields utility over time rather than
be being completely consumed in one use

Entrepreneur An individual who organizes production and is

willing to take risks.
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Labour Human resources available in an economy.

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Capital A man-made aid to production.

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Production The process of creating goods and services in

an economy.
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Consumption The process by which consumers satisfy their

wants.
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Specialization Is the process by which individuals, firms and

economies concentrate on producing those
goods and services where they have an
advantage over others.

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Market Where buyers and sellers get together to

trade.
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Division of labour Where a manufacturing process is split into a

sequence of individual tasks.
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Households A family including its servants.

Economic structure The way in which an economy is organised in

terms of sectors.
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Economic system The means by which choices are made in an

economy.
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Market economy One where most decisions are taken through

market forces.
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Command/Planned economy One where resource allocation decisions are

taken by a central body.
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Mixed economy One where market forces and
government,private and public sectors are
involved in resource allocation decisions.
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Market mechanism Where decisions on price and quantity are

made on the basis of demand and supply
alone.
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Production possibility curve,PPC A simple representation of maximum level of

output that an economy can achieve when
using its existing resources in full.
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Reallocation of resources Where resources are deliberately moved from

one product to another.
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Factor mobility The ease by which factors of production can

be moved around.
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Economic growth Represented by a shift outwards of the

production possibility curve.
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Capital consumption The capital required to replace that which is

worn out.
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Investment The creation of capital goods.

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Developing economy One that has a low income per head.

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Money Anything that is generally acceptable as a

means of payment.
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Near money Non-cash assets that can be quickly turned

into cash.
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Liquidity The extent to which there is an adequate

supply of assets that can be turned into cash.
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Liabilities Debt obligations.

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Private goods Consumed by someone and not available to

anyone else.
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Excludability Where it is possible to exclude one from

consumption.
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Rivalry Where consumption by one person reduces

availability for others.
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Public goods One that is non-excludable and non-rival and

for which it is usually difficult to charge a
direct price.
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Non-excludable Where it is not possible to stop all benefiting

from consumption.
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Non-rival As more consume, the benefit to those

already consuming is not diminished.
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Quasi-public good Goods that have some but not all of the
characteristics of public goods.
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Free rider Someone who does not pay to use a public

good.
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Merit good One that has positive side effects when

consumed.
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Demerit good One that has adverse side effects when

consumed.
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Information failure Where people do not have full or complete

information.
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Paternalism A situation where society knows best and

some right to make a value judgement.
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Moral hazard The tendency for people who are insured or

otherwise protected to taker greater risks.
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Adverse selection Where information failure results in someone

who is unsuitable obtaining insurance.
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