1.

Introduction to Economics
Scarcity - limited resources, unlimited wants; inability to fulfil the needs of every
consumer in society

Choice - Choices have to be made as a result of scarcity / Economies have to

choose between competing needs of resources to fulfil consumer wants

Opportunity Cost - The value of the next best alternative forgone; the necessity of
choice results in opportunity costs

Factors of Production (FOP) - Land (natural resources), labour (physical

resources), capital (man-made FOPs), entrepreneurship (special type of labour;
organise the other FOPs to produce goods and services in pursuit of profit, taking on
the risk of business failure/success)

Resource Allocation - How should resources be allocated to produce goods and

services since it is impossible to produce everything that consumers want?
● What to produce: what goods and services should be produced and in what
quantities?
● How to produce: what methods of production/resources should be used in
production?
● For whom to produce: how should goods and services be allocated to
different consumers?

Ceteris Paribus - All other things are assumed to be equal

Rational Decision Making - Individuals always act to maximise their self-interest;

consumers seek to maximise utility, firms seek to maximise profits

Positive Concepts - Are factual and can be proven/disproven by data and are thus
objective

Normative Concepts - Are opinions that cannot be proven/disproven and are thus
subjective

Economic Growth - Increase in output of goods and services produced

Economic Development - Increase in the standard of living and well-being of

people

Sustainability - Meeting the needs of the current generation without compromising

the needs of future generation
Government Intervention - Government determines what to produce, how to
produce and for whom to produce to improve efficiency and equitability in resource
allocation

Economic Efficiency - Allocating resources towards the production of certain goods

and services in a way that minimises waste (what and how to produce)

Equity - Allocating goods and services to consumers in a fair (not necessarily equal)
manner, ensuring that a certain minimum standard of living can be achieved (for
whom to produce)

2. Demand & Supply

Demand - Ability and willingness to purchase a given good or service at each given
price level. Ceteris paribus

Quantity Demanded - Quantity of a good/service demanded at a particular price

(Note: Quantity demanded is NOT Demand)

Supply - Ability and willingness to produce and sell a given good or service at each
given price level, ceteris paribus

Quantity Supplied - Quantity of a good/service supplied at a particular price

(Note: Quantity supplied is NOT Supply)

Market Equilibrium - When quantity demanded = quantity supplied at a particular

price, such that there are no shortages and surpluses and neither consumers nor
producers have an incentive to deviate from the price or quantity traded

Price Mechanism - The process through which a change in price leads to a market
equilibrium

Shortage - When quantity demanded (Qd) exceeds quantity supplied (Qs) at a

particular price

Surplus - When quantity supplied (Qs) exceeds quantity demanded (Qd) at a

particular price

Allocative Efficiency - When the combination of goods and services most wanted
by society is produced
Productive Efficiency - When the lowest amount of resources/cost is used in the
production of goods and services

Society’s Welfare - Well-being of consumers and producers, measured by the sum

of consumer and producer surplus

Consumer Surplus - The difference between the maximum price that consumers are
willing to pay for a good and the price that is actually paid

Producer Surplus - The difference between the minimum price that producers are
willing to charge for a good and the price that is actually received

3. Elasticity
Price Elasticity of Demand (PED) - The responsiveness of the demand of a
good/service given a change in its price, ceteris paribus

Cross Elasticity of Demand (XED) - The responsiveness of the demand of a

good/service given a change in price of another good/ service, ceteris paribus

Income Elasticity of Demand (YED) - The responsiveness of the demand of a

good/service given a change in income, ceteris paribus

Price Elasticity of Supply (PES) - The responsiveness of the quantity supplied of a

good/service given a change in its own price, ceteris paribus

4. Government Intervention
Indirect Tax - Imposed on spending to buy goods and services, raising cost of
production and lowering market supply

Specific Tax - A type of indirect tax that is set at a fixed $/ unit

Ad Valorem Tax - A type of indirect tax that is set at a percentage of the selling price

Subsidy - Cash payments by the government to firms to lower their cost of

production

Price ceiling - A legal maximum price for a good or service, set below the market
equilibrium price
Price Floor - A legal minimum price for a good or service, set above the market
equilibrium price

5. Market Failure

Market Failure - The failure of the free market to achieve allocative efficiency, where
too much or too little of a good or service is consumed and produced relative to the
socially optimal level where social surplus is maximised

Allocative Inefficiency - The failure to allocate resources into the production of

goods and services that maximises social surplus, such that MB is NOT MC

Externalities - The failure to take into account the positive/negative impact on third
parties during consumption and production, resulting in over/under allocation of
resources

Public Goods - The failure of the free market to provide essential goods that are
non-rival and non-excludable

Marginal Private Benefit (MPB) - Extra benefit to consumers from the consumption
of one more unit of good/service

Marginal Private Cost (MPC) - Extra cost to producers from the production of one
more unit of good/service

Marginal Social Benefit (MSB) - Extra benefit to society from the consumption of
one more unit of good/service

Marginal Social Cost (MSC) - Extra cost to society from the production of one more
unit of good/service

Deadweight Loss - Welfare loss to society as measured by the loss of producer and
consumer surplus

Merit Goods - Deemed to be good by the government but underconsumed by

consumers

Demerit Goods - Deemed to be bad by the government but overconsumed by

consumers
Sustainability - Normally refers to environmental sustainability, where the
consumption of resources today does not threaten the ability to produce goods and
services in the future