Foundation of economics

Economics Terminology

Sr. Economic Terms Definition

No.
1 Economics Economics is one of the field of human sciences which focuses on the
study of how societies use their scare resources to produce goods and
services and how they distribute them among different groups to satisfy
unlimited need and wants.
2 Goods and services Goods and services are the products produced to satisfy needs and
wants of consumers. While goods are tangible, services are intangible.
Examples of goods: Kindle, books, chair, car, ipad etc. Examples of
services include: Banking, Insurance, teaching, designing etc.
3 Needs and wants Needs refers to those goods and services which are considered necessary
for survival, while wants refers to those goods and services whose
consumption provides comfort and luxury to consumers.

4 Resources or Factors Resources or Factors of Production are the inputs used to produce goods
of Production and services wanted by the people, for example, human labour,
machines, agriculture, land, metals, etc. Resources do not exist in
unlimited abundance, they are scarce.
5 Land Land/natural resources or gift of nature – includes agricultural land, non-
agricultural land, minerals, oil, reserves, forests, lakes, rivers, etc.
6 Labour Labour/human resources – includes physical or mental effort that people
contribute for the production of goods or services. E.g. Doctors, drivers,
teachers, etc.
7 Capital Capital/ physical capital/ man-made resource – includes factories, road
systems, airports, telephone supply lines. It is also known as capital good
or investment good.
8 Enterprise Entrepreneurship/ management – it includes those people having special
abilities like innovation, risk taking, seeking new opportunities, etc.

9. Factor income Factor income refers to the income earned by the household or resource
owners in return of allowing others to use the resources owned by them
to produce goods or services. Factor income for land owner is rent,
factor income for the owner of labor is wages, for the owner of capital it
is interest and for the owner of enterprise it is profit.
10 Scarcity Scarcity is the condition in which available resources are not enough to
produce everything that human beings need and want.
11 Resource allocation Resource allocation refers to the use of a particular resource to produce
a particular good or a service.
12 Trade-off or choice In the presence of scarcity, Individual and society as a whole are
constantly making choices involving tradeoff between alternatives,
whether it’s about what goods to consume/what goods to produce/how
to produce them and so on.
13 Opportunity Cost Opportunity cost is defined as the next best alternative that must be
given up or sacrificed while making choice.
14 Economic Goods Economic good is any good that is scarce, either naturally occurring (e.g.
oil, gold, forest, etc) or because it is produced using scarce resources. All
economic goods have an opportunity cost greater than zero.
15 Free Goods A free good is any good that is not scarce and thus has no opportunity
cost. Sometimes goods can be free goods in certain conditions and
economic goods in another.
Extension - Oxygen in an open unpolluted area can be a free good, but in
a room with no windows open and which is crowded by people, it
becomes and economic good.
16 Conflict of interest In the presence of scarcity, Individual and society as a whole are
constantly making choices involving tradeoff between various alternate
uses of the resources, choices made may be more suitable to a particular
individual or a group compared to another individual or a group due to
the difference in the utility they may derive from consuming the product
produced using those scare resources. For example, one group may
prefer to use the available plot of land to construct a school, while other
may prefer to build hospital, consider the plot of land can be put to any
one use this may create a conflict of interest among competing groups.
In other words whenever there is scarcity resource allocation will give
rise to conflict of interest.
17 Resource re- When the resources are withdrawn from existing use and put to
allocation alternate use then this process is called as resource reallocation.

18 Economic system Economic system refers to the system of rationing in an economy. It

depends on who owns, manages and control over resources, private
sector or public sector. There are mainly three types of economic
systems, planned economy, market economy and mixed economy.

19 Planned economic A centrally planned economy is a rationing system where the resources
system are owned, managed and controlled by the state. All question
encountered while solving economic problem like ‘what to produce?’
‘how to produce?’ and ‘for whom to produce?’ are answered by the
government.
20 Market economic A free market economy is a rationing system where the resources are
system owned, managed and controlled by the private sector. There is no
government intervention. All economic decisions are based on the
market forces of demand and supply.
21 Mixed economic A mixed economy is a rationing system where the ownership,
system or Mixed management and control of resources are shared by both private sector
market economy and public sector. Economies where there is little government
intervention and majority of resources are owned, managed and
controlled by the private sector are referred as mixed market economies.

22 Transitional Economies which were strongly based on central planning and are
economy deliberately moving away from command economy to mixed market
economies are called ‘economies in transition. For example, Russia,
China etc.
23 Production PPC/PPF is an economic model which is based on the assumption that in
Possibility Curve an economy by using the given resources and the available technology in
the most efficient way only two types of products or the various
combinations of these two types of products can be produced in a given
time period. It is the concave curve.
24 Ceteris paribus Ceteris Paribus is a Latin expression that means ‘other things equal’ or
‘all other things are assumed to be constant or unchanging’. It is just a
tool used by economists to construct models and theories.
25 Utility Utility is the benefit or satisfaction that consumer derives from
consuming goods and services.

26 Positive Economic Positive statements are those which tries to describe and explain how
Statement things in the economy actually work, they may describe something, they
may be about a cause and effect relationship, they may be based facts or
theories. For example: if the price of a iPhone increases, customer buy
less of the iPhones, Rapid industrialization has raised pollution levels,
India’s GDP per capita is Rs. 1,10,000 (approx.).
27 Normative Economic Normative statements deal with how things ought to work in an
Statement economy. They are value judgements, which cannot be true or false but
can only be assessed. For example – Distribution of income and output
should be more equal among people, Education and health care should
be provided free of charge etc.

28 Economic growth When the quantity of output produced by an economy over a period
time increases, there is economic growth. If it decreases, then there is
economic contraction/ negative growth. It is measured in terms of GDP.

29 Economic Economic development refers to raising the standards of living and

development wellbeing of people. It involves increasing income levels and reducing
poverty, reducing income inequalities and unemployment, increasing the
provision of an access to basic goods and services such as food, clothing
and shelter, education, sanitation, health care services etc.
30 Sustainable Sustainable development is defined as development which meets the
development need of the present generation without compromising the ability of
future generation to meet their needs.
31 Efficiency-Allocative An economy is said to be efficient when it achieves both productive and
& productive allocative efficiency form the point of view of society.
Productive efficiency is achieved when the output is produced using the
fewest resources so that the cost of production can be kept low. When
productive efficiency is achieved the question – ‘how to produce’ is
answered in the best possible way because from the society’s point of
view, there is no wastage of resources.
Allocative efficiency is achieved when the resources are being used to
produce those goods are services that are most wanted by the society.
When Allocative efficiency is achieved, the answer to the question –
‘what to produce’ is answered on the best possible way as it results in
greater benefit of the consumer.
32 Equity and Equality Equity is the condition of being fair or just, while equality is the state of
being equal with respect to something.
Extension - While interpreting equity in the context of distribution of
income it refers to more equitable distribution of income, because if
equity here is interpreted as fairness then people will be paid according to
their efforts which will be highly unequal which will lead to more unequal
distribution of income. However, if it is interpreted as equal distribution
of income then it won’t be fair.
Both these expressions are correct, provided it is understood that in these
case equity in income distribution is interpreted as greater income
equality which does not mean complete income equality.

33 Circular flow of It’s an economic model which shows that in any given time period, the
income value of output produced is equal to total income generated which is
equal to the expenditure made to purchase that output.
34 Full employment In the context of production possibility curve and economy achieves full
employment stats when it products at PPC. At PPC, unemployment is
equal to zero.
35 Shock therapy Measures designed centrally planned economies to achieve rapid
transition to a mixed market economic system have been termed as
shock therapy. They include, privatization of government owned
organization to encourage competition and efficiency, allowing market
forces to determine prices through interaction instead of controlling
price ie. Replacing non-price rationing by price rationing, encouraging
competition, opening trade and finance to international economies etc.
36 Merit Goods Merit goods are those goods which government believes everybody
ought to consume irrespective of their affordability. For example:
healthcare and education.
37 Demerit Goods Demerit good are those goods whose consumption is harmful for the
consumers; therefore, governments discourage the consumption of such
goods. For example cigarettes, alcohol etc.
38 Public goods Public goods are those goods whose provision if left to private sector will
not be provided at all. It is not possible to trace to consumers of such
goods hence it is not possible to charge consumers against their
consumption. Private sector which is driven by profit motive hence find
no incentive to provide such goods For example, roads, street lights, light
house etc.
39 Price-rationing Price rationing is a method of distribution or allocation of a limited
output/income based on the ability of consumers to pay the price
determined by the market. It is one way of answering ‘for whom to
produce’ question.
40 Non-price rationing Non-price rationing is a method of distribution or allocation of a limited
output/income based on the need of the consumers. Price if charged are
set by the government and output/income is distributed on the basis of
mechanisms like first come first serve basis or waiting in line or drawing
a lot etc. It is one way of answering ‘for whom to produce’ question.

41 Privatisation Privatisation refers to the transfer of public sector/government owned

resources to the private sector.
42 Nationalisation Nationalisation refers to the takeover of resources owned by the private
sector by the public sector in its hands.

43 Labour intensive Labour intensive technology refers to the method of production that
technology requires greater use of human resource compared to manmade
resources in the production process.
44 Capital intensive Capital intensive technology refers to the method of production that
technology requires greater use of manmade resource compared to human
resources in the production process.
45 Microeconomics Microeconomics is the part of the discipline that studies the behaviour of
individual economic agents, such as households, firms, industries and the
government, and how they make economic decisions.
46 Macroeconomic Macroeconomics is the part of the discipline that studies the economy as
a whole, focusing on the 'aggregates' of the economy and on countries'
fundamental economic goals in relation to five main variables: economic
growth, employment, price stability, external stability and income
distribution.