Economics Definitions:

Unit 1:
Term:
Opportunity cost
Free market economy
Centrally planned economy
Mixed economy

Factors of production

Production possibility frontier

Division of labour

Specialisation

Positive statement

Normative statement

Normal good
Inferior good

Definition:
The value of the next best
alternative foregone.
An economy in which all
resources are allocated by the
price (free market) mechanism
An economy in which all
resources are allocated by the
government
An economy in which resources
are allocated partly through the
price mechanism and partly
through government intervention
Inputs used in the production of
goods and services;
Capital,
Entrepreneurship,
Labour,
Land
The maximum output potential
for two good or services, when
all resources are fully employed,
in a given time period.
A process whereby the
production procedure is broken
down into different tasks, and
labour are allocated to particular
tasks.
Specialisation occurs when
workers are assigned specific
tasks within a production
process.
An objective statement based on
fact that can be tested. A
scientific approach to economics
without value-judgement.
A subjective statement based on
value judgement that cannot be
tested. A non-scientific approach
to economics.
A good for which demand
increases as incomes increase.
YED is positive for normal goods.
A good for which demand
decreases as incomes increase.
YED is negative for inferior

Substitutes
Complements

Price elasticity of demand (PED)

Income elasticity of demand

(YED)
Luxury good
Necessity good
Cross-price elasticity of demand
(XED)
Price elasticity of supply (PES)
Consumer surplus

Producer surplus
Direct tax
Indirect tax
Incidence of tax?
Ad valorem tax
Unit tax
Subsidy

National minimum wage (NMW)

goods.
Substitute goods are in
competitive demand.
XED is positive for substitutes.
Complementary goods are in
joint demand.
XED is negative for
complements.
The responsiveness of the
quantity demanded of a good to
a change in the price of that
good.
The responsiveness of the
quantity demanded of a good to
a change in consumer incomes.
Elastic PED
Inelastic PED
The responsiveness of the
quantity demanded of one good
to a change in price of another
good.
The responsiveness of the
quantity supplied of a good to a
change in price of that good.
The difference between the price
consumers are willing to pay for
a good and the actual market
price.
The difference between the price
firms are willing to sell a good for
and the actual market price.
A tax levied directly on an
individual or organisation.
A tax levied on the purchase
goods and services.
The way in which the burden of
tax is divided between buyers
and sellers.
A tax set as a percentage of the
price of a good.
A tax set as a fixed amount per
unit of a good.
A government grant to firms to
increase production or lower the
price of a good, by decreasing
production costs for a firm.
A minimum hourly rate of pay an
employer can pay its worker, set
by the government.

Market failure
Government failure
Externality
Social cost
Private cost

External cost
Social benefit
Private benefit

External benefit
Public good
Private good
Free-rider problem

Merit good

Demerit good

Asymmetric information

When the free market (price)

mechanism leads to a
misallocation of resources.
When government intervention
to correct a market failure leads
to a misallocation of resources.
A third party effect, which is not
taken account of by the price
mechanism.
Private cost + External cost
A cost incurred by an individual
(firm or consumer) as part of its
production or other economic
activities, which is taken account
of by the price mechanism.
Negative third party spill-over
effects that is not taken account
of by the price mechanism.
Private benefit + External benefit
A benefit incurred by an
individual (firm or consumer) as
part of its production or other
economic activities, which is
taken account of by the price
mechanism.
A positive third party spill-over
effect that is not taken into
account by the price mechanism.
A good that is non-rivalrous and
non-excludable.
A good that is rivalrous and
excludable.
When an individual cannot be
excluded from consuming a
good, and thus has no incentive
to pay for its provision.
A good that brings unanticipated
benefits to its consumers, such
that society believes that it is
under-consumed by private
individuals, within a free market.
A good that brings less benefits
to consumers than they expect,
such that society believes that it
is over-consumed by individual
within a free market.
When consumers or producers
have imperfect and unequal
market knowledge.

Imperfect information
Buffer stock scheme

Mobility of labour
Occupational mobility of labour

Geographical mobility of labour

Occupational immobility of
labour
Geographical immobility of
labour
Frictional unemployment
Structural unemployment
Welfare loss
Welfare gain
Economic growth
Renewable resource
Non-renewable resource

When consumers or producers

lack market knowledge to make
an informed decision.
An agency intervenes to buy up
surplus stock when harvest is
good with a view to selling when
it is poor, in an attempt to
stabilise volatile commodity
prices.
An agency intervenes to buy and
sell stocks, in an attempt to
stabilise volatile commodity
prices.
The ease of movement of labour,
both geographically and
occupationally.
The ease of movement of labour
between jobs of different
occupations.
The ability of labour to move
between jobs of different
occupations.
The ease of movement of labour
between jobs in different regions.
The ability of labour to move
between jobs in different regions.
The obstacles that prevent the
movement of labour between
jobs of different occupations.
The obstacles that prevent the
movement of labour between
jobs in different regions.
Unemployment that arises while
people move between jobs.
Unemployment arising from
changes in the pattern of
economic activity in an economy.
The excess of social cost over
social benefit for a given output.
The excess of social benefit over
social cost for a given output.
An increase in real GDP/ An
increase in the productive
potential for an economy.
One whose stock level can be
maintained over a period of
time.
One whose stock level is
decreased over time as it is

Equilibrium
Surplus
Shortage
Tradable pollution permits
(carbon emissions trading)

Minimum price scheme

Marginal social cost (MSC)
Marginal social benefit (MSB)
Productive efficiency?
Allocative efficiency?

consumed.
Where supply meets demand.
Excess supply
Excess demand
A system where firms in major
polluting industries are given an
allowance to emit carbon dioxide
Incentive to not pollute fine for
going over allowance
Market for permits develops
Can make profits from selling
permits incentive to reduce
carbon emissions
A legal (maintained by the govt.)
floor price, below which the price
cannot fall.