economic definitions
(1) Production: transformation of input into outputs by firms in order to earn a profit (or some other objective). Consumption: Act of using goods and services to satisfy wants. Purchasing goods and services. Factors of production (resources): inputs into the production of goods and services: Labour: All forms of human inputs. Land and raw materials: inputs to production provided by nature. Capital: All inputs in production which have themselves been produced e.g. Factories, machines, tools. Scarcity: The excess of human wants over what can actually be produced to satisfy these wants. Macroeconomics: Studies economic aggregates (grand totals) e.g., overall level of prices, output and employment in the economy. Aggregate demand: total level of spending in the economy. Aggregate supply: total amount of output in the economy. Microeconomics: studies individual units e.g., households, firms and industries. Rate of inflation: % increase in level of prices over a 12 year period. Current account balance of payments: exports of goods and services minus imports of goods and services. If exports exceed imports, there is a ‘current account surplus’ (positive figure), if imports exceed exports, there is a ‘current account deficit’ (negative figure). Recession: output in economy declines. Low level of consumer spending. Demand side policy: government policy designed to alter level of aggregate demand and level of output, employment and prices. Supply side policy: government policy attempts to alter level of aggregate supply directly (more incentives schemes). (2) Planned or command economy: all economic decisions taken by central authorities. Free market economy: economy where all economic decisions are taken by individual households and firms, with no government intervention. Mixed economy: economic decision made partly by government and partly through the market. Mixed market economy: Market economy where there is some government intervention. Input, output analysis: dividing economy into sectors, each sector is a user of input from and supplier of outputs to other sectors. Techniques examines how inputs and outputs can be matched to the total resources available in the economy. Price mechanism: system in a market economy whereby price changes that occur in response to changes in demand and supply. Have the effect of making demand=supply. (3) Perfect competition: highly competitive markets, many firms competing against each other. This is where consumers and producers are price takers (no power to be able to influence market price). Consumers have to accept the prices given for things that they buy. Producers are too small and face too much competition to be able to raise prices. (4) The law o demand: quantity of goods demanded per period of time will fall as price rises and will rise as price falls. Other things being equal. (Relationship between price and consumption). 2 reasons for law: • Income effect: effect of a change in price on quantity demanded arising from consumer becoming better of worse off as a result of price change. • Substitution effect: effect of change in price on quantity demanded arising from consumer switching to or from alternative (substitute) products. Quantity demanded: amount of good a consumer is willing and able to buy at given price over given period of time (not what people would like to consume). Demand curve: negative Substitute goods: a pair of goods which are considered by consumers to be alternatives to each other. As price of one goes up, the demand for the other rises. Complementary goods: a pair of goods consumed together.