Unit 1: The foundations of economics
SCARCITY The situation in which available factors of production are finite, whereas
society’s wants are infinite
PRICE MECHANISM A system where the distribution of goods and serves and the allocation of
resources are determined by changes in market prices, influenced by forces of
demand and supply
RESOURCE ALLOCATION Assigning available factors of production to specific uses chosen among many
possible alternatives
LAND All natural resources (eg. forests, oceans, oil reserves, minerals, lakes)
LABOUR The physical and mental effort that people contribute to the production of
goods and services
CAPITAL PHYSICAL CAPITAL: A man-made factor of production used to produce goods
and services (eg. machinery)
HUMAN CAPITAL: The skills, abilities, and knowledge acquired by people in
labour force to make them more productive (eg. education, health)
NATURAL CAPITAL: All natural resources (eg. air, biodiversity, soil quality)
ENTREPRENEURSHIP Human skill that involves the ability to innovate, take business risks, and seek
new opportunities
OPPORTUNITY COST The value of the next best alternative that must be sacrificed to obtain
something else
PRODUCTION POSSIBILITIES Represents all combinations of the maximum amounts of two goods that can
CURVE (PPC) be produced by an economy when there is full employment of resources and
productive efficiency
TRANSITIONAL ECONOMY When an economy transitions between a command and a free-market
economy
FREE MARKET ECONOMY an economy where resource allocation is determined mainly by market forces
of demand and supply
SOCIAL SCIENCES Studies of people in society and how they interact with each other.
ECONOMIC WELL-BEING A multi-dimensional concept relating to the level of prosperity and quality of
living standards in a country.
,CETERIS PARIBUS All other things constant
Unit 2: Microeconomics
Demand & Supply
MARKET A platform where buyers and sellers of goods, services, or resources can
carry out exchanges
DEMAND The various quantities of a good or service the consumer is willing and
able to buy at different possible prices during a particular time period, CP
***(Qd = a-bP)
LAW OF DEMAND There is a negative causal relationship between the price of a good and its
quantity demanded over a particular time period, CP
SUPPLY The various quantities of a good or service a firm is willing and able to
produce and supply to the market for sale at different possible prices
during a particular time period, CP ***(Qs = c+dP)
SUPPLY CURVE This shows the relationship between the price of a good or service and the
quantity supplied. It is normally upward sloping.
LAW OF SUPPLY There is a positive causal relationship between the quantity of a good
supplied over a particular time period and its price, CP
UTILITY A measure of the satisfaction derived from purchasing a good or service.
MARGINAL BENEFIT The extra benefit that consumers receive from each additional unit of
goods bought
MARGINAL COST The extra benefit firms receive from each additional unit of goods
produced
NORMAL GOOD A good when the demand increases in response to an increase in
consumer income
INFERIOR GOOD A good when the demand falls in response to an increase in consumer
income
SUBSTITUTE GOODS Goods which can be used in place of each other since they satisfy a similar
need.
, COMPLEMENTARY GOODS Two goods are complements if they tend to be used together
COMPETITIVE SUPPLY Two or more products refer to production of one or the other by a firm
(eg. wheat and corn as farmer can choose to grow either one)
JOINT SUPPLY Two or more products refer to production of goods that are derived from
a single product (eg. butter and skimmed milk are both produced from
whole milk)
SHORTAGE Excess demand (Quantity demanded > Quantity supplied)
SURPLUS Excess supply (Quantity supplied > Quantity demanded)
MARKET EQUILIBRIUM The forces of supply and demand are in balance, Qd = Qs, and there is no
tendency for the price to change
PRICE MECHANISM A system of price determination and allocation of goods by free market
forces
ALLOCATIVE EFFICIENCY The best allocation of resources from society’s point of view is at
competitive market equilibrium, where social surplus is maximized (MB =
MC)
PRODUCTIVE EFFICIENCY Production with the fewest possible resources (Pareto optimality)
CONSUMER SURPLUS The highest price consumers are willing to pay for a good minus the price
paid
PRODUCER SURPLUS The price received by firms for selling their good minus the lowest price
they are willing to accept to produce the good
SOCIAL SURPLUS Sum of consumer and producer surplus
SOCIAL WELFARE The well-being of society, of consumers and producers
WELFARE LOSS A loss of economic efficiency that can occur when equilibrium for a good
or service is not allocatively efficient.
STANDARD OF LIVING The level of wealth, comfort, material goods, and necessity goods
available to a certain socioeconomic class in a country.
FREE MARKET a market in which resource allocation (or price and/or output) is
determined by one of the following:
• demand and supply
• price mechanism
• producers and consumers
SCARCITY The situation in which available factors of production are finite, whereas
society’s wants are infinite
PRICE MECHANISM A system where the distribution of goods and serves and the allocation of
resources are determined by changes in market prices, influenced by forces of
demand and supply
RESOURCE ALLOCATION Assigning available factors of production to specific uses chosen among many
possible alternatives
LAND All natural resources (eg. forests, oceans, oil reserves, minerals, lakes)
LABOUR The physical and mental effort that people contribute to the production of
goods and services
CAPITAL PHYSICAL CAPITAL: A man-made factor of production used to produce goods
and services (eg. machinery)
HUMAN CAPITAL: The skills, abilities, and knowledge acquired by people in
labour force to make them more productive (eg. education, health)
NATURAL CAPITAL: All natural resources (eg. air, biodiversity, soil quality)
ENTREPRENEURSHIP Human skill that involves the ability to innovate, take business risks, and seek
new opportunities
OPPORTUNITY COST The value of the next best alternative that must be sacrificed to obtain
something else
PRODUCTION POSSIBILITIES Represents all combinations of the maximum amounts of two goods that can
CURVE (PPC) be produced by an economy when there is full employment of resources and
productive efficiency
TRANSITIONAL ECONOMY When an economy transitions between a command and a free-market
economy
FREE MARKET ECONOMY an economy where resource allocation is determined mainly by market forces
of demand and supply
SOCIAL SCIENCES Studies of people in society and how they interact with each other.
ECONOMIC WELL-BEING A multi-dimensional concept relating to the level of prosperity and quality of
living standards in a country.
,CETERIS PARIBUS All other things constant
Unit 2: Microeconomics
Demand & Supply
MARKET A platform where buyers and sellers of goods, services, or resources can
carry out exchanges
DEMAND The various quantities of a good or service the consumer is willing and
able to buy at different possible prices during a particular time period, CP
***(Qd = a-bP)
LAW OF DEMAND There is a negative causal relationship between the price of a good and its
quantity demanded over a particular time period, CP
SUPPLY The various quantities of a good or service a firm is willing and able to
produce and supply to the market for sale at different possible prices
during a particular time period, CP ***(Qs = c+dP)
SUPPLY CURVE This shows the relationship between the price of a good or service and the
quantity supplied. It is normally upward sloping.
LAW OF SUPPLY There is a positive causal relationship between the quantity of a good
supplied over a particular time period and its price, CP
UTILITY A measure of the satisfaction derived from purchasing a good or service.
MARGINAL BENEFIT The extra benefit that consumers receive from each additional unit of
goods bought
MARGINAL COST The extra benefit firms receive from each additional unit of goods
produced
NORMAL GOOD A good when the demand increases in response to an increase in
consumer income
INFERIOR GOOD A good when the demand falls in response to an increase in consumer
income
SUBSTITUTE GOODS Goods which can be used in place of each other since they satisfy a similar
need.
, COMPLEMENTARY GOODS Two goods are complements if they tend to be used together
COMPETITIVE SUPPLY Two or more products refer to production of one or the other by a firm
(eg. wheat and corn as farmer can choose to grow either one)
JOINT SUPPLY Two or more products refer to production of goods that are derived from
a single product (eg. butter and skimmed milk are both produced from
whole milk)
SHORTAGE Excess demand (Quantity demanded > Quantity supplied)
SURPLUS Excess supply (Quantity supplied > Quantity demanded)
MARKET EQUILIBRIUM The forces of supply and demand are in balance, Qd = Qs, and there is no
tendency for the price to change
PRICE MECHANISM A system of price determination and allocation of goods by free market
forces
ALLOCATIVE EFFICIENCY The best allocation of resources from society’s point of view is at
competitive market equilibrium, where social surplus is maximized (MB =
MC)
PRODUCTIVE EFFICIENCY Production with the fewest possible resources (Pareto optimality)
CONSUMER SURPLUS The highest price consumers are willing to pay for a good minus the price
paid
PRODUCER SURPLUS The price received by firms for selling their good minus the lowest price
they are willing to accept to produce the good
SOCIAL SURPLUS Sum of consumer and producer surplus
SOCIAL WELFARE The well-being of society, of consumers and producers
WELFARE LOSS A loss of economic efficiency that can occur when equilibrium for a good
or service is not allocatively efficient.
STANDARD OF LIVING The level of wealth, comfort, material goods, and necessity goods
available to a certain socioeconomic class in a country.
FREE MARKET a market in which resource allocation (or price and/or output) is
determined by one of the following:
• demand and supply
• price mechanism
• producers and consumers
