Unit 1 Definitions

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AS Microeconomics Revision Booklet

Micro-Economics Definitions
THE ECONOMIC PROBLEM
Economic Term| Definition|
Opportunity Cost| The real cost of a good/service in terms of the next best alternative foregone.| Economic goods| Goods which have an opportunity cost.|
Free goods| Goods which don’t have an opportunity cost.| Normative statements| Based on opinion, have some valued judgments.| Positive statements| Value-free, objective, based upon testable theories, fact.| The economic problem| There is an unlimited want but limited resources.| Factors of production| Land, Labour, Capital, Enterprise| Planned economy| Communist, government intervention, the public sector.| Market economy| Capitalist, decisions are up to the individual, private sector.| Mixed economy| An economy made up of both capital and communists.| Production possibility frontiers| Shows all the combinations of two products given current level resources.| Saving| Foregoing present consumption in the hope of higher future consumption.| Investment| All additions to the capital stock.|

ALLOCATION OF RESOURCES IN COMPETITVE MARKETS
Economic Term| Definition|
Demand| Is the willingness and ability to purchase a product at the prevailing price in a given time period.| Consumer surplus| Occurs when consumers pay less than they would have been willing to pay.| Supply| Is the willingness and ability of producers to put a product onto the market at a prevailing price in a given time period.| Producer Surplus| Occurs when producers receive more for their product than they were willing to accept.| Equilibrium Price| Where the supply is equal to demand.|

Price elasticity of demand| The proportionate change in quantity demanded in response to the change in price.| Relatively elastic demand| PED>1 the proportionate change in quantity demanded is less than the proportionate change in price.| Relatively inelastic demand|...
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