Definitions in Economics 11/27/2009

Scarcity: scarcity occurs when the resources are limited to satisfy

all people’s wants.
Economics: it is the study of human behavior as a relation
between ends and scarce. It means having there own goods.
The economic problem: it arises when the wants exceed the
scarce resources.
Economic goods: scarce resources are used in the production of
economic goods.
PPF: a graphical representation of the maximum amount of good ’a’
that could be produced given the amount of good ‘b’ to be produced.
Land: all the natural resources used in the production of an
economic goods.
Capital: all the mechanism and assets involved to produce more
goods or services.
Capital goods: these goods are required to produce other goods.
Consumer goods: these goods are produced to satisfy people’s
wants.
Labor: all the physical and mental aid(input) used to produce
goods and services.
Opportunity cost: due to the lack of resources, a choice is to be
made.
Micro economics: the study of the behaviors of individuals within
an economy.
Macro economics: it is the study of the total effect on a nation’s
people of all the micro economic activity within that nation.
Free market economy: an economy where consumers determine
the demand and supply (basically price mechanism)of a country.
Mixed economy: an economy where both the private and public
sectors play an important role.
Planned economy: an economy where everything is owned and
decided by the government.
Demand: if a person is willing and able to purchase a good at a
given price then it is known as a demand.
Normal goods: when the income increases, the demand for
normal goods would increase. (luxury good)
 Inferior goods: when the income increases, the demand for
inferior goods decreases. (basic good)
Complement goods: goods that are normally consumed together,
eg car and gas.
Substitute goods: goods that are used in place of each other,
example coffee and tea.
Market: a place where potential buyers and sellers are in contact.
It enables them to trade goods and satisfy their needs and wants.
Ceteris paribus: a change in price will lead to a change in quantity
demanded or supplied.
Sustainable development: it meets the needs of the present
without compromising the ability of future generations to meet their own
needs.
Giffen goods: rise in price of this product makes the people buy
even more of the product.
Conspicuous goods: these are goods that add on to a persons
status value. The more expensive the goods are, the more people will
desire.
Veblen goods (ostentation): when the price rises then the
quantity demanded rises.
Buffer stock: is an economic term, referring to the use of
commodity storage for economic stabilization.
Price ceiling: when the government sets the maximum price for a
good.
Price flooring: when the government sets the minimum price for a
good.
Non-price determinants of demand: any variable that changes
the pattern of demand other than price.
Equilibrium: this is when both the quantity demanded and supplied
and the prices are equal.
Elasticity: the elastic goods are those, where the price increases
and the demand falls.
Inelasticity: an inelastic good is that, the price increases and the
demand remains constant.
Cost-price elasticity of demand: it measures the relative
sensitivity of a change in quantity of a good with respect to a change in
price of another good. Measures the closeness of substitute and the
relevance of complements.
Income elasticity of demand: it measures the relative sensitivity of a
change in the quantity of a good with respect to a change in people’s
income.
Price elasticity of demand: it is the relative increase in quantity
supplied in respect to a relative increase in price.
Price elasticity of supply: it is a measure of the of firms to
increasing the quantity supplied.
Revenue: the money earned by a firm’s business activity.
Total revenue: the total income for a business activity during a
time period, price time quantity sold, is the total revenue.
Flat rate: this tax is the same amount on each unit sold.
Ad valorem tax: it is based on the base value of goods sold, and
as it is the percentage the amount will increase as the base value
increases.
Subsidy: it is a grant from the government which acts as am
incentive to produce more and lowers he cost of production.
Incidence: burden of the tax is shared between producers and
consumers.
Market failure: it is a term used by economists to describe the
condition where the allocations of goods and services by a market are not
efficient.
Non excludability: non payers can not be excluded from the
benefits of the good.
Positive Externality: when one person’s action affect the third person
and the relevant costs are not reflected in market price
Negative Externality: when one person’s action affect the third person
and the relevant benefits are not reflected in market price.
Formulae 11/27/2009
 Important points to remember
11/27/2009
Reasons for economic problems:
Economic problem: the human wants and needs are infinite, while
the resources needed to satisfy those wants and needs are limited and
scarce.
 Unlimited wants
 different priorities
 limited resources
opportunity cost: cost of next best alternative that is sacrificed. The
opportunity cost is the opportunity lost.
Assumptions in a ppf:
 There are only two goods
 There are limited technology and inputs of production
Shows that nothing is free and there is an opportunity cost for
everything