Chapter 1 Glossary

Front 1

Allocative efficiency

Back 1

When production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Front 2

Centrally planned economy

Back 2

An economy in which the government decides how economic resources will be allocated.

Front 3

Consumer sovereignty

Back 3

Occurs because firms must produce goods and services that meet the wants of consumers or the firms will go out of business. Therefore it is ultimately consumers who decide what goods and services will be produced.

Front 4

Dynamic efficiency

Back 4

Occurs when new technologies and innovation are adopted over time.

Front 5

Economic models

Back 5

Simplified versions of reality used to analyse real-world economic situations.

Front 6

Economic variable

Back 6

Something measurable that relates to resource use that can have different values, for example wages, prices, litres of water.

Front 7

Economics

Back 7

The study of the choices people and societies make to attain their unlimited wants, given their scarce resources.

Front 8

Equity

Back 8

The fair distribution of economic benefits between individuals and between societies.

Front 9

Macroeconomics

Back 9

The study of the economy as a whole, including topics such as inflation, unemployment and economic growth.

Front 10

Marginal analysis

Back 10

Analysis that involves comparing marginal benefits and marginal costs.

Front 11

Market

Back 11

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Front 12

Market economy

Back 12

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Front 13

Microeconomics

Back 13

The study of how households and firms make choices, how they interact in markets and how the government attempts to influence their choices.

Front 14

Mixed economy

Back 14

An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in the allocation of resources.

Front 15

Normative analysis

Back 15

Analysis concerned with what ought to be and involves making value judgements, which cannot be tested.

Front 16

Opportunity cost

Back 16

The opportunity cost of any activity is the highest-valued alternative that must be given up to engage in that activity.

Front 17

Positive analysis

Back 17

Analysis concerned with what is and involves value-free statements that can be checked by using the facts.

Front 18

Productive efficiency

Back 18

When a good or service is produced using the least amount of resources.

Front 19

Resources

Back 19

Inputs used to produce goods and services, including natural resources such as land, water and minerals, labour, capital and entrepreneurial ability. These are otherwise referred to as the factors of production.

Front 20

Scarcity

Back 20

The situation in which unlimited wants exceed the limited resources available to fulfil those wants.

Front 21

Trade-off

Back 21

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

Front 22

Voluntary exchange

Back 22

Occurs in markets when both the buyer and seller of a product are made better off by the transaction.