Markets and market failure - The economic problem

opportunity cost

the next best alternative given up when an economic decision is made. NB - only the next one NOT a range of alternatives

Economic goods

goods that are scarce and therefore have an opportunity cost

free goods

goods that have no opportunity cost, for example air.

factor market

the market for the factors of production that make other goods and services such as labour or raw materials

renewable resources

resources that are able to be replenished over time, whereas non-renewables such as oil and gas are likely to run out

profit

when total income or revenue for a firm is greater than total costs

free market economy

one in which there is very limited government involvement in providing goods and services

production possibility boundary

the PPB indicates the maximum possible output that can be achieved given a fixed set of resources and technology in a particular time period

productive efficiency

when a firm operates at minimum average total cost, producting the maximum possible output from inputs into the production process

allocative efficiency

this is achieved in an economy when it is not possible to make anyone better off without making someone worse off, or you cannot produce more of one good without making less of another

productivity

a measure of efficiency, measuring the ratio of inputs to outputs; the most common measure is labour productivity, which is the output per worker

human capital

the skills, abilities, motivation and knowledge of labour, improvements in human capital raise productivity and can shift the PPB to the right.

division of labour

breaking the production process down into a sequence of tasks, with workers assigned to particular tasks

specialisation

the production of a limited range of goods by an individual factor of production or firm or country, in cooperation with others so that together a complete range of goods is produced.

value judgements

statements or opinions expressed that are not testable or cannot be verified and depend very much on the views of the individual and the values they hold.

normative statements

opinions that require value judgements to be made

positive statements

statements that can be tested against real world data