Economics Unit one Definitions

UNIT ONE DEFINITIONS 2008

A Production Possibility Frontier shows the maximum combinations of any two goods that an economy can produce with its given level of resources.

The Opportunity Cost of an action is the value of the next best alternative that is foregone as a result of choosing that action.

A Free Market Economy is a system where resources are privately owned and allocated through the price mechanism.

A Mixed Economy is an economic system where resources are owned by both private individuals and the government and some resources are allocated through the price mechanism, whilst others are allocated through a planning process.

The Demand Curve shows the amount of a good that consumers are willing to buy at various prices.

The Supply Curve shows the amount of a good that producers are willing to sell at various prices.

Price Elasticity of Demand measures the responsiveness of quantity demanded of a good to a change in price. We calculate the price elasticity from the following formula: Price elasticity of demand = % change in quantity demanded / % change in the price

Cross Price Elasticity of Demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. We calculate the cross price elasticity from the following formula: Cross price elasticity of demand = % change in quantity demanded of good A / % change in the price of good B

Income Elasticity of Demand measures the responsiveness of quantity demanded of a good to a change in income. We calculate the income elasticity from the following formula: Income elasticity of demand =

% change in quantity demanded / % change income

Price Elasticity of Supply measures the responsiveness of quantity supplied to a change in price. We calculate the price elasticity of supply from the following formula: Price elasticity of supply = % change in the quantity supplied / % change in the price

A subsidy is a grant given to producers to encourage them to supply more of a product.

Consumer Surplus is the difference between the price a consumer is willing to pay for a good and the lower price they actually pay.

Producer Surplus is the difference between the price a producer is willing to supply a good for and the higher price they actually receive.

A Positive Economic Statement is an objective statement of fact, which can be proved or disproved, and concerns how the world is.

A Normative