List Of Most Important Definitions For Unit 1: How Market Work?

This can become handy, days before the examination

(1) Production possibility frontier (PPF). A curve that shows the combination of two goods that can be produced in an economy shall all resources are fully & efficiently used

(2) Opportunity cost. The next best alternative forgone

(3) Absolute advantage. Situation where a country can produce a good using lesser resources than another country

(4) Comparative advantage. Situation where a country can produce a good at lower opportunity costs compared to another country, & therefore should specialise in it

(5) Specialisation. Process of breaking up a task into a number of repetitive operations each done by different workers

(6) Free market economy. An economy where resources are all privately owned & price mechanism will act to allocate resources

(7) Command economy. An economy where all resources are publicly owned & state government will intervene to allocate resources

(8) Mixed economy. An economy where resources are owned & allocated by both private sector & government

(9) Positive statement. Statement that can be proven true or false by referring to facts

(10) Normative statement. Value judgement & cannot be proven true or false

(11) Substitutes. Goods that can be used in place of another

(12) Complements. Goods that are jointly used with another

(13) Consumer surplus. The difference between what the consumers are willing to pay & what they are actually paying

(14) Producer surplus. The difference between the actual price a producer receives for its good & the lower price it is willing to accept

(15) Price elasticity of demand (PED). Measures the responsiveness of quantity demanded to a change in price

(16) Cross elasticity of demand (XED). Measures the responsiveness of quantity demanded for a good (say Good X) to a change in the price of another good (say Good Y)

(17) Income elasticity of demand (YED). Measures the responsiveness of quantity demanded for a good to a change in income

(18) Price elasticity of supply (PES). Measures the responsiveness of quantity supplied to a change in price

(19) Taxes. Fee charged onto a particular good or service to discourage its production or consumption

(20) Subsidies. Grants given by the government to encourage the production or consumption of a particular good or service

(21) Incidence of tax. Means upon who the tax fall onto