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Summary Definitions for Economics 114
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Definitions for Economics 114 (Microeconomics) from Economy: The Core textbook
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The capitalist revolution: the emergence in the eighteenth century and the eventual global Labour market: a market that allows employers to offer wages to individuals who agrees tospread of a way of organising an economy, which we call capitalism. work under the direction of the employer.
Gross domestic product (GDP): the total value of everything produced in a given period, Demand side: the side of a market on which the participants offer money in return for
typically a year. Also referred to as gross domestic income. another good or service.
Disposable income: an individual’s income (from all sources) received over a given period, Supply side: the side of a market on which participants are offering a good or a service in
minus any transfers the individual made to others, including taxes paid to the government. return for money.
Absolute income: the Rand value that an individual earns, e.g. R3 000. Economies of scale: the doubling of all inputs of a production process, results in a more than
doubling of the production process’ output. Also known as increasing returns to scale.
Constant prices: the price of a good or service corrected increases and decreased in prices,
enabling a unit of currency to represent the buying power in different periods. Division of labour: the specialisation of producers to carry out different tasks in the
production process. Also known as specialisation.
Purchasing power parity (PPP): a statistical correction that allows for goods and services to
be compared in different countries that have different currencies, which attempts to achieve Absolute advantage: when the inputs a producer/country uses to produce a good or service
equality in the real purchasing power of different currencies. is less than that of another producer/country.
Industrial revolution: a wave of technological advances and organisational changes which Comparative advantage: when the cost of producing an additional unit of a specific good or
changed agrarian and craft-based economies into commercial and industrialised countries. service of a producer/country is lower relative to the cost of producing an additional unit of
the same good or service by another producer/country.
Technology: a process that takes a set of inputs to produce a specific output.
Causality: a direction from cause to effect, which establishes that a change in one variable
General-purpose technologies: technological advances that can be applied to many sectors, brings about a change in another. Correlation is simply an assessment that two variables
and spawn further innovations. Computers and electricity are two common examples. move together, but causation is a more restrictive concept that accounts for the association
among variables.
Technological progress: the change in technology that reduces the inputs required to
produce a set output. Natural experiment: an empirical study exploiting naturally occurring statistical controls in
which researchers do not have the ability to assign participants to treatment and control
Economic system: the institutions that organises the production and distribution of goods groups, as is the case in conventional experiments. Instead, differences in law, policy,
and services within an economy. weather, or other events can offer the opportunity to analyse populations as if they had been
part of an experiment. The validity of such studies depends on the premise that the
Institutions: the laws and social customs that governs the way that individuals interact with assignment of subjects to the naturally occurring treatment and control groups can be
one another in a society. plausibly argued to be random.
Capitalism: an economic system in which private property, markets and firms play an Subsistence level: the level of living standards (measured by consumption or income) such
important role that the population will not grow or decline.
Private property: the right and expectation that one can enjoy one’s possessions in ways of Productivity: the amount of something that a person could produce in a given amount of
one’s own choosing, exclude others from their use, and dispose of them by gift or sale to time.
others who then become their owners. Also referred to as private ownership.
Index of real wages: a quantitative amount, relative to its value in a reference period
Capital goods: the equipment, buildings, and other durable inputs used in producing goods (“index”) of the money wage of a worker, adjusted for changes in prices over time (“real”).
and services. Raw materials, however, is not included under capital goods as this is referred The result represents the real buying power of the money the workers earned.
to as intermediate inputs.
Flow: A quantity measured per unit of time, such as annual income or hourly wage.
Market: a way of connecting people who may mutually benefit by exchanging goods and
services through buying and selling. Equilibrium: a model outcome that is self-perpetuating. In this case, something of interest
does not change unless an outside or external force is introduced that alters the model’s
Firm: a way of organising production by directing employees to produce goods and services description of the situation. Note that equilibrium means that one or more things in the model
by using sets of capital goods that are owned by one or more individuals within the economy remains constant. It does not necessarily mean that nothing changes.
in exchange for wages and salaries. The produced goods and services become the property
of the firm, which then sells the goods and services on markets to generate a profit.
, Ceteris paribus: the literal meaning of the expression is ‘other things equal’. In an economic Tangency: when two curves share one point in common but do not cross. The tangent to a
model it means an analysis ‘holds other things constant’. curve at a given point is a straight line that touches the curve at (only) that point but does not
cross it.
Incentive: economic reward or punishment, which influences the benefits and costs of
alternative courses of action. Diminishing returns: A situation in which the use of an additional unit of a factor of production
results in a smaller increase in output than the previous increase. Also known as diminishing
Relative price: the price of one good or service compared to another (usually expressed as a marginal returns in production.
ratio).
Concave function: a function of two variables for which the line segment between any two
Economic rent: a payment or other benefit received above and beyond what the individual points on the function lies entirely below the curve representing the function (the function is
would have received in his or her next best alternative (or reservation option). convex when the line segment lies above the function).
Reservation option: a person’s next best alternative among all options in a particular Preferences: a description of the benefit or cost we associate with each possible outcome.
transaction. Also known as a fallback option.
Indifference curve: A curve of the points which indicate the combinations of goods that
Dominated: we describe an outcome in this way if more of something that is positively provide a given level of utility to the individual.
valued can be attained without less of anything else that is positively valued. In short: an
outcome is dominated if there is a win-win alternative, for example moving from the C- Utility: A numerical indicator of the value that one places on an outcome, such that higher
technology to the A-technology. valued outcomes will be chosen over lower valued ones when both are feasible
Isocost line: a line that represents all combinations of inputs that cost a given total amount. Consumption good: a good or service that satisfies the needs of consumers over a short
period.
Entrepreneur: a person who creates or is an early adopter of new technologies,
organisational forms, and other opportunities. Marginal rate of substitution (MRS): the trade-off that a person is willing to make between
two goods. At any point, this is the slope of the indifference curve.
Creative destruction: Schumpeter’s name for the process by which firms who do not adopt
new technologies, along with the old technologies are swept away by the new technology Opportunity cost: when taking an action implies forgoing the next best alternative action, this
and those who adopt it, because they cannot compete in the market. In his view, the failure is the net benefit of the foregone alternative.
of unprofitable firms is creative because it releases labour and capital goods for use in new
combinations. Economic cost: the out-of-pocket cost of an action, plus the opportunity cost.
Evolutionary economics: an approach that studies the process of economic change, Feasible frontier: the curve made of points that defines the maximum feasible quantity of one
including technological innovation, the diffusion of new social norms, and the development of good for a given quantity of the other.
novel institutions.
Feasible set: all the combinations of the things under consideration that a decision- maker
Factors of production: the labour, machinery and equipment (usually referred to as capital), could choose given the economic, physical or other constraints that he faces.
land, and other inputs to a production process.
Marginal rate of transformation (MRT): The quantity of some good that must be sacrificed to
Production function: expresses a graphical or mathematical relationship describing the acquire one additional unit of another good. At any point, it is the slope of the feasible
amount of output that can be produced by any given amount or combination of input(s). The frontier.
function describes differing technologies capable of producing the same thing.
Constrained choice problem: this problem is about how we can do the best for ourselves,
Average product: total output divided by a particular input, for example per worker (divided given our preferences and constraints, and when the things we value are scarce.
by the number of workers) or per worker per hour (total output divided by the total number of
hours of labour put in). Budget constraint: an equation that represents all combinations of goods and services that
one could acquire that exactly exhaust one’s budgetary resources.
Diminishing average product of labour: a situation in which, as more labour is used in a
given production process, the average product of labour typically falls. Income effect: the effect that the additional income would have if there were no change in
the price or opportunity cost.
Marginal product: the additional amount of output that is produced if a particular input was
increased by one unit, while holding all other inputs constant. The marginal product Substitution effect: the effect that is only due to changes in the price or opportunity cost,
represents the slope of the production function. given the new level of utility.
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