Principles of Economics cheat sheet

Key terms

Economic resources

The inputs (land, labour, capital and entrepreneurship) used to produce goods and services, scarce relative to the demands placed on them.

Human wants

Desires for goods and services that give satisfaction; effectively unlimited, since satisfying one want commonly reveals or creates another.

Scarcity and choice

Scarcity is the basic economic condition that resources are insufficient to satisfy every want; because of it, every economic agent must choose which wants to satisfy and which to leave unmet.

Opportunity cost

The value of the best alternative forgone when a choice is made, the true economic cost of any decision, not merely its monetary price.

Production possibility curves/frontiers

A curve showing the maximum combinations of two goods an economy can produce with its existing resources and technology, fully employed; a point inside the curve shows unused capacity, a point outside is currently unattainable, and points along the curve itself show the opportunity cost of shifting production from one good to the other.

Wealth

The stock of resources, assets and property owned by an individual, firm or nation at a point in time.

Welfare

The overall well-being of individuals or society, of which wealth is only one contributor; economics is ultimately concerned with welfare, not wealth for its own sake.

Microeconomics

Studies the behaviour of individual economic units, households, firms and specific markets, how they make decisions and interact (the microeconomics chapters of this guide).

Macroeconomics

Studies the economy as a whole, national income, inflation, unemployment, growth and the aggregate behaviour of all markets combined (the macroeconomics chapters).

Positive economics

Concerned with what is, objective, testable statements about how the economy actually behaves, free of value judgement (e.g. 'a minimum wage above equilibrium causes unemployment').

Normative economics

Concerned with what ought to be, statements involving a value judgement about what policy should aim for (e.g. 'the minimum wage should be raised').

Scientific method / economics as a social science

Economics builds and tests theories through observation and logical deduction, as the natural sciences do, but with the added difficulty that human behaviour, the subject matter, cannot be controlled in a laboratory the way physical phenomena can.

Planned economy

Resource allocation decisions, what, how and for whom to produce, are made centrally by government rather than by market forces.

Free market economy

Resource allocation is left to the interaction of demand and supply in markets (see the chapter on demand, supply and pricing), with minimal government intervention.

Mixed economy

Combines market allocation with government intervention, the system most real-world economies, Kenya included, actually operate under.