Key Economic Terms

SCARCITY - the limited number of resources in the economy creates the fundamental economic problems. What should these resources be used to produce? How should they be combined for efficient production? And once produced, how should we decide who gets what?
REVENUE - the total value of a firm's sales. Total Revenue = Price x Quantity
COSTS - Total Costs = Fixed Costs + Variable Costs Unit Cost = Total Cost / Output
PROFIT = REVENUE - COSTS
NORMAL PROFIT - the level of profit which will keep resources in their present usage in the long run. It occurs when Total Revenue = Total Costs (TR = TC)
ABNORMAL PROFIT - profit additional to normal profit.
MARKETS - involve an exchange process between buyers and sellers. In a free market the desire of buyers and sellers are brought into equilibrium by the price mechanism.
PROFIT MAXIMISATION - a fundamental assumption of classical economics is that firms seek to maximise profits (i.e. the difference between total revenue and total costs). This occurs where marginal cost equals marginal revenue, i.e. there is no extra profit to be made because the profit is now maximised.
UTILITY MAXIMISATION - consumers are assumed to be seeking to maximise their satisfaction (utility). They will spend their income on goods and services in such a way as to maximise utility.
OPPORTUNITY COST - the use of any resource involves an opportunity cost, i.e. it could be being used for something else. Individuals and governments should always consider what else their resources could be used for when making decisions.
SPECIALISATION - occurs when an individual, business or country focuses on a limited range of tasks. The argument is that by specialising it is possible to become more skilled and efficient. You can then sell the output to others in return for their goods. They will want to buy your goods because you can make them and sell them at a profit more cheaply than they could make them themselves, because you are a specialist. Similarly it is cheaper for you to buy other goods from people who specialise in producing these than to try and make them yourself. Specialisation is the basis for trade.
DIVISION OF LABOUR - occurs when a process is divided up into small, narrowly defined tasks. Individuals specialise in particular parts of the process. First described by Adam Smith in The Wealth of Nations in 1776, it basically involved a production line approach.
1. Should increase productivity because individuals become more skilled through repetition.
2. Saves time as individuals only have to be trained for one job and do not have to keep moving around.
3. Makes it easier to replace staff as newcomers only have to be trained in one job - there is a shorter training period.
SHORT-TERM / LONG-TERM - in economics, the short-term is defined as the period of time when at least one factor of production is fixed. The long-term is a period over which all factors are variable. In the long-term, a firm can completely change its production system because it is not limited by a fixed factor. Also, in the long-term, entry and exit is possible into and out of a market.

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	Created by Tom Barber over 10 years ago