Fundamental Economic Terms and Their Applications
Real Assets
Those things that are deemed adequate to meet human needs.
Needs
A sense of lack of something linked to the desire to satisfy it. The economy is particularly interested in those needs whose satisfaction requires the use of scarce resources.
Marginal Analysis
Assumes that people make decisions weighing the benefits against the additional costs at the time we choose.
Incentives
People change their behavior in response to a reward.
FPP (Production Possibilities Frontier)
A simple tool to study efficiency, opportunity cost, and improving your performance in the studio or in any other activity.
Land as a Factor of Production
Comprises all those resources that are extracted directly or indirectly from nature: mining, agricultural, livestock, etc.
Labor as a Factor of Production
Encompasses all human activity dedicated to the production of goods and services for the satisfaction of needs.
Capital as a Factor of Production
Encompasses all those goods produced by man, not intended for consumption, but for the production of other goods and services.
Productivity
The relationship established between the goods and services produced and the factors used in obtaining them.
Maximum Potential Production
The maximum production of goods and services that can be developed over a period of time, using all resources in an efficient manner.
Efficiency
The use of available resources with a given technological level, by achieving a maximum possible output.
Positive Economics
Economic analysis that describes how the economic reality is and predicts how it might vary in response to certain events.
Normative Economics
A set of propositions, which includes value judgments on the desirability of adopting certain measures to improve the economic reality.
Economic Rationality
Assuming household behavior, which considers these use their scarce resources to be aimed to maximize their own utility or benefits. Used to perform economic models that explain and predict the behavior of economic agents.
Product Market
Where goods and services that satisfy a need are traded in exchange for a certain price.
Factor Market
Where resources used in the production process (labor, land, capital) are exchanged in exchange for a price or income as wages, rents, interest, and benefits.
Circular Flow of Income
Constituted by the flow of goods and services and factors between families and businesses, and secondly by their corresponding cash payments.
Equity
- Horizontal Equity: People who are in similar circumstances should pay similar taxes and receive the same type of benefits.
- Vertical Equity: People who enjoy greater well-being should pay more taxes and receive fewer benefits than those who do not enjoy this welfare.
Specialization
Specialization is development in a particular occupation with the aim of producing different goods and services through exchange and trade to serve the needs of other members of society. One advantage is that it increases productivity, increasing the amount of goods and services a country produces. But it also makes our relationships more complex and creates a strong interdependence between people forming a community.
Value-Added of an Enterprise
The difference between the value of goods produced and the cost of raw materials used for production.