3.3 Terminology and basic concepts
Like any academic discipline, economics abounds with terminology and jargon. Sometimes it may seem as if the terminology of economics is designed to confuse. However, its purpose, when used properly, is to convey in a concise and precise manner the meaning associated with certain basic concepts and to facilitate the discussion of economic problems. Of course it can, like so many useful innovations, be abused. It can be used to mystify rather than clarify, and to take shortcuts that create ambiguity at the expense of precision. You should always be on your guard against such abuses.
Business and development managers need to know about the economic agents they will be working with, competing against, representing, or producing for. Economic agents are individuals, consumers, managers, business owners, shareholders, or workers. In fact, an economic agent is anyone who acts in an economic way, allocating resources to satisfy wants.
The firm may also be treated as a unitary economic agent with the sole objective of maximising its profits (defined as the surplus of revenue over costs). This is, of course, a simplification of how real firms work, since, in practice, they usually consist of a number of different agents, such as managers, workers, and shareholders, each with their own set of objectives. Nevertheless, it is a useful assumption to make when examining the choices that confront the managers of a business enterprise.
The definitions of a market are varied and often depend upon the context in which the word is used. A market or market place is often identified with a specific location where goods are sold or exchanged. Today, the exchange of goods and services does not always take place at a specific location. A more appropriate definition of a market might be 'a mechanism by which buyers and sellers of goods and commodities are brought together for the purposes of exchange'. The market might involve buyers and sellers haggling over the price of goods displayed in stalls on the village square, or it might be on the internet whereby computer users from all round the world can view, order, and pay for products online.
A market may also involve a combination of different exchange mechanisms. Economists talk in terms of the market for a particular good or service, such as the market for apples, for books, or financial services. Various mechanisms may be used for selling in each of these specific markets.
Efficiency is a word that is often thrown about without much thought being given to its precise definition. Doing something efficiently is often the economists' or managers' way of saying that it is done well, as opposed to badly or inefficiently. As such it is usually something to be strived for. In fact there are various different forms of efficiency, each with their own specific definition. For now we can assume that efficiency is associated with activities that tend in some way or other to maximise benefits and minimise costs.
Many economic concepts and their associated terminology are linked in one way or another to the goal of achieving economically efficient outcomes. They include those listed below.
Opportunity cost: economically efficient outcomes are only possible when one takes into account the opportunity cost of an action or resource. In taking a particular course of action or utilising a resource in a particular way, one is forgoing the opportunity to undertake an alternative course of action or utilise the resource in a different way. Opportunity cost, therefore, equates to the benefits forgone in the next best alternative use or action.
For example, the economic cost of chopping down a forest is not just the cost of employing labour and machinery to do the job, but also includes the cost of lost opportunities to use the forest for alternative purposes, such as for recreation, or to provide environmental benefits.
- Productivity: productivity is usually used in relation to labour, but can be measured in terms of the output per unit of any factor of production, such as land, labour, capital, water, and so on. A plantation may, for example, substitute agricultural machinery for labour. The few labourers that are left each produce far more than they did before the machinery was introduced. However, the machinery may break down frequently, disrupting production and reducing per hectare yields. Whilst labour productivity has increased, land productivity may have fallen.
- Marginal analysis: in studying economics you will soon become familiar with the concept of marginal analysis. Economists are interested in the cost or benefit associated with the consumption or production of the next additional unit. For example, if we extract another litre of oil from the ground will the cost of extraction be more or less than the benefit obtained. If the benefit is greater than the cost we would proceed.