2 Flashcards
Equilibrium
Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded.
Excess demand
When price is set too low so demand is greater than supply.
Excess supply
When price is set too high so supply is greater than demand.
Externalities
The cost or benefit a third party receives from an economic transaction outside of the market mechanism.
External cost/benefit
The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit.
Free market
An economy where the market mechanism allocates resources so consumers and producers make decisions about what is produced, how to produce and for whom.
Free rider principle
People who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit.
Government failure
When government intervention leads to a net welfare loss in society.
Habitual behaviour
A cause of irrational behaviour; when consumers are in the habit of making certain decisions.
Incidence of tax
The tax burden on the taxpayer.
Income elasticity of demand (YED)
The responsiveness of demand to a change in income.
Indirect tax
Taxes on expenditure which increase production costs and lead to a fall in supply.
Inferior goods
YED<0; goods which see a fall in demand as income increases.
Information gap
When an economic agent lacks the information needed to make a rational, informed decision.
Information provision
When the government intervenes to provide information to correct market failure.
Labour
One of the four factors of production; human capital.
Land
One of the four factors of production; natural resources such as oil, coal, wheat, physical space.
Luxury goods
YED>1; an increase in incomes causes an even bigger increase in demand.
