Definitions Flashcards
Dunknoe, these are the easy marks ygm
Economic resources/Factors of Production
The resource inputs that are available in an economy for the production of goods and services. These are: Capital, enterprise, land, labour
The economic problem
Because wants are infinite but resources are scarce, choices must be made as of how to allocate resources. These choices include what to produce, how to produce and for whom to produce to
Scarcity
We have limited resources which are insufficient to meet infinite wants
Opportunity cost
The value of the next best alternative foregone when a choice is made
Production possibility curve
Represents the maximum output combinations of 2 goods that can be produced given the current level of resources, the current state of technology and assuming all resources are working at optimum efficiency
Economic Growth
Increase in the productive potential of an economy. Can be shown by an outwards shift in the PPC
Productive potential/capacity
The maximum output that an economy is capable of achieving
Pareto efficiency
Where one person cannot be made better off without someone else being made worse off. All points on a PPC are pareto efficient
Productive efficiency
Where the production takes place using the least amount of scarce resources.
Division of labour
Where the production process is broken down into separate tasks and individual workers will specialise in one task.
Specialisation
The concentration of a worker, group of workers, firm, region or whole economy on the production of a narrow range of goods and services
Exchange
The process by which goods and services are traded
Want
Anything a consumer would like irrespective of whether they have the means to purchase it
Need
The things we actually need to survive. Basic needs are food, water, shelter, and warmth. Everything else we may wish to purchase is a want
Economic system
The way in which production is organised by a country or group of countries.
Economic decisions can be made entirely by the state (planned economy) [example on what to produce, how to produce or for whom to produce], entirely by the market (market economy) [example] or a mixture of both
Positive statement
A statement based on fact
Normative statement
A statement which is based upon opinion
Economic Good
Goods and services which use up resources in order to be produced. They therefore have an opportunity cost- in order for one economic good to be produced, another must be foregone. As resources are limited , so is the number of economic goods that can be produced
Free good
A good with zero opportunity cost as it requires no use of economic resources in order to be able to consume it eg. air
Trade off
The calculation involved in deciding whether to give up one good or another
Capital goods/Producer goods
Man-made goods aids to production and are goods that will be used up over and over again in production processes such as machinery or factory buildings
Consumer goods
Goods and services used for immediate consumption. They do not add to the productive capacity and can be ‘single use’ or ‘long use consumer durables’
Gross investment
Total value of capital goods created in an economy in a given time period
Capital consumption
Reduction in value of capital goods created in an economy due to depreciation becoming obsolete in a given time period
Net investment
Gross investment - capital consumption in a given time period
Effective demand
The quantity of a product that consumers are willing and able to purchase at different market prices over a period of time
consumer surplus
The difference between the value a consumer is prepared to pay for a good or service and the price that is actually required to make the purchase (market price)
First law of demand
There is an inverse relationship between price and quantity demanded: The lower the price, the higher quantity demanded; the higher the price, the lower quantity demanded
Ceteris paribus
All other things being equal
Movement along the demand curve
The response to a change in price. An increase shows an extension of quantity demanded and a decrease shows a contraction of quantity demanded
Conditions/detriments of demand
Non price factors that affect the level of demand for a good or service
Shift in the demand curve
When a change in a non price factor leads to an increase or decrease in demand
Increase in demand
Shift outwards; quantity demanded will increase at each and every price
Decrease in demand
Shift to the left (inwards); quantity demanded will be less at each and every price
PED
The responsiveness of quantity demanded of a good to a change in price
eg. %change in quantity demanded
—————————————
%change in price
Price elastic demand
When quantity demanded is very responsive to a change in price.
eg. A 1% change in price will lead to a >1% change in quantity demanded
Price inelastic demand
When quantity demanded is not very responsive to to a change in price
eg. A 1% change in price will lead to a <1% change in quantity demanded
YED
The responsiveness of quantity demanded to a change in income
eg. % change in quantity demanded
—————————————–
% change in income
Normal good
Goods for which an increase income leads to an increase in demand
Income elastic demand
When quantity demanded is very responsive to a change in income
eg. A 1% change in income will lead to a >1% change in quantity demanded
Income inelastic demand
When quantity demanded is not very responsive to to a change in income
eg. A 1% change in price will lead to a <1% change in quantity demanded
Inferior good
Goods for which an in income leads to a fall in demand
XED
The responsiveness of a quantity demanded of one good to a change in the price of another
Complementary good
Goods for which there is joint demand
Substitute good
Substitute goods are goods which, as a result of changed conditions, may replace each other in use (or consumption). A substitute good, in contrast to a complementary good, is a good with a positive cross elasticity of demand. This means a good’s demand is increased when the price of another good is increased.
Total revenue
The price X the quantity sold
Effective supply
The quantity of a product that producers are willing and able to supply at different market prices over a period of time
Producer surplus
The difference between the price actually received (the market price) by producers for a good/service and the price they are willing to accept
Movement along the supply curve
The response to a change in price.
An increase shows an extension of quantity supplied
A decrease shows a contraction of quantity supplied
Conditions of supply
Non-Price factors that affect the level of supply for a good or service
conditions of supply
non-price factors that affect the level of supply for a good or service
indirect (ad valorem tax)
a tax levied on the consumption of goods and services eg. VAT, APD
Incidence of taxation
The way in which the burden of taxation is divided between the buyers and the sellers
The more price inelastic the demand curve, the higher the tax incidence on the consumer
Subsidy
A payment (usually from government) to encourage production or consumption by lowering the costs of production per unit
Price elasticity of supply (PES)
The responsiveness of a quantity supplied of a good/service to a change in its price
eg.%change in quantity supplied
—————————————
%change in price
Determinants of PES
Factors that affect the extent to which quantity supplied is responsive to price
Such as availability of stocks of the product, availability of factors of production and the time period
Market
Any situation which brings together buyers and sellers (consumers and producers) for the purpose of trading (exchanging) goods and/or services
Price system
A method of allocating resources by the free movement of prices
Equilibrium quantity
The quantity that is demanded and supplied at the equilibrium price.
Equilibrium price/market clearing price
The price where quantity demanded and supplied are equal
Market equilibrium
The price where quantity supplied and demanded are equal
Disequilibrium
Any situation position in a market where demand and supply are not equal
Shortage
An excess of demand over supply
When quantity demanded > quantity supplied
surplus
An excess of supply over demand
When quantity supplied > quantity supplied
Market failure
where the free market mechanism fails to achieve economic efficiency.
Allocative efficiency
Where scarce resources are used to produce the goods and services that consumers actually demand in the quantities they desire, so consumer welfare is maximised
Economic efficiency
where allocative and productive efficiency are achieved
Allocative inefficiency
Where resources are over or under-allocated to the production of a particular good or service
Externality
Where an action taken by one economic agent has an effect on a third party not directly involved in the activity
Negative externality (external cost)
When the actions of of one group result in a negative side effect /impact on a third party
OR
When the social costs of an activity are greater than the private costs
Positive externality (external benefit)
A benefit to a third party
OR
when social benefits of an economic activity are greater than the private benefits
Third party
Person/group of people not directly involved in making a decision
Private cost
The costs directly incurred by those undertaking a particular economic activity
Private benefit
The benefits directly accruing to those undertaking a particular economic activity
Social cost
Private cost + external cost of an economic activity
Social benefit
Private benefit + external benefit of an economic activity
Socially optimum output
The output quantity where full social cost is equal to full social benefit
Information failure
When some, or all, of the participants in an economic exchange do not have perfect knowledge. Or when one participant in an economic exchange has more knowledge than another participant. This leads to the misallocation of scarce resources, resulting in consumers paying too much or too little and/or firms producing too much or too little
Asymmetric information
Where information is not equally shared between two parties and therefore one participant in an economic exchange has more knowledge than another.
Merit good
A good whose consumption is better for consumers than they actually realise.
Hence consumers underestimate the private benefits of consumption and will under-consume this good in a free market
Demerit good
A good whose consumption is more harmful than consumers actually realise
OR
A good that brings less private benefits to consumers than they expect , such that too much will be consumed in a free market
Public good
A good which is non excludable and non rivalrous in consumption and will therefore not be provided by the free market due to the free rider problem
Non-excludable
Situation where it is technically impossible or financially unviable for individual consumers to be excluded from consuming a good or service (even if they havent paid)
Private good
A good which is rivalrous and excludable in consumption
Non-rivalrous
Situation where consumption by one person does not reduce its availability for consumption by others
Quasi public good
goods that have some, but not all, of the characteristics of a public good
Free rider problem
When someone directly benefits from the consumption of a public good without contributing towards its provision
Direct provision
The government steps in to supply a good or service
Internalising an externality
An attempt to deal with an externality by bringing it within the price system (eg. the polluter pays)
Green tax/carbon tax
A tax on emissions of greenhouse gasses
Tradable pollution permits
A permit which allows the owner to emit a certain amount of pollution and which can be sold to another polluter if it is not required
provision of information
When the government aims to inform consumers in order to correct market failure eg. providing information on the benefits of merit good/problems of consuming demerit goods and perhaps by advertising or via the curriculum of schools. The government may also try to correct the asymmetric information in this way so that consumers have more power to make more effective choices
Regulation
Use of the legal system to place restrictions/ basic standards on producers/consumers.
Possible legal restrictions include complete ban, requirement for permit/license or compulsory consumption.
This may require enforcement such as fines for non-compliance
Property rights system
A system which grants ownership to third parties so that they have the right to sue those creating negative externalities for compensation in order to internalise the externality.
Minimum price
A price below which goods and services cannot be sold by law. (eg. the lowest price a unit of alcohol can be sold at.
Government failure
A market failure that is the result of a government intervention.
For example due to a lack of accurate information, political leaning, need to raise revenue/reduce budget deficit or where costs of administering policy outweigh benefits
Consumer expenditure
The total amount that households spend on goods and services to satisfy their current wants and needs
Credit
Loans and borrowings
Public good
Non-rival and non excludable
Can be used by everyone (eg. Not benefits)
Market failure
When free market forces, using the price mechanism, fail to produce the products that people want, in the quantities they desire and at prices that reflect consumer’s satisfaction.
In other words, market failure occurs when productive, allocative and thus economic and pareto efficiency are not achieved
