Definitions Flashcards
What is market failure
When the price mechanism fails to allocate resources efficiently
What is a PPF
The combinations of 2 goods which an economy is capable of producing using all its resources in the most efficient way
PED=?
%change in quantity
%change in price
Elastic > 1
YED=?
% change in QD
% change in Y
XED=?
% change in QD of good B
% change in price of good A
PES=?
% change in QS
% change in P
Elastic > 1
What is Price Mechanism?
The means by which millions of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses
Ad Valorem tax
An indirect tax based on a percentage of the sale price of a good or service
Allocative efficiency
When the price the consumer pays equals the marginal cost
Barter
The practice of exchanging a good or a service for another
Basic economic problem
Unlimited wants limited resources
Buffer stock
A scheme which seeks to stabilise the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks onto the market when supplies are low
Pollution permits or carbon credits
An allowance to a business to generate a specific level of emissions - may be traded on the carbon market
Competitive supply
Alternative products a firm can make with its resources (eg a farmer can plant potatoes or carrots // an electronics factory can produce DVDs or CDs)
Complement goods
Goods to be in joint demand
Consumer surplus
The difference between what the consumer is willing to pay for a good and what they actually get
De-merit goods
Goods which have a negative externality. Consumers may be unaware of this if there is imperfect information
Division of labour
The specialisation of labour In Specific tasks intended to increase productivity
Externality
The spill over effects from the consumption or production of a good
Government failure
Policies that cause a deeper market failure
Incidence of tax
How the final burden of tax is shared out
Indirect tax
A tax imposed on the producers eg excise duties on cigarettes, alcohol or even ad Valorem taxes
In elastic demand
When PED
Inelastic supply
When PES
Inferior good
when demand for a product falls as real income increases
Market failure
When the competitive outcome of markets is not efficient from the point of view of the economy as a whole
Merit good
A product that society values and judges that everyone should have regardless of whether an individual wants them (so the government provides it)
Normal goods
Have positive PED
Necessities have PED between 0 and +1
Luxuries have PED > +1
Normative statement
A subjective statement
Positive statement
A statement of fact
Opportunity cost
The cost of the next best alternative foregone in a decision
Producer surplus
The difference between what a producer is willing and able to supply a good at and what they actually get
Public good
Non rivalrous non excludable
Regressive tax
A tax is said to be regressive when low income earners pay a higher proportion of their income in tax than high income earners
Social benefit
Social benefit = private cost + external benefit
Social cost
Social cost = private cost + external cost
Specialisation
A method of production where a business or area focuses on the production of a limited scope of products to gain greater productive efficiency
Subsidy
Payments by the government to suppliers to reduce their costs with the aim of increasing supply and therefore reducing the Pe
Total revenue
TR=PxQ
Pareto optimality
the best possible allocation of resources. Efficiency occurs when resources cannot be reallocated to make one consumer better off without making someone worse off
Productive efficiency
Using the least amount of resources to produce a given good or service
OR
Output being produced at the lowest possible unit cost
Geographical mobility of labour
The ability of labour to take available work in different areas/regions
