Definitions Flashcards
Economic problem
The need to make choices regarding how to allocate limited and finite resources between unlimited and competing wants. The resulting scarcity means that decisions have to be made about what is produced, how it is produced and for whom.
Economic Activity
The process of combining resources to add value and produce goods and services demanded by consumers.
Specialisation
The concentration of an individual, firm, region or country on a narrow range of tasks or goods and services.
Opportunity Cost
The next best alternative foregone when a choice is made.
PPC
Shows the maximum combinations of two goods and services that can be produced in an economy with all resources fully employed.
A Market
Any interaction between buyers and sellers for the exchange of goods and services.
Demand
The quantity of a good or service that consumers are willing and able to purchase at a given market price over a period of time.
Supply
The quantity of a good or service that producers are willing and able to supply at a given market price over a specified period of time.
Producer Surplus
The difference between the price a producer is willing to accept and the market price actually recieved.
Market Equilibrium
Occurs when supply equals demand and the market clears.
Equilibrium Price
The price at which supply equals demand.
PED (Price elasticity of demand)
Measures the responsiveness of the quantity demanded to a change in the price of a good or service.PED = % change in quantity demanded / % change in price
YED (Income elasticity of demand)
Measures the responsiveness of demand to a change in consumers’ disposable income.YED = % change in quantity demanded / % change in income
XED (cross elasticity of demand)
Measures the responsiveness of demand for one product to a change in the price of another product.XED = % change in quantity demanded of good A / % change in price of good B
PES (Price elasticity of supply)
Measures the responsiveness of the quantity supplied to a change in the price of a good or service.PES = % change in quanity supplied / % change in price
Allocative efficiency
Whether scarce resources have been allocated in accordance with consumer preferences.
Market Failure
Occurs when a free market fails to achieve allocative efficiency.
Externalities
Spillover effects on third parties arising from production or consumption.
A positive externality
A favorable or beneficial effect on a third party.
A negative externality
An unfavourable or adverse effect on a third party.
Information failure
Occurs when a lack of information causes consumers and/or producers to make decisions that don’t maximise their welfare.
Asymmetric information
A form of information failure where information is not shared equally between consumers and producers.
A 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.)
A Demerit Good
A good whose consumption is more harmful than consumers actually realise.(Tend to be over consumed in a free market)
A 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
One person cannot prevent someone else from consuming the good or service.
Non-rival
One persons consumption doesn’t reduce the amount available for others to consume.
A Private Good
A good which is rivalrous and excludable in consumption.
Quasi Public Good
Goods that have some, but not all, of the characteristics of a public good.
Productive Potential
The maximum output that an economy is capable of producing.
Consumer Surplus
The difference between the value of a consumer is prepared to pay for a good or service and the price that is actually required to make the purchase (market price)
Price elastic demand
When quantity demanded is very responsive to a change in price.
Price inelastic demand
When quantity demanded is not very responsive to a change in price.
Normal good
Goods for which an increase in income leads to an increase in demand.
Subsidy
A payment (usually from the government) to encourage production by lowering the costs of production per unit.
Supply
The quantity of a good or service that producers are willing and able to supply at a given market price over a specified period of time
