Definitions

Question 1

Economic problem

Answer 1

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.

Question 2

Economic Activity

Answer 2

The process of combining resources to add value and produce goods and services demanded by consumers.

Question 3

Specialisation

Answer 3

The concentration of an individual, firm, region or country on a narrow range of tasks or goods and services.

Question 4

Opportunity Cost

Answer 4

The next best alternative foregone when a choice is made.

Question 5

PPC

Answer 5

Shows the maximum combinations of two goods and services that can be produced in an economy with all resources fully employed.

Question 6

A Market

Answer 6

Any interaction between buyers and sellers for the exchange of goods and services.

Question 7

Demand

Answer 7

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.

Question 8

Supply

Answer 8

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.

Question 9

Producer Surplus

Answer 9

The difference between the price a producer is willing to accept and the market price actually recieved.

Question 10

Market Equilibrium

Answer 10

Occurs when supply equals demand and the market clears.

Question 11

Equilibrium Price

Answer 11

The price at which supply equals demand.

Question 12

PED (Price elasticity of demand)

Answer 12

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

Question 13

YED (Income elasticity of demand)

Answer 13

Measures the responsiveness of demand to a change in consumers’ disposable income.YED = % change in quantity demanded / % change in income

Question 14

XED (cross elasticity of demand)

Answer 14

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

Question 15

PES (Price elasticity of supply)

Answer 15

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

Question 16

Allocative efficiency

Answer 16

Whether scarce resources have been allocated in accordance with consumer preferences.

Question 17

Market Failure

Answer 17

Occurs when a free market fails to achieve allocative efficiency.

Question 18

Externalities

Answer 18

Spillover effects on third parties arising from production or consumption.

Question 19

A positive externality

Answer 19

A favorable or beneficial effect on a third party.

Question 20

A negative externality

Answer 20

An unfavourable or adverse effect on a third party.

Question 21

Information failure

Answer 21

Occurs when a lack of information causes consumers and/or producers to make decisions that don’t maximise their welfare.

Question 22

Asymmetric information

Answer 22

A form of information failure where information is not shared equally between consumers and producers.

Question 23

A Merit Good

Answer 23

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.)

Question 24

A Demerit Good

Answer 24

A good whose consumption is more harmful than consumers actually realise.(Tend to be over consumed in a free market)

Question 25

A public good

Answer 25

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.

Question 26

Non-excludable

Answer 26

One person cannot prevent someone else from consuming the good or service.

Question 27

Non-rival

Answer 27

One persons consumption doesn’t reduce the amount available for others to consume.

Question 28

A Private Good

Answer 28

A good which is rivalrous and excludable in consumption.

Question 29

Quasi Public Good

Answer 29

Goods that have some, but not all, of the characteristics of a public good.

Question 30

Productive Potential

Answer 30

The maximum output that an economy is capable of producing.

Question 31

Consumer Surplus

Answer 31

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)

Question 32

Price elastic demand

Answer 32

When quantity demanded is very responsive to a change in price.

Question 33

Price inelastic demand

Answer 33

When quantity demanded is not very responsive to a change in price.

Question 34

Normal good

Answer 34

Goods for which an increase in income leads to an increase in demand.

Question 35

Subsidy

Answer 35

A payment (usually from the government) to encourage production by lowering the costs of production per unit.

Question 36

Supply

Answer 36

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