Definitions Flashcards
Positive statement
is an assertion of fact
can be proved or disproved
value free
(look for words such as ‘will’ or ‘has’ or ‘is’)
Normative statement
is a value judgement
can be tested as true or false
contains a value judgement
(look for words such as ‘should’ and if the statement is suggesting one action is better than another)
Price mechanism
interaction of supply and demand
Invisible hand
allocates resources according to market signals in prices and quantities
Producer surplus
the difference between the price producers are willing to supply a good for and the market price
Consumer surplus
the difference between the price a consumer is willing to pay for a good and the market price
Price elasticity of demand
% change in quantity demanded/% change in price
responsiveness of demand to a change in price
-ve for normal good
+ve for giffen good
Income of elasticity of demand
%change in quantity demanded/%change in income
Responsiveness of demand to a change in income
+ve for normal good
-ve for inferior good
Cross elasticity of demand
%change in demand good A /%change in price good B
Price elasticity of supply
% change in supplied / % change in price
responsiveness of supply to a change in price
Public good
Non-rivalry Non-excludability Characterised by free rider problem Under provided if left to market Hard to attach monetary value
National minimum wage
Legal minimum firms can pay to workers
Extends supply contracts demand
Asymmetric information
Imbalance of information between producer and consumer
A form of market failure
Misallocation of resources
Opportunity cost
the value of the next best alternative that is foregone
External benefits
Benefits ignored by the price mechanism
Positive third party effects
External costs
Costs ignored by the price mechanism
Negative third party effects (ad valorem tax on diagram)
Mixed economy
Resources are allocated by the market (price mechanism) and partly by the state (government)
Product possibility frontier
The maximum output combinations of two goods an economy can produce when all its resources are fully and efficiently employed
Normal good
A good that when price rises demand decreases or contracts (and vice versa) and as income rises demand rises (and vice versa)
Giffen good
A good that when price rises demand rises (vice versa), ostentatious goods or goods with snob value, caviar
Inferior good
A good that when income rises demand falls (vice versa)
Minimum price floor
a minimum price below which price can not fall
(Im)Mobility of labour
The (in)ability of labour to move from one place to another
Typically affected by asymmetric knowledge of job market
Specific or per unit tax
An indirect tax put on the sales of a good that is a fixed amount (parallel shift)
Ad valorem (by value) tax
An indirect tax put on the sales of a good expressed as a % (VAT) pivot/non-parallel shift
