Definitions of how markets work Flashcards
Rational economic behaviour
A decision making process by individuals and firms by which they act to maximise their welfare
Effective demand
The quantity of the good people are willing and able to buy at any given price over a period of time
Supply
The quantity of the good firms are willing and able to offer for sale at any given price over a period of time
DMU
The law of diminishing marginal utility is a law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product. Marginal utility is defined as the change in utility as an additional unit is consumed
PED
A measure of the responsiveness of the quantity demanded of a product to a change in its price in percentage terms
Income elasticity of demand YED
A measure of the responsiveness of the quantity demanded of a product to a change in income in percentage terns
Cross elasticity of demand XED
A measure of the responsiveness of the quantity supplied of a product to a change in its price, in percentage terms
Price elasticity of supply
A measure of the responsiveness of the quantity supplied of a product to a change in its price, in percentage terms
Normal goods
These are goods for which demand increases when income increases. This means the YED is positive. The term does not refer to the quality of the good.
Inferior goods
These are goods for which demand increases when income rises. This means the YED is negative. Inferiority, in this sense, is an observable fact rather than a statement about the quality of the good.
Complements
Goods that are used in conjunction with others. They have negative XED
Substitutes
Goods that compete for the same market. They have positive XED
Price mechanism
The price mechanism is the method through which the market allocates scarce resources by responding to changes in the conditions of supply and demand. Prices create signals and incentives to determine what is produced, how it’s produced and who receives the product
Consumer surplus
The difference between what a person would be willing to pay and what they actually pay to buy a certain quantity of a good. This represents the extra utility that a consumer gains above the price that they pay for it. It is the area below the demand curve and above the price level.
Producer surplus
The difference between what a producer is paid for a quantity of a good and the lowest price the producer requires in order to supply that quantity. It is the area above the supply curve and below the price level
Direct tax
This is collected directly by government from the individuals or companies on whom it is levied. Examples include income tax and corporate taxes. Direct taxes are more likely to influence the demand curve because they influence the disposable income of consumers
Indirect tax
A tax on the producer or sale of a good or service. Indirect taxes are included in the price paid for the good or service by its final purchases e.g. VAT, beer duty. The introduction or increase of an indirect tax causes a negative shift in the supply curve
Unit/Specific tax
A tax based on the volume of the product sold e.g. tax of £1 per bottle of whisky or 50p per litre of petrol. The supply curve shifts parallel to itself
Ad valorem tax
Means according to value, a method of taxation using the value of the product taxed to determine the amount of tax. VAT is an example of an ad valorem tax because it is charged at 20% of the value of product or service being sold. The supply curve shift is nonparallel.
Incidence of tax
The way in which the burden of tax eventually falls on the consumer and producer
Subsidy
A grant given that lowers the price of a good, usually designed to encourage production or consumption of a good and causes a positive shift in the supply curve
Behavioural economics
A method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making
Commodity
Any product of agriculture, fishing or mining that is produced to be traded or sold such as cash crops. It can be a food, a fibre such as cotton, or tobacco, gold and copper
Exchange rate
The price of one country’s currency expressed in terms of another country’s currency
