Economics Theme 1 Flashcards
What are the functions of the price mechanism?
- A rationing device (allocates scarce resources)
- An incentive device (rising prices offer an incentive to produce more of a good or service as higher profits can be earned).
- A signalling device (indicates changes in demand or supply).
Consumer Surplus
The difference between the price consumers are willing to pay and the price they actually pay.
Producer Surplus
The difference between the price producers are willing to supply for and the price they actually supply for.
Specialisation
When an individual, firm, region or country concentrates on the production of a limited range of goods and services. (Goods they are best/most efficient at)
Division of Labour
The specialisation of workers on specific tasks in the production process.
Utility
The amount of satisfaction obtained from consuming a good or service.
Marginal Utility
The utility gained from consuming one extra unit of a good or service.
Diminishing Marginal Utility
As successive units of a good are consumed, the utility gained from each extra unit will fall.
Price Elasticity of Demand (PED)
The responsiveness of demand for a good or service to its change in price.
% Change in Quantity Demanded
__________________________
% Change in Price
Cross Elasticity of Demand (XED)
% Change in Demand for good A
__________________________
% Change in price of good B
Supply
The quantity of a good or service that firms are willing to sell at a given price over a given period of time.
Indirect Taxes
A tax imposed on goods or services supplied by businesses. It includes specific and ad-valorem taxes.
Subsidy
A government grant to firms which reduces production costs leading to an increase in output. This increases supply, lowering the price of a good, thus increasing demand for the good.
Externalities
The costs/benefits to 3rd parties not involved in the making, buying, selling and consumption of a specific good or service.
External Costs
Negative 3rd party effects outside of a market transaction.
External Benefits
Positive 3rd party effects outside of a market transaction.
Scarcity (The Economic Problem)
There are finite resources compared to unlimited human wants so choices have to be made about how to use those resources.
What are the factors of production?
- Land (Including all the natural resources on it)
- Labour
- Capital (Equipment used to produce goods and services)
- Enterprise (Willingness to take a risk to make a profit)
Ceteris Paribus
All other things being equal.
Positive Statement
An objective statement which can be tested by referring to the available evidence.
Normative Statement
A subjective statement which contains a value judgement (opinion).
Opportunity Cost
The value of the next best alternative forgone.
Free Market Economy
All resources are allocated by the price mechanism. No government intervention.
Mixed Economy
Some resources are allocated by the price mechanism and some by the government.
Planned Economy
All resources are allocated by the government. There is no price mechanism.
Price Elasticity of Supply (PES)
% Change in supply of a good
_______________________
% Change in price of a good
Income Elasticity of Demand (YED)
% Change in demand for a good
__________________________
% Change in real income
Social Costs
Private costs + External costs
Social Benefits
External benefits + Private benefits
Public Goods
Goods which have non-rivalry and non-excludeability in their consumption.
Free Rider Problem
Once a public good is provided, it is impossible to stop someone from benefiting from it, regardless of whether they have paid for it.
Maximum Price Scheme
A ceiling price set by the government on a good or service, above which it cannot rise. It may be enforced through government legislation.
Money
Anything which is acceptable in the payment of a good, service or debt.
Rational Decision Making
Where consumers allocate their expenditure on goods and services to maximise their utility.
Where producers allocate their resources to maximise profit.
Demand
The quantity of a good or service purchased at a given price over a given time period.
Government Failure
When government intervention leads to an inefficient allocation of resources and a net welfare loss.
Regulation
Government rules in markets to influence the behaviour of consumers and producers.
Tradeable pollution permits
Pollution permits that can be bought and sold in a market. They are an attempt to solve the problem of pollution by creating a market for it.
Incidence of Tax
The distribution of the tax paid between consumers and producers.
Production Possibility Frontier (PPF)
The maximum potential output of two goods or services an economy can produce when all resources are fully and efficently employed.
What are the functions of money?
- Medium of Exchange
- Measure of value
- Store of value
- Method of deferred payment
Information Gaps
Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.
Symmetric Information
Where consumers and producers have access to the same information about a good or service in the market.
Asymmetric Information
Where consumers and producers have unequal access to information about a good or service in the market.
Minimum Price Scheme
A floor price set by the government on a good or service, below which it cannot fall. It may be enforced through government legislation.
