Introduction to markets and market failure - glossary Flashcards
Ceteris paribus
All things being equal; the assumption that while the effects of a change in one variable are being investigated, all other variables are kept constant.
Normative economics
The study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated.
Positive economics
The scientific/objective study of the allocation of resources.
Normative statement
A statement that cannot be supported or refuted because it is a value judgement.
Positive statement
A statement which can be supported or refuted with evidence.
Real values
Values that are adjusted for inflation (e.g. values at constant prices).
Nominal values
Values that are unadjusted for the effects of inflation (e.g. values at current prices).
Base period
The period with which all other values in a series are compared.
Index number
An indicator showing the relative value of one number to another from a base of 100.
Basic economic problem
Resources have to allocated between competing uses because human wants are infinite, whilst resources are scarce.
Capital
A factor of production. It is a stock of manufactured resources used in the production of goods and services.
Choice
Economic choices involves the alternative uses of scarce resources in production.
Economic goods
Goods that are scarce because their use has an opportunity cost.
Entrepreneurs
Individuals who seek out profitable opportunities for production and take risks in attempting to exploit these.
Enterprise
A factor of production. It is the seeking out of profitable opportunities for production and taking risks in attempting to exploit these.
Factors of production
The inputs to the production process; land, labour, capital and enterprise.
Fixed capital
Economic resources (e.g. factories) which are used to transform working capital into goods and services.
Human capital
The value of the productive potential of an individual or group of workers. It is made up of the skills, talents, education and training of an individual or group, and it represents the value of future earnings and production.
Working/circulating capital
Resources that are in the production system waiting to be transformed into goods, or other materials before being finally sold to the consumer.
Free goods
Goods that are unlimited in supply and which therefore have no opportunity cost.
Labour
A factor of production. It is the workforce of the economy.
Land
A factor of production. It is all the natural resources below the earth, on the ground, in the atmosphere and in the sea.
Needs
The minimum that is necessary for a person to survive as a human being.
Non-renewable resources
Resources (e.g. coal or oil) which once exploited cannot be replaced.
Non-sustainable resources
A resource which can be economically exploited, where its stock is being reduced over time.
Opportunity cost
The benefits forgone of the next best alternative.
Renewable resources
Resources (e.g. fish stocks or forests) that can be exploited over and over again because they have the potential to renew themselves.
Scarce resources
Resources that are limited in supply so that choices have to be made about their use.
Sustainable resources
Renewable resources that are being economically exploited in a way that will not diminish or run out.
Human wants
Desire for the consumption of goods and services.
Capital goods
Goods that are used in the production of other goods (e.g. factories, offices, roads, machines and equipment).
Consumer goods
Goods and services that are used by people to satisfy their needs and wants.
Margin
Point of possible change.
PPF
A curve which shows the maximum potential output combinations an economy can achieve when all its resources are fully/efficiently employed.
Barter
Swapping one good for another without the use of money.
Capital productivity
Output per unit of capital employed.
Labour productivity
Output per worker.
Division of labour
Specialisation by workers, who perform different tasks at different stages of production to make a good or service, in cooperation with other workers.
Market
A convenient set of arrangements by which buyers and sellers communicate to exchange goods and services.
Money
Any item (e.g. coins) which fulfils four functions: a medium of exchange, a measure of value, a store of value and a method of deferred payment.
Money substitutes
Anything which can be used as a medium of exchange but are not stores of value (e.g. credit cards).
Primary sector
Extractive and agricultural industries.
Private sector
The part of the economy owned by individuals, companies and charities.
Productivity
Output per unit of input employed.
Public sector
The part of the economy where production is organised by the state or the government.
Secondary sector
Industries involved in the production of goods, mainly manufactured goods.
Specialisation
A system of organisation where economic units (e.g. households or nations) are not self sufficient but concentrate on producing certain goods and services and trading the surplus with others.
Sub-market
A market which is a distinct and identifiable part of a larger market.
Tertiary sector
Industries involved in the production of services.
Command/Centrally planned economy
An economic system where the government, through a planning process, allocates resources in society.
Economic system
A complex network of individuals, organisations and institutions and their social and legal interrelationships which allocate resources.
Free market economy
An economic system that resolves the basic economic problem mainly through the market mechanism.
Mixed economy
An economy where both the free market mechanism and the government planning process allocates significant proportions of total resources.
Economic welfare
The level of well-being or living standards of an individual or a group of individuals (e.g. a country).
Macroeconomics
The study of the economy as a whole, including inflation, economic growth and unemployment.
Microeconomics
The study of the behaviour of individuals or groups (e.g. consumers, firms or workers), typically within a market context.
Neoclassical theory
A theory of economics which typically starts with the assumption that economic agents will maximise their benefits and act rationally, and which develops how resources will be allocated in markets and at what price through supply and demand forces.
Utility
The satisfaction derived from consuming a good or a set of goods.
Conditions of demand
Factors other than price (PASIFIC) which leads to changes in demand and are associated with shifts in the demand curve.
Consumer surplus
The difference between how much buyers are willing to pay and the market price.
Contraction of demand
When quantity demanded for a good falls because its price rises. Shown by a movement up the demand curve.
Demand curve
The line on a price/quantity diagram which shows the level of effective demand at any given price.
Demand
The quantity purchased of a good at any given price , given that other determinants of demand remain unchanged.
Extension of demand
When quantity demanded for a good increases because its price falls. Shown by a movement down the demand curve.
Law of diminishing marginal utility
The value or utility that individual consumers gain from the last product consumed falls, the greater the number consumed.
Elastic demand
This is where the price elasticity of demand is greater than 1. The responsiveness of demand is proportionally greater than the change in price.
Demand is perfectly elastic if PED is infinity.
Inelastic demand
This is where the PED is less than 1. The responsiveness of demand is proportionally less than the change in price.
Demand is perfectly inelastic if PED is 0.
PED
The proportionate response of changes in quantity demanded to a proportionate change in price.
Unitary elastic
This is where the value of PED is 1. The responsiveness of demand is proportionally equal to the change in price.
Total expenditure
Quantity bought x Average price of a product
Total revenue
Quantity sold x Average price of a product
Complement
A good that is purchased with other goods to satisfy a want. Complements have a negative cross elasticity of demand with each other.
XED
A measure of the responsiveness of quantity demanded of one good to a change in price of another good.
YED
A measure of the responsiveness of quantity demanded to a change in income.
Inferior good
A good here demand falls when income increases (e.g. will have a negative YED).
Normal good
A good where demand increases when income increases (e.g. will have a positive YED).
Substitute
A good which can be replaced by another to satisfy a want. Substitutes have a positive XED with each other.
Conditions of supply
Factors other than price (PINTS WC) , which leads to changes in supply, and are associated with shifts in the supply curve.
PINTS WC
Productivity Indirect taxes Number of firms in the market Technology Substitutes Weather Costs of production
PASIFIC
Population Advertisement Substitutes (price) Income Fashion Income tax Complements (price)
Long run
The period of time when all factor inputs can be varied but the state of technology remains constant.
PES
A measure of the responsiveness of quantity supplied to a change in price.
Producer surplus
The difference between the price producers are prepared to supply at and the market price.
Short run
The period of time when at least one factor input in the production process can be varied.
Supply
The quantity of goods that suppliers are willing to sell at any given price over a period of time.
Excess demand
When demand is greater than supply.
Excess supply
When supply is greater than demand.
Market clearing price
The price at which there is neither excess demand nor excess supply but where everything offered for sale is purchased.
Free market forces
Forces in free markets which act to reduce prices when there is excess supply and raise prices when there is excess demand.
Incentive function
When changes in price encourage buyers and sellers to change the quantity they buy and sell. A rise in price encourages buyers to purchase less and sellers to produce more.
Rationing function
When changes in price lead to more or less being produced, so increasing or limiting the quantity demanded by buyers.
Signalling function
When changes in price give information to buyers and sellers which influence their decisions to buy and sell.
Ad valorem tax
A tax levied as a percentage of the value of the good.
Incidence of tax
The tax burden on the taxpayer.
Specific tax
Tax levied on volume.
Subsidy
A grant given by the government which lowers the price of a good, usually designed to encourage production or consumption of a good.
Complete market failure
When a market fails to supply any of a good which is demanded, creating a missing market.
Market failure
This is where resources are inefficiently allocated due to imperfections in the working of the market mechanism.
Missing market
A market where the market mechanism fails to supply any of the good.
Partial market failure
When a market for a good exists but there is overproduction or underproduction of the good.
Consumption externalities - external benefits of consumption
When the social costs of consumption are different from the private costs of consumption.
Positive consumption externalities - social benefits > private benefits.
Negative consumption externalities - social benefits < private benefits.
Externality
The difference between social costs and benefits, and private costs and benefits.
Negative externality
If net social cost (social cost - social benefit) is greater than net private cost (private cost - private benefit), then an external cost exists.
Positive externality
If net social benefit is greater than net private benefit, an external benefit exists.
Marginal social and private costs and benefits
The social and private costs and benefits of the last unit, either produced or consumed.
Private cost and benefit
The cost or benefit of an activity to an individual economic unit (e.g. a consumer or a firm).
Social cost and benefit
The cost or benefit of an activity to society as a whole.
Production externalities - external benefits of production
When the social costs of production are different from the private costs of production.
Negative production externalities - If social costs > private costs.
Positive production externalities - If social costs < private costs.
Free rider
A person or organisation which receives benefits that others have paid for without making any contributions.
Non-excludability
Once provided, it is impossible to prevent any economic agent from consuming the good.
Non-rejectability
Once provided, it is impossible for any economic agent not to consume the good.
Non-rivalry
When consumption by one economic agent does not reduce the amount available for consumption by others.
Private good
A good which possesses the characteristics of rivalry (once consumed, it can’t be consumed by anyone else) and excludability (it’s possible to prevent anyone else from consuming the good).
Public good
A good which possesses the characteristics of non-rivalry and non-excludability.
Quasi-public good
A good which does not perfectly or fully possess the characteristics of non-rivalry and non-excludability.
Asymmetric information
Where buyers and sellers have different amounts of information, with one group having more information than the other.
Imperfect information
Where buyers or sellers or both lack information to make informed decisions.
Information gap
Where buyers or sellers or both don’t have the information that is available to make a decision.
Moral hazard
When an economic agent makes a decision in their own best interest knowing that there are potential adverse risks, and if problems result, the cost will be partly paid for by other economic agents.
Principal-agent problem
Occurs when the goals of the principal are different from the agents, making decisions on behalf of the principal.
Ex. shareholders and managers.
Cap and trade schemes
Schemes which set a limit on a particular type of pollution, and then issue pollution permits to the total of that limit, which can be bought and sold between firms which pollute.
Trade pollution permit
A permission issued, usually be the government, to allow a fixed amount of pollution to be created. This permit can be used by the owner or sold to another firm.
Government failure
Occurs when government intervention leads to an inefficient allocation of resources. Lads to a net welfare loss compared to the free market solution.
Public choice theory
Theories about how and why public spending and taxation decisions are made.
Rent seeking
The use of political power by an economic agent to manipulate the distribution of resources for their own benefit, at the expense of others without creating any extra wealth for society.
