Key Definitions Flashcards
Ceteris paribus
All other things being equal
Normative statements
Subjective statements. Value judgement based on opinion
Positive statements
Objective statements based on evidence and can be tested
Absolute advantage
Being able to produce more of something than another country
Comparative advantage
Being able to produce something at a lower opportunity cost than another country
Consumer surplus
The difference between the price the consumer would pay and the market price the consumer has to pay
Producer surplus
Difference between what producers are willing and able to supply an good for and the price they actually receive
Marginal utility
The additional satisfaction a consumer gains from consuming one more unit of a good or service
Specialisation
Where individuals, firms or countries concentrate on producing a narrow range of goods or services
Division of labour
Where a firm specialises in producing a good or service and the production is broken down into separate tasks
Subsidy
An amount of money given directly to firms by the government to encourage production and consumtion
Externality
The cost or benefit that affects a third party who did not choose to receive the cost or benefit
Flat tax
A tax system with a constant marginal rate, usually applied to individual or corporate income.
Ad Valorem tax
A tax whose amount is based on the value of a transaction
Minimum pricing
Placing a price which the market price cannot legally go below
Pollution permit
Give polluting firms a permit to pollute to a certain amount
Buffer stocks
Promising that prices of certain commodities remain stable
Price mechanism
The interactions of buyers and sellers in the free market enabling goods and services and resources to be allocated by price. Relative changes in price reflect the forces of supply and demand.
Rationing function
Wherever resources are particularly scarce, demand exceeds supply and prices are driven up. This is to discourage demand and conserve resources.
Signalling function
Price changes send contrasting messages to consumers and producers whether to leave or enter the market.
Rising prices: signal to decrease demand or withdraw from the market, falling prices is opposite
Incentive function
Incentive is something that motivates a producer or consumer to follow a course of action or to change behaviour. The incentive function of price rise is associated with an extension of supply along the existing supply curve.
Total utility
The total satisfaction from a given level of consumption
Price elasticity of demean
The responsiveness of demand to changes in price
Elasticity of supply
The responsiveness of supply to changes in price
