key words Flashcards
what is excess demand
when price is set too low so demand is greater than supply
what is excess supply
when price is set too high so supply is greater then demand
what are externalities
the cost or benefit a third party receives from an economic transaction outside the market mechanism
what are external costs/benefits
the cost benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit
what is free market
an economy where the market mechanism allocates resources so consumers and producers make decisions about what is produced, how to produce and for whom
what is the free rider principal
people who do not pay for a public good still receives benefits from it so the private sector will under-provide the good as they cannot make a profit
what is government failure
when government intervention leads to a net welfare loss in society
what is habitual behaviour
a cause of irrational behaviour, when consumers are in habit of making certain decisions
what is incidence of tax
the tax burden on the payer
what is income elasticity of demand (YED)
the responsiveness of demand to a change in income
what is indirect tax
taxes on expenditure which increase production costs and leads to a fall in supply
what are inferior goods
YED<0; goods which see a fall in demand as income increases
what is information gap
when an economic agent lacks the information needed to correct market failure
what is labour
one of the four factors of production; human capital
what is land
one of the four factors of production; natural resources such as oil, coal, wheat and physical space
what are luxury goods
YED>1; an income causes an even bigger increase in demand
what is market failure
when the free market fails to allocate resources to the best interest
what is ad valorem tax
an indirect tax imposed on a good where the value of the tax is dependant on the value of their good
what is asymmetric information
where one party has more information than the other , leading to market failure
what is capital
one of the four factors of production; goods which can be used in the production process
what are capital goods
goods produced in order to aid production of consumer goods in the future
what is ceteris paribus
all other things remaining the same
what is a command economy
all factors of production are allocated by the state, so they decide what, how for whom to produce goods
what are complementary goods
Negative XED; if good B becomes too expensive, demand for good A falls
what are consumer goods
goods bought and demanded by household individuals
what is consumer surplus
the difference between the price the consumer is willing to pay and the price they actually pay
what is cross elasticity of demand (XED)
the responsiveness of demand for one good to a change in the price of another good
what is demand
the quantity of a good/service that consumers are able and willing to buy at a given prices at a given moment in time
what is diminishing marginal utility
the extra benefits gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping
what is division of labour
when labour becomes specialised during the production process so do a specific task in cooperation with other workers
what is the economic problem
the problem is scarcity; wants are unlimited but resources are finite so choices have to be made
what is efficiency
when resources are allocated optimally, so every consumer benefits and waste is minimised
what is enterprise
one of the four factors of production; the willingness and ability to take risks and combine the three other factors of production
