Th1: Definitions 2 Flashcards
Equilibrium price / quantity
where demand equals supply so there are no more market forces bringing about change to price or quantity demanded
Excess demand
when price is set too low so demand is greater than supply
Excess supply
when price is set too high so supply is greater than demand
Externalities
the cost or benefit a third party receives from an economic transaction outside the market mechanism
External cost / benefit
the cost/benefit to a third party not involved in the economic activity - the difference between social cost/benefit and private cost/benefit
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
Free rider principle
people who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit
Government failure
when government intervention leads to a net welfare loss in society and a misallocation of resources
Habitual behaviour
a cause of irrational behaviour - when consumers are in the habit of making certain decisions
Incidence of tax
the tax burden on the taxpayer
Income elasticity of demand (YED)
the responsiveness of demand to a change in income
% change in QD
———————–
% change in Y
Indirect tax
taxes on expenditure which increase production costs and leads to a fall in supply
Inferior goods
YED < 0
goods which see a fall in demand as income increases
Information gap
when an economic agent lacks the information needed to make a rational, informed decision
Information provision
when the government intervenes to provide information to correct market failure
