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Theme 1 Flashcards

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1
Q

Ad valorem tax

A

An indirect tax imposed on a good where the value of the tax is
dependent on the value of the good

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1
Q

Asymmetric information

A

Where one party has more information than the other, leading to
market failure

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2
Q

Capital

A

One of the four factors of production; goods which can be used in
the production process

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3
Q

Capital goods

A

Goods produced in order to aid production of consumer goods in
the future

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4
Q

Ceteris paribus

A

All other things remaining the same

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5
Q

Command economy

A

All factors of production are allocated by the state, so they decide
what, how and for whom to produce goods

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6
Q

Complementary goods

A

Negative XED; if good B becomes more expensive, demand for
good A falls

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7
Q

Consumer goods

A

Goods bought and demanded by households and individuals

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8
Q

Consumer surplus

A

The difference between the price the consumer is willing to pay and
the price they actually pay

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9
Q

Cross elasticity of
demand (XED)

A

The responsiveness of demand for one good (A) to a change in
price of another good (B)
%change in QD of A
%change in P of B

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10
Q

Demand

A

The quantity of a good/service that consumers are able and willing
to buy at a given price at a given moment of time

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11
Q

Diminishing marginal
utility

A

The extra benefit gained from consumption of a good generally
declines as extra units are consumed; explains why the demand
curve is downward sloping

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12
Q

Division of labour

A

When labour becomes specialised during the production process so
do a specific task in cooperation with other workers

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13
Q

Economic problem

A

The problem of scarcity; wants are unlimited but resources are finite
so choices have to be made

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14
Q

Efficiency

A

When resources are allocated optimally, so every consumer
benefits and waste is minimised

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15
Q

Enterprise

A

One of the four factors of production; the willingness and ability to
take risks and combine the three other factors of production

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16
Q

Equilibrium
price/quantity

A

Where demand equals supply so there are no more market forces
bringing about change to price or quantity demanded

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17
Q

Excess demand

A

When price is set too low so demand is greater than supply

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18
Q

Excess supply

A

When price is set too high so supply is greater than demand

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19
Q

Externalities

A

The cost or benefit a third party receives from an economic
transaction outside of the market mechanism

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20
Q

External cost/benefit

A

The cost/benefit to a third party not involved in the economic
activity; the difference between social cost/benefit and private
cost/benefit

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21
Q

Free market

A

An economy where the market mechanism allocates resources so
consumers and producers make decisions about what is produced,
how to produce and for whom

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22
Q

Free rider principle

A

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

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23
Q

Government failure

A

When government intervention leads to a net welfare loss in society

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24
Habitual behaviour
A cause of irrational behaviour; when consumers are in the habit of making certain decisions
25
Incidence of tax
The tax burden on the taxpayer
26
Income elasticity of demand (YED)
The responsiveness of demand to a change in income %change in QD %change in Y
27
Indirect tax
Taxes on expenditure which increase production costs and lead to a fall in supply
28
Inferior goods
YED<0; goods which see a fall in demand as income increases
29
Information gap
When an economic agent lacks the information needed to make a rational, informed decision
30
Information provision
When the government intervenes to provide information to correct market failure
31
Labour
One of the four factors of production; human capital
32
Land
One of the four factors of production; natural resources such as oil, coal, wheat, physical space
33
Luxury goods
YED>1; an increase in incomes causes an even bigger increase in demand
34
Market failure
When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources
35
Market forces
the economic factors that influence the price and quantity of goods and services in a market.
36
Maximum price
A ceiling price which a firm cannot charge above
37
Minimum price
A floor price which a firm cannot charge below
38
Mixed economy
Both the free market mechanism and the government allocate resources
39
Model
A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words
40
Negative externalities of production
Where the social costs of producing a good are greater than the private costs of producing the good
41
Non-excludable
A characteristic of public goods; someone cannot be prevented from using the good
42
Non-renewable resources
Resources which cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed
43
Non-rivalry
A characteristic of public goods; one person’s use of the good does not prevent someone else from using it
44
Normal goods
YED>0; demand increases as income increases
45
Normative statement
Subjective statements based on value judgements and opinions; cannot be proven or disproven
46
Opportunity cost
The value of the next best alternative forgone
47
Perfectly price elastic good
PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes
48
Perfectly price inelastic good
PED/PES=0; quantity demanded/supplied does not change when price changes
49
Positive externalities of consumption
Where the social benefits of consuming a good are larger than the private benefits of consuming that good
50
Positive statement
Objective statements which can be tested with factual evidence to be proven or disproven
51
Possibility production frontier (PPF)
Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed
52
Price elasticity of demand (PED)
The responsiveness of demand to a change in price %change in QD %change in P
53
Price elasticity of supply (PES)
The responsive of supply to a change in price %change in QD %change in P
54
Price mechanism
The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves
55
Private cost/benefit
The cost/benefit to the individual participating in the economic activity
56
Private goods
Goods that are rivalry and excludable
57
Producer surplus
The difference between the price the producer is willing to charge and the price they actually charge
58
Public goods
Goods that are non-excludable and non-rivalry
59
Rationality
Decision-making that leads to economic agents maximising their utility
60
Regulation
Laws to address market failure and promote competition between firms
61
Relatively price elastic good
When PED/PES>1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied
62
Relatively price inelastic good
When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied
63
Renewable resources
Resources which can be replenished, so the stock of resources can be maintained over a period of time
64
Scarcity
The shortage of resources in relation to the quantity of human wants
65
Social cost/benefit
The cost/benefit to society as a whole due to the economic activity
66
Social optimum position
Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare
67
Social science
The study of societies and human behaviour
68
Specialisation
The production of a limited range of goods by a company/country/individual so they aren’t self-sufficient and have to trade with others
69
Specific tax
A tax imposed on a good where the value of the tax is dependent on the quantity that is bought
70
State provision of goods
Through taxation, the government provides public goods or merit goods which are underprovided in the free market
71
Subsidy
Government payments to a producer to lower their costs of production and encourage them to produce more
72
Substitutes
Positive XED; if good B becomes more expensive, demand for good A rises
73
Supply
The ability and willingness to provide a particular good/service at a given price at a given moment in time
74
Symmetric information
Where buyers and sellers both have access to the same information
75
Trade pollution permits
Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control the amount of pollution. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute
76
Unitary price elastic good
When PED/PES=1; a change in price leads to a change in output by the same proportion
77
Utility
The satisfaction derived from consuming a good
78
Weakness at computation
A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs

Economics key terms (4 decks)

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