Theme 1: An introduction to markets and market failure Flashcards
Capital goods
Goods produced in order to aid production of consumer goods in the future
Free market
An economy where the market mechanism allocates resources so consumers and producers make decision about what is produced, how to produce it and from whom
Normal goods
YED>0; demand increases as income increases
Renewable resources
Resources which can be replenished, so the stock of resources can be maintained over a period of time
Positive externalities of consumption
Where the social benefits of consumer a good are larger than the private benefits of consuming that good
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
Market forces
Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand
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
Social optimum position
Where social costs equal social benefits; the amount which should be produced/consumer in order to maximise social welfare
Perfectly price inelastic good
PED/PED=0; quantity demanded/supplied does not change when price changes
Regulation
Laws to address market failure and promote competition between firms
Labour
One of the four factor of production; human capital
Externalities
The cost of benefit a third party receives from an economic transaction outside of the market mechanism
Unitary price elastic good
When PED/PED=1; a change in price leads to a change in output by the same proportion
Luxury goods
YED>1; an increase in incomes causes an even bigger increase sin demand
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 larger change in quantity demanded/supplied
Habitual behaviour
A cause of irrational behaviour; when consumers are in the habit of making certain decisions
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
Opportunity cost
The value of the next best alternative forgone
Equilibrium price/quantity
Where demand equals supply so there are no more market forces bringing about changes to price or quantity sold
Mixed economy
Both the free market mechanism and the government allocate resources
Subsidy
Government payments to a producer to lower their cost of production and encourage them to produce more
Model
A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words
Private goods
Goods that are rivalry and excludable
Command economy
All factors of production are allocated by the state, so they decide what, how and from whom to produce goods
Social cost/benefit
The cost/benefit to society as a whole due to the economic activity
Normative statements
Subjective statements based on value judgements and opinions; cannot be proven or disproven
Utility
The satisfaction derived from consuming a good
Specific tax
A tax imposed on a good where the value of the tax is dependent on the quality that is bought
Consumer goods
Goods bought and demanded by households and individuals
Indirect tax
Taxes levied on goods and services which increases production and leads to a fall in supply, although this is often partially, or fully, passed onto consumers
Weakness at computation
A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities, and working out future benefits/costs
Enterprise
One of the four factors of production the willingness and ability to take risk and combine the three other factors of production
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
Supply
The ability and willingness to provide a particular good/service at a given price at a given moment in time
Producer surplus
The difference between the price the producer is willing to charge and the price they actually charge
Public good
Goods that are non-excludable, non-rivalry, non-resectable and have zero marginal cost
Ceteris paribus
All else is equal
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
Cross elasticity of demand (XED)
The responsiveness of demand for one good to a change in the price of another good
Consumer surplus
The difference between the price the consumer is willing to pay and the price they actually pay
Land
One of the four factors of production; natural resources such as oil, coal, wheat, physical spaceL
Price mechanism
The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves
Ad Valorem tax
An indirect tax imposed on a good where the value of the tax is dependent on the value of the good
Rationality
Decision-making that leads to economic agents maximising their utility
inferior goods
YED<0; goods which see a fall in demand as income increases
Non-excludability
A characteristic of public goods, someone cannot be prevent from using the good
Economic problem
The problem of scarcity; wants are unlimited by recourse are finite so choices have to be made
Division of labour
When labour comes specialised during the production process so do a specific task in cooperation with other workers
Scarcity
The shortage of resources in relation to the quality of human wants
Substitutes
Positive XED; if good B becomes more expensive, demand for good A rises
Income elasticity of demand (YED)
The responsiveness of demand to a change in income
Asymmetric information
Where one party has more information than the other, leading to market failure
Negative externalities of production
Where the social cost of producing a good are greater than the private cost of producing the good
Excess supply
When price is set too high so supply is greater than demand
Diminishing marginal utility
satisfaction or usefulness as additional units of a product are consumed; explains why the demand curve is downward sloping
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
Price elasticity of demand
The responsiveness of demand to a change in price
Price elasticity of supply
The responsive of supply to a change in price
Government failure
When government intervention leads to a net welfare loss in society
Symmetric information
Where buyers and sellers both have access to the same information
State provision
When the government provides public goods or merit goods which are under provided in the free market
Demand
The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment in time
Positive statements
Objective statements which can be tested with factual evidence to be proven or disproven
Minimum price
A floor price which a firm cannot charge below
Non-rivalry
A characteristic of public goods; one person’s use of goods does not prevent someone else form using it
Capital
one of the four factors of production; goods which can be used in the production process
Perfectly price elastic good
PED/PED=Infinity; quantity demand/supplied falls to 0 when price changes
Complementary goods
Negative XED; if good B becomes more expensive, demand for good A falls
Efficiency
When resources are allocated optimally, so every consumer benefits and waste is minimised
Social science
The study of societies and human behaviour
Private cost/benefit
The cost/benefit to the individual participating in the economic activity
Information gaps
When an economic agent lacks the information needs to make a rational informed decision
Possibility production fortifier (PPF)
Depicts the maximum productive potential of an economy, using combination of two goods or services
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
Incidence of tax
The tax burden on the taxpayer
Excess demand
Where price is set too low so demand is greater than supply
