Theme 1 definition Flashcards
Ad valorem tax
An indirect tax imposed on a good where the value of the tax is dependent on the value of the good
asymmetric information
When an economic agent has more information than another which may lead to market failure
Capital
A factor of productions; goods which can be used in the production process
Ceteris Paribus
All other things remaining the same
Command economy
All factors of production are owned by the state, the state decides how resources are allocated, what and whom to produce for
complementary goods
Negative XED; if good B becomes more expensive, demand for good A will fall
Consumer goods
Goods bought and demanded by households and individuals
Consumer surplus
The difference between the price the consumer is willing to pay and the price they actually pay
Cross elasticity of demand XED
The responsiveness of demand for one good A to a change in the price of another good B
%change in QD of A / %change in P of B
Demand
The quantity of a good/service that consumers are able and willing to buy at a given moment of time
Diminishing marginal utility
The extra benefit gained from consumption of a good generally declines as extra units are consumed, this is why demand is downward sloping
Division of labour
When labour becomes specialised during the production process so do a specific task in cooperation with other workers
Economic problem
The problem of scarcity; wants are unlimited but resources are finite so choices have to be made
Efficiency
When resources are allocated optimally, so every consumer benefits and waste is limited
Enterprise
One of the four factors of productions; the willingness and ability to take risk and combine the three other factors of production
Equilibrium of price/quantity
When demand equals supply so there are no 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 to a third party due to an economic transaction between agents; highlights the difference between social cost/benefit and private cost/benefits
Free market
An economy where the market mechanism allocated resources so consumers and producers make decisions about what is produced and how and for whom
Free rider problem
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
Government failure
When government intervention leads to a net welfare loss in society
Habitual behaviour
A cause of irrational behaviour; when consumers are in a habit of making a certain decision
Incidence of tax
The tax burden on the tax payer
Income elasticity (YED)
The responsiveness of demand to a change in income
%change in QD/%change in Y
indirect tax
A levy on expenditure which increases production cost, leading to a fall in supply
inferior goods
YED<0; goods which see a fall in demand as income increases
Information gap
When an economic agents lacks the information needed to make a rational, informed decision
Information provision
When the government provides information to correct market failure
Labour
One of the factors of production; human capital
Land
One of the factors of production; natural resources such as oil, wheat, coal and physical space
Luxury goods
YED>1; an increase in incomes causes an even bigger increase in demand
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 the free market which acts to reduce prices when there is excess supply and increases them when there is excess demand
Maximum price
A price ceiling below market equilibrium that firms cannot charge above
Minimum price
A price floor set above equilibrium that firms cannot charge below
Mixed economy
Both the free market mechanism and the government allocation of resources
Model
A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words
Negative externalities of production
Where the social cost of producing a good are greater than the private cost, this is a overproduction of demerit goods that cause negative externalities like pollution and health issues
Non-excludable
Characteristic of public goods; where someone cannot prevent you from using the good as everyone has access to the good.
Non-renewable resources
Resources that cannot be readily replenished or replaced at equal levels of its consumption, so general stock decreases over time e.g fossil fuel
Non-rivalry
A characteristic of public goods; one persons use does not prevent someone else from using it
Normal goods
YED>0, demand increases as income increases
Normative statements
Subjective statements based on value judgements and opinions which cannot be proven or disproven
Opportunity cost
The value of the next best alternative forgone
Perfectly price elastic good
PED/PES = infinity, quantity demand/supply falls to zero when price change
Perfectly price inelastic good
When PED/PES = 0; quantity demanded/supplied does not change when price change
Positive externalities of consumption
Where social benefits of consuming a good are larger than the private benefits; merit/public goods that are underproduced
Positive statements
Objective statements which can be tested with factual evidence to be proven or disproven
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; demonstrates opportunity cost
Price elasticity of demand
The responsiveness of demand to a change in price
%change in QD / %change in price
Price elasticity of supply
The responsiveness of supply to a change in price
%change in QD / %change in p
Price mechanism
The system of resource allocation based on the free markets movement of prices, determine by the demand and supply curves
Private cost/benefit
Cost/benefit to the individual participating in the economic activity
Private goods
Goods that are rivalry and excludable
Producer surplus
The difference between the price the producer is willing to charge and the price they actually charge
Public goods
Goods that are non-excludable and non-rivalrous
Rationality
Decision-making that leads to economic agents maximising their utility
Regulation
Laws to address market failure and promote competition among firms
Relatively price elastic goods
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 demand/supplied
Relatively inelastic goods
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
Renewable resources
Resources that can be replenished, so stock can be maintained over time
Scarcity
The shortage of resources in relation to quantity of human wants
Social cost/benefit
The cost/benefit to society as a whole due to economic activity
Social optimum position
Where social costs equal social benefits; the amount which should be produced/consumed in order to maximise social welfare
Social science
The study of societies and human behaviour
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
Specific tax
A tax imposed on a good where the value of the tax is dependent on the quantity that is bought
State provision of goods
Through taxation, the government provides public goods or merit goods which are underprovided for in the free market
Subsidy
Government payments to a producer to lower their cost of production and encourage them to produce more; grants given to firms
Substitutes
Positive XED, if good B becomes more expensive, demand for good A rises
Supply
The ability and willingness to provide a particular good/service at a given price at a given moment
Symmetric information
Where buyers and sellers both have access to the same information
Trade pollution permits
Licenses which allow businesses to pollute up to a certain amount. Government controls amount of licenses. Businesses are allowed to sell and buy permits which means there is incentive to reduce pollution
Unitary price elastic good
When PED/PES = 1; a change in price leads to a change in output by the same proportion
Utility
The satisfaction derived from consuming a good
Weakness at computation
A cause of irrational behaviour; when consumers are bad at making calculation, estimating probabilities and working out future benefits/costs
