Theme 1 - Definition Glossary

Question 1

Ad valorem tax

Answer 1

An indirect tax put on a good where the value of tax depends on the value of the good

Question 2

Asymmetric information

Answer 2

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

Question 3

Capital

Answer 3

One of the four factors of production. Goods which can be used in the production process

Question 4

Capital goods

Answer 4

Goods produced to help production of consumer goods

Question 5

Ceteris paribus

Answer 5

All other things remaining the same

Question 6

Command economy

Answer 6

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

Question 7

Complimentary goods

Answer 7

Negative XED. If good B becomes more expensive, demand for good A falls

Question 8

Consumer goods

Answer 8

Goods bought and demanded by households and individuals

Question 9

Consumer surplus

Answer 9

Difference between the price the consumer is willing to pay and the price they will actually pay

Question 10

Cross elasticity of demand

Answer 10

The responsiveness of demand for one good to change in price of another good

Question 11

Cross elasticity of demand equation

Answer 11

% change in quantity demanded of good A
————————————————————
% change in price of good B

Question 12

Demand

Answer 12

The quantity of a good or service that consumers are willing to buy at a given price at a given moment

Question 13

Diminishing marginal utility

Answer 13

The extra benefit gained from consumption of a good generally declines as extra units are consumed. (Explains demand curve sloping downwards)

Question 14

Division of labour

Answer 14

When labour becomes specialised during the production process

Question 15

Economic problem

Answer 15

The problem of scarcity. Wants are unlimited but resources are finite so choices must be made

Question 16

Efficiency

Answer 16

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

Question 17

Enterprise

Answer 17

One of the four factors of production. The ability to take risks and combine the other three factors of production

Question 18

Equilibrium price/quantity

Answer 18

When demand equals supply so there is no more market forces causing a change to price/quantity demanded

Question 19

Excess demand

Answer 19

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

Question 20

Excess supply

Answer 20

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

Question 21

Externalities

Answer 21

The cost or benefit a third party gets from a transaction

Question 22

External cost/benefit

Answer 22

The cost/benefit to a third party not involved in the economic activity

Question 23

Free market

Answer 23

An economy where consumers and producers make decisions about what is produced, how to produce, and for whom

Question 24

Free rider principle

Answer 24

People who don’t pay for a public goof still get benefits from it so the private sector under provides the good, as they can’t make a profit

Question 25

Government failure

Answer 25

When government intervention leads to a net welfare loss in society

Question 26

Habitual behaviour

Answer 26

A cause of irrational behaviour. When consumers have habits for making certain decisions

Question 27

Incidence of tax

Answer 27

The tax burden on the taxpayer

Question 28

Income elasticity of demand (YED)

Answer 28

The responsiveness of demand to a change in income

Question 29

Income elasticity of demand (YED) equation

Answer 29

% change in quantity demanded
———————————————
% change in income

Question 30

Indirect tax

Answer 30

Taxes on expenses which increase production costs, leading to a fall in supply

Question 31

Inferior goods

Answer 31

YED < 0 goods which see a fall in demand as income increases