Theme 1 - Definition Glossary Flashcards
Ad valorem tax
An indirect tax put on a good where the value of tax depends on the value of the good
Asymmetric information
Where on party has more information than the other, leading to market failure
Capital
One of the four factors of production. Goods which can be used in the production process
Capital goods
Goods produced to help production of consumer goods
Ceteris paribus
All other things remaining the same
Command economy
All factors of production are allocated by the state, so they decide what, how and for whom to produce the goods
Complimentary goods
Negative XED. If good B becomes more expensive, demand for good A falls
Consumer goods
Goods bought and demanded by households and individuals
Consumer surplus
Difference between the price the consumer is willing to pay and the price they will actually pay
Cross elasticity of demand
The responsiveness of demand for one good to change in price of another good
Cross elasticity of demand equation
% change in quantity demanded of good A
————————————————————
% change in price of good B
Demand
The quantity of a good or service that consumers are willing to buy at a given price at a given moment
Diminishing marginal utility
The extra benefit gained from consumption of a good generally declines as extra units are consumed. (Explains demand curve sloping downwards)
Division of labour
When labour becomes specialised during the production process
Economic problem
The problem of scarcity. Wants are unlimited but resources are finite so choices must be made
Efficiency
When resources are allocated optimally so every consumer benefits and waste is minimised
Enterprise
One of the four factors of production. The ability to take risks and combine the other three factors of production
Equilibrium price/quantity
When demand equals supply so there is no more market forces causing a change to price/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 gets from a transaction
External cost/benefit
The cost/benefit to a third party not involved in the economic activity
Free market
An economy where consumers and producers make decisions about what is produced, how to produce, and for whom
Free rider principle
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
Government failure
When government intervention leads to a net welfare loss in society
Habitual behaviour
A cause of irrational behaviour. When consumers have habits for 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
Income elasticity of demand (YED) equation
% change in quantity demanded
———————————————
% change in income
Indirect tax
Taxes on expenses which increase production costs, leading to a fall in supply
Inferior goods
YED < 0 goods which see a fall in demand as income increases
