Theme 1 Definitions

Question 1

Ad valorem tax

Answer 1

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

Question 2

Asymmetric information

Answer 2

Where one 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 in order to aid production of consumer goods in the future

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 goods

Question 7

Complementary 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

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

Question 10

Cross elasticity of demand (XED)

Answer 10

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

Question 11

Demand

Answer 11

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

Question 12

Diminishing marginal utility

Answer 12

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

Question 13

Divison of labour

Answer 13

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

Question 14

Economic problem

Answer 14

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

Question 15

Efficiency

Answer 15

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

Question 16

Enterprise

Answer 16

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

Question 17

Equilibrium price/quantity

Answer 17

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

Question 18

Excess demand

Answer 18

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

Question 19

Excess supply

Answer 19

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

Question 20

Externalities

Answer 20

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

Question 21

External cost/benefit

Answer 21

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

Question 22

Free market

Answer 22

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

Question 23

Free rider principle

Answer 23

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

Question 24

Government failure

Answer 24

When government intervention leads to a net welfare loss in society

Question 25

Habitual behaviour

Answer 25

A cause of irrational behaviour; when consumers are in the habit of making certain decisions

Question 26

Incidence of tax

Answer 26

The tax burden on the taxpayer

Question 27

Income elasticity of demand (YED)

Answer 27

The responsiveness of demand to a change in income

Question 28

Indirect tax

Answer 28

Taxes on expenditure which increase production costs and lead to a fall in supply

Question 29

Inferior goods

Answer 29

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

Question 30

Information gap

Answer 30

When an economic agent lacks the information needed to make a rational, informed decision

Question 31

Information provision

Answer 31

When the government intervenes to provide information to correct market failure

Question 32

Labour

Answer 32

One of the four factors of production; human capital

Question 33

Land

Answer 33

One of the four factors of production; natural resources such as oil, coal, wheat, physical space

Question 34

Luxury goods

Answer 34

YED>1; an increase in incomes causes an even bigger increase in demand

Question 35

Market failure

Answer 35

When the free market fails to allocate resources to the best interest of society so there is an inefficient allocation of scarce resources