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PMT Economics Flashcards > Theme 1: Intro to Markets and market failure > Flashcards

Theme 1: Intro to Markets and market failure Flashcards

1
Q

Ad valorem tax

A

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

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2
Q

Asymmetric information

A

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

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3
Q

Capital

A

One of the four factors of production;
goods which can be used in the production process

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4
Q

Capital goods

A

Goods produced in order to aid production of consumer goods in the future

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5
Q

Ceteris paribus

A

All other things remain the same

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6
Q

Command economy

A

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

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7
Q

Complementary goods

A

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

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8
Q

Consumer goods

A

Goods bought and demanded by households and individuals

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9
Q

Consumer surplus

A

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

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10
Q

Cross elasticity of demand (XED)

A

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

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11
Q

Demand

A

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

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12
Q

Diminishing marginal utility

A

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

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13
Q

Division of labour

A

When labour becomes specialised during the production process to do a specific task in cooperation with other workers also doing specific tasks

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14
Q

Economic problem

A

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

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15
Q

Efficiency

A

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

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16
Q

Enterprise

A

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

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17
Q

Equilibrium price/quantity

A

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

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18
Q

Excess demand

A

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

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19
Q

Excess supply

A

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

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20
Q

Externalities

A

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

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21
Q

External cost/benefit

A

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

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22
Q

Free market

A

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

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23
Q

Free rider problem

A

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

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24
Q

Government failure

A

When government intervention leads to a net welfare loss in society

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25
Q

Habitual behaviour

A

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

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26
Q

Incidence of tax

A

The tax burden on the taxpayer

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27
Q

Income elasticity of demand (YED)

A

The responsiveness of demand to a change of income

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28
Q

Indirect tax

A

Taxes levied on goods and services which increase production and leads to a fall in supply, although this is often partially, or fully, passed onto consumers.

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29
Q

Inferior goods

A

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

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30
Q

Information gaps

A

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

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31
Q

Labour

A

One of the four FoPs; human capital

32
Q

Land

A

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

33
Q

Luxury goods

A

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

34
Q

Market failure

A

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

35
Q

Market forces

A

Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand

36
Q

Minimum price

A

A floor price which a firm cannot charge below

37
Q

Mixed economy

A

Both the free market mechanism and the government allocate resources

38
Q

Model

A

A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words

39
Q

Negative externalities of production

A

Where the social costs of producing a good are greater than the private costs of producing the good

40
Q

Non excludability

A

A characteristic of public goods; someone cannot be prevented from using the good

41
Q

Non renewable resources

A

Resources which cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed

42
Q

Non-rivalry

A

A characteristic of public goods; one person’s use of the good does not prevent someone else from using it

43
Q

Normal goods

A

YED>0; demand increases as income increases

44
Q

Normative statements

A

Subjective statements based on value judgements and opinions; cannot be proven or disproven

45
Q

Opportunity cost

A

The value of the next best alternative foregone

46
Q

Perfectly price elastic good

A

PED/PES=Infinity; quantity
demanded/supplied falls to 0 when price changes

47
Q

Perfectly price inelastic good

A

PED/PES=0; quantity
demanded/supplied does not change when price changes

48
Q

Positive externalities of consumption

A

Where the social benefits of consuming a good are larger than the private benefits of consuming that good

49
Q

Positive statements

A

Objective statements which can be tested with factual evidence to be proven or disproven

50
Q

Production possibility frontier (PPF)

A

Depicts the maximum productive potential of an economy, using a combination of two goods or services

51
Q

Price elasticity of demand

A

The responsiveness of demand to a change in price

52
Q

Price elasticity of supply

A

The responsive of supply to a change in price

53
Q

Price mechanism

A

The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves

54
Q

Private cost/benefit

A

The cost/benefit to the individual participating in the economic activity

55
Q

Private goods

A

Goods that are rival and excludable

56
Q

Producer surplus

A

The difference between the price the producer is willing to charge and the price they actually charge

57
Q

Public good

A

Goods that are non-excludable, non-rivalry, non-rejectable and have zero marginal cost

58
Q

Rationality

A

Decision-making that leads to economic agents maximising their utility

59
Q

Regulation

A

Laws to address market failure and promote competition between firms

60
Q

Relatively price elastic good

A

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

61
Q

Relatively price inelastic good

A

When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied

62
Q

Renewable resources

A

Resources which can be replenished, so the stock of resources can be maintained over a period of time

63
Q

Scarcity

A

The shortage of resources in relation to quantity of human wants

64
Q

Social cost/benefit

A

The cost/benefit to society as a whole due to the economic activity

65
Q

Social optimum position

A

Where social costs equal social benefits;
the amount which should be produced/consumed in order to maximise social welfare

66
Q

Specialisation

A

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

67
Q

Social science

A

The study of societies and human behaviour

68
Q

Specific tax

A

A tax imposed on a good where the value of the tax is dependent on the quantity that is bought

69
Q

State provision

A

When the government provides public goods or merit goods which are underprovided in the free market

70
Q

Subsidy

A

Government payments to a producer to lower their costs of production and encourage them to produce more

71
Q

Substitutes

A

Positive XED; if good B becomes more expensive, demand for good A rises

72
Q

Supply

A

The ability and willingness to provide a particular good/service at a given price at a given moment in time

73
Q

Symmetric information

A

Where buyers and sellers have access to the same information

74
Q

Trade pollution permits

A

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

75
Q

Unitary price elastic good

A

When PED/PES=1; a change in price leads to a change in output by the same proportion

76
Q

Utility

A

The satisfaction derived from consuming a good

77
Q

Weakness at computation

A

A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs

PMT Economics Flashcards (4 decks)

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