Theme 1 - Intro to Markets and Market Failure Flashcards
Define ‘Ad valorem tax’
An indirect tax imposed on a good where the value of the tax is dependent on the value of the good
Define ‘Assymetric Info’
Where one party has more information than the other, leading to market failure
Define ‘Capital’
One of the four factors of production; goods which can be used in the production process
Define ‘Capital goods’
Goods produced in order to aid production of consumer goods in the future
Define ‘Ceteris paribus’
All other things remaining the same
Define ‘Command Economy’
All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
Define ‘Complementary Goods’
Negative XED; if good B becomes more expensive, demand for good A falls
Define ‘Consumer goods’
Goods bought and demanded by households and individuals
Define ‘Consumer Surplus’
The difference between the price the consumer is willing to pay and the price they actually pay
Define ‘Cross elasticity of Demand (XED)’
The responsiveness of demand for one good (A) to a change in price of another good (B)
%change in QD of A (divided by)
%change in P of B
Define ‘Demand’
The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment of time
Define ‘Diminishing Marginal Utility’
The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping
Define ‘Division of Labour’
When labour becomes specialised during the production process so do a specific task in cooperation with other workers
Define ‘Economic Problem’
The problem of scarcity; wants are unlimited but resources are finite so choices have to be made
Define ‘Efficiency’
When resources are allocated optimally, so every consumer benefits and waste is minimised
Define ‘Enterprise’
One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production
Define ‘Equilibrium price/quantity’
Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded
Define ‘Excess Demand’
When price is set too low so demand is greater than supply
Define ‘Excess Supply’
When the price is set too high so supply is greater than demand
Define ‘Externalities’
The cost or benefit a third party receives from an economic transaction outside of the market mechanism
Define ‘External cost/benefit’
The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit
Define ‘Free Market’
An economy where the market mechanism allocates resources so consumers and producers make decisions about what is produced, how to produce and for whom
Define ‘Freedom Rider Principle’
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
Define ‘Govt Failure’
When government intervention leads to a net welfare loss in society
Define ‘Habitual Behaviour’
A cause of irrational behaviour; when consumers are in the habit of making certain decisions
Define ‘Incidence of Tax’
The tax burden on the taxpayer
Define ‘Income Elasticity of Demand’
The responsiveness of demand to a change in income
%change in QD (divided by)
%change in Y
Define ‘Indirect Tax’
Taxes on expenditure which increase production costs and lead to a fall in supply
Define ‘Inferior Goods’
YED<0; goods which see a fall in demand as income increases
Define ‘Info Gap’
When an economic agent lacks the information needed to make a rational, informed decision
Define ‘Info Provision’
When the government intervenes to provide information to correct market failure
Define ‘Labour’
1 of the 4 factors of production; human capital
Define ‘Land’
1 of the 4 factors of production; natural resources such as oil, coal, wheat, physical space
Define ‘Luxury Goods’
YED>1; an increase in incomes causes an even bigger increase in demand
Define ‘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
Define ‘Market Forces’
Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand
Define ‘Maximum Price’
A ceiling price which a firm cannot charge above
Define ‘Minimum Price’
A floor price which a firm cannot charge below
Define ‘Mixed Economy’
Both the free market mechanism and the government allocate resources
Define ‘Model’
A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words
Define ‘Negative Externalities of Production’
Where the social costs of producing a good are greater than the private costs of producing the good
Define ‘Non-excludable’
A characteristic of public goods; someone cannot be prevented from using the good
Define ‘Non-renewable resources’
Resources which cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed
Define ‘Non-rivalry’
A characteristic of public goods; one person’s use of the good does not prevent someone else from using it
Define ‘Normal goods’
YED>0; demand increases as income increases
Define ‘Normative Statement’
Subjective statements based on value judgements and opinions; cannot be proven or disproven
Define ‘Opportunity Cost’
The value of the next best alternative forgone
Define ‘Perfectly price Elastic good’
PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes
Define ‘Perfectly price Inelastic good’
PED/PES=0; quantity demanded/supplied does not change when price changes
Define ‘Positive Externalities of Consumption’
Where the social benefits of consuming a good are larger than the private benefits of consuming that good
Define ‘Positive Statement’
Objective statements which can be tested with factual evidence to be proven or disproven
Define ‘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
Define ‘Price Elasticity of Demand (PED)’
The responsiveness of demand to a change in price
%change in QD (divided by)
%change in P
Define ‘Price Elasticity of Supply (PES)’
The responsive of supply to a change in price
%change in QD (divided by)
%change in P
Define ‘Price Mechanism’
The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves
Define ‘Private cost/benefit’
The cost/benefit to the individual participating in the economic activity
Define ‘Private goods’
Goods that are rivalry and excludable
Define ‘Producer Surplus’
The difference between the price the producer is willing to charge and the price they actually charge
Define ‘Public goods’
Goods that are non-excludable and non-rivalry
Define ‘Rationality’
Decision-making that leads to economic agents maximising their utility
Define ‘Regulation’
Laws to address market failure and promote competition between firms
Define ‘Relatively Price Elastic good’
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
Define ‘Relatively Price Inelastic good’
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
Define ‘Renewable Resources’
Resources which can be replenished, so the stock of resources can be maintained over a period of time
Define ‘Scarcity’
The shortage of resources in relation to the quantity of human wants
Define ‘Social cost/benefit’
The cost/benefit to society as a whole due to the economic activity
Define ‘Social Optimum Position’
Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare
Define ‘Social Science’
The study of societies and human behaviour
Define ‘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
Define ‘Specific Tax’
A tax imposed on a good where the value of the tax is dependent on the quantity that is bought
Define ‘State Provision of Goods’
Through taxation, the government provides public goods or merit goods which are underprovided in the free market
Define ‘Subsidy’
Government payments to a producer to lower their costs of production and encourage them to produce more
Define ‘Substitutes’
Positive XED; if good B becomes more expensive, demand for good A rises
Define ‘Supply’
The ability and willingness to provide a particular good/service at a given price at a given moment in time
Define ‘Symmetric Information’
Where buyers and sellers both have access to the same information
Define ‘Trade Pollution Permits’
Licenses which allow businesses to pollute up to a certain amount, controlled by the Govt. Permits can be bought and sold between businesses with an incentive to reduce pollution
Define ‘Unitary Price Elastic good’
When PED/PES=1; a change in price leads to a change in output by the same proportion
Define ‘Utility‘
The satisfaction derived from consuming a good
Define ‘Weakness at Computation’
A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs
