Theme 1 - Intro to Markets and Market Failure Flashcards

1
Q

Define ‘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

Define ‘Assymetric Info’

A

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

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3
Q

Define ‘Capital’

A

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

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4
Q

Define ‘Capital goods’

A

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

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5
Q

Define ‘Ceteris paribus’

A

All other things remaining the same

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6
Q

Define ‘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

Define ‘Complementary Goods’

A

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

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8
Q

Define ‘Consumer goods’

A

Goods bought and demanded by households and individuals

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9
Q

Define ‘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

Define ‘Cross elasticity of Demand (XED)’

A

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

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11
Q

Define ‘Demand’

A

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

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12
Q

Define ‘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

Define ‘Division of Labour’

A

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

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14
Q

Define ‘Economic Problem’

A

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

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15
Q

Define ‘Efficiency’

A

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

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16
Q

Define ‘Enterprise’

A

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

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17
Q

Define ‘Equilibrium price/quantity’

A

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

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18
Q

Define ‘Excess Demand’

A

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

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19
Q

Define ‘Excess Supply’

A

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

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20
Q

Define ‘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

Define ‘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

Define ‘Free Market’

A

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

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23
Q

Define ‘Freedom Rider Principle’

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

Define ‘Govt Failure’

A

When government intervention leads to a net welfare loss in society

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25
Q

Define ‘Habitual Behaviour’

A

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

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26
Q

Define ‘Incidence of Tax’

A

The tax burden on the taxpayer

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27
Q

Define ‘Income Elasticity of Demand’

A

The responsiveness of demand to a change in income

%change in QD (divided by)
%change in Y

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28
Q

Define ‘Indirect Tax’

A

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

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29
Q

Define ‘Inferior Goods’

A

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

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30
Q

Define ‘Info Gap’

A

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

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31
Q

Define ‘Info Provision’

A

When the government intervenes to provide information to correct market failure

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32
Q

Define ‘Labour’

A

1 of the 4 factors of production; human capital

33
Q

Define ‘Land’

A

1 of the 4 factors of production; natural resources such as oil, coal, wheat, physical space

34
Q

Define ‘Luxury Goods’

A

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

35
Q

Define ‘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

36
Q

Define ‘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

37
Q

Define ‘Maximum Price’

A

A ceiling price which a firm cannot charge above

38
Q

Define ‘Minimum Price’

A

A floor price which a firm cannot charge below

39
Q

Define ‘Mixed Economy’

A

Both the free market mechanism and the government allocate resources

40
Q

Define ‘Model’

A

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

41
Q

Define ‘Negative Externalities of Production’

A

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

42
Q

Define ‘Non-excludable’

A

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

43
Q

Define ‘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

44
Q

Define ‘Non-rivalry’

A

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

45
Q

Define ‘Normal goods’

A

YED>0; demand increases as income increases

46
Q

Define ‘Normative Statement’

A

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

47
Q

Define ‘Opportunity Cost’

A

The value of the next best alternative forgone

48
Q

Define ‘Perfectly price Elastic good’

A

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

49
Q

Define ‘Perfectly price Inelastic good’

A

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

50
Q

Define ‘Positive Externalities of Consumption’

A

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

51
Q

Define ‘Positive Statement’

A

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

52
Q

Define ‘Possibility Production Frontier (PPF)’

A

Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed

53
Q

Define ‘Price Elasticity of Demand (PED)’

A

The responsiveness of demand to a change in price

%change in QD (divided by)
%change in P

54
Q

Define ‘Price Elasticity of Supply (PES)’

A

The responsive of supply to a change in price

%change in QD (divided by)
%change in P

55
Q

Define ‘Price Mechanism’

A

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

56
Q

Define ‘Private cost/benefit’

A

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

57
Q

Define ‘Private goods’

A

Goods that are rivalry and excludable

58
Q

Define ‘Producer Surplus’

A

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

59
Q

Define ‘Public goods’

A

Goods that are non-excludable and non-rivalry

60
Q

Define ‘Rationality’

A

Decision-making that leads to economic agents maximising their utility

61
Q

Define ‘Regulation’

A

Laws to address market failure and promote competition between firms

62
Q

Define ‘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

63
Q

Define ‘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

64
Q

Define ‘Renewable Resources’

A

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

65
Q

Define ‘Scarcity’

A

The shortage of resources in relation to the quantity of human wants

66
Q

Define ‘Social cost/benefit’

A

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

67
Q

Define ‘Social Optimum Position’

A

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

68
Q

Define ‘Social Science’

A

The study of societies and human behaviour

69
Q

Define ‘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

70
Q

Define ‘Specific Tax’

A

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

71
Q

Define ‘State Provision of Goods’

A

Through taxation, the government provides public goods or merit goods which are underprovided in the free market

72
Q

Define ‘Subsidy’

A

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

73
Q

Define ‘Substitutes’

A

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

74
Q

Define ‘Supply’

A

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

75
Q

Define ‘Symmetric Information’

A

Where buyers and sellers both have access to the same information

76
Q

Define ‘Trade Pollution Permits’

A

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

77
Q

Define ‘Unitary Price Elastic good’

A

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

78
Q

Define ‘Utility‘

A

The satisfaction derived from consuming a good

79
Q

Define ‘Weakness at Computation’

A

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