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Economics Definitions > Theme 1: Introduction to Markets and Market Failure > Flashcards

Theme 1: Introduction to Markets and Market Failure Flashcards

1
Q

Ad valorem tax

A

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

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2
Q

Asymmetric information

A

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

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3
Q

Ceteris Paribus

A

All other things remain constant

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4
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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5
Q

Complementary goods

A

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

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6
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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7
Q

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 / %Change in P of B

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8
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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9
Q

Division of Labour

A

When labour is specialised during the production process

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10
Q

Economic problem

A

The problem of scarcity; wants are unlimited but resources are finite

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11
Q

Efficiency

A

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

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12
Q

Excess demand

A

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

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13
Q

Excess supply

A

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

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14
Q

Externalities

A

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

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15
Q

External cost/benefit: (2)

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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16
Q

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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17
Q

Free rider principle (2)

A
  • People who do not pay for a public good but still receive benefits from it
  • The private sector will under-provide the good as they cannot make a profit
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18
Q

Government failure

A

When government intervention leads to a net welfare loss in society

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19
Q

Habitual behaviour

A

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

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20
Q

Incidence of tax

A

The tax burden on the taxpayer

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21
Q

Income elasticity of demand (YED)

A

The responsiveness of demand to a change in income
%change in QD / %change in Y

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22
Q

Indirect tax

A

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

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23
Q

Inferior goods

A

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

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24
Q

Information gap

A

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

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25
Q

Information provision

A

When the government intervenes to provide information to correct market failure

26
Q

Luxury goods

A

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

27
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

28
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

29
Q

Maximum price

A

A ceiling price which a firm cannot charge above

30
Q

Minimum price

A

A floor price which a firm cannot charge below

31
Q

Mixed economy

A

Both the free market mechanism and the government allocate resources

32
Q

Negative externalities of production

A

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

33
Q

Non-excludable

A

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

34
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

35
Q

Non-rivalry

A

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

36
Q

Normal goods

A

YED > 0
Demand increases as income increases

37
Q

Normative statement

A

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

38
Q

Opportunity cost

A

The value of the next best alternative forgone

39
Q

Positive statement

A

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

40
Q

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

41
Q

Price elasticity of demand (PED):

A

The responsiveness of demand to a change in price
% change in QD / % change in P

42
Q

Price elasticity of supply (PES)

A

The responsiveness of supply to a change in price
% change in QS / % change in P

43
Q

Price mechanism

A

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

44
Q

Private cost/benefit

A

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

45
Q

Private goods

A

Goods that are rivalrous and excludable

46
Q

Producer surplus

A

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

47
Q

Public goods

A

Goods that are non-excludable and non-rivalry

48
Q

Rationality

A

Decision-making that leads to economic agents maximising their utility

49
Q

Regulation

A

Laws to address market failure and promote competition between firms

50
Q

Renewable resources

A

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

51
Q

Scarcity

A

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

52
Q

Social cost/benefit

A

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

53
Q

Social Optimum position

A

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

54
Q

Specialisation

A

The process of an organisation concentrating its labour and resources on a certain type of production to be more efficient and create a comparative advantage for an economy.

55
Q

Specific tax

A

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

56
Q

State provision of goods

A

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

57
Q

Subsidy

A

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

58
Q

Substitutes

A

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

59
Q

Symmetric information

A

Where buyers and sellers both have access to the same information

60
Q

Tradable pollution permits

A

Licences which allow businesses to pollute up to a certain amount. The government controls the number of licences 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

61
Q

Utility

A

The satisfaction derived from consuming a good

62
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

Economics Definitions (6 decks)

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