Theme 1: Introduction to Markets and Market Failure

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 as a percentage of the good

Question 2

Capital goods

Answer 2

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

Question 3

Ceteris paribus

Answer 3

All other things remaining the same

Question 4

Complementary goods

Answer 4

Have a negative XED; if good B becomes more expensive, demand for good A falls

Question 5

Command economy

Answer 5

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

Question 6

Consumer goods

Answer 6

Goods bought and demanded by households and individuals

Question 7

Consumer surplus

Answer 7

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

Question 8

Cross elasticity of
demand (XED)

Answer 8

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

Question 9

Demand

Answer 9

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 10

Diminishing marginal
utility

Answer 10

the benefit from consuming one more gradually declining as more is consumed

Question 11

Division of labour

Answer 11

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

Question 12

Efficiency

Answer 12

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

Question 13

Equilibrium
price/quantity

Answer 13

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

Question 13

Enterprise

Answer 13

The willingness and ability to
take risks and combine the three other factors of production

Question 14

Externalities

Answer 14

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

Question 15

Free market

Answer 15

Market mechanism allocates resources

Question 16

Free rider principle

Answer 16

Don’t pay for the public good but still receive benefit from it

Question 17

Government failure

Answer 17

When government intervention leads to a net welfare loss in society

Question 19

Incidence of tax

Answer 19

The tax burden on the taxpayer

Question 20

Income elasticity of
demand (YED)

Answer 20

The responsiveness of demand to a change in income

Question 21

Indirect tax

Answer 21

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

Question 22

Inferior goods

Answer 22

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

Question 23

Information gap

Answer 23

When the government intervenes to provide information to correct
market failure

Question 24

Luxury goods

Answer 24

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

Question 25

Market failure

Answer 25

When the free market fails to allocate resources to the best interest

Question 26

Mixed economy

Answer 26

Both the free market mechanism and the government allocate resources

Question 27

Negative externalities of production

Answer 27

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

Question 28

Non-rivalry

Answer 28

Non-rivalry

Question 30

Positive externalities of consumption

Answer 30

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

Question 31

Social optimum position

Answer 31

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

Question 31

Specific tax

Answer 31

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

Question 32

State provision of goods

Answer 32

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

Question 33

Substitutes

Answer 33

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

Question 34

Supply

Answer 34

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

Question 35

Trade pollution permits

Answer 35

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