Theme 1 Key Terms Flashcards
Ad valorem tax
An indirect tax imposed on a good where the value of the tax is dependent on the value of the good
Asymmetric Information
Where one party has more information than the other, leading to market failure
buffer stock schemes
where both maximum and minimum prices are implemented at the same time
Capital
- one of the four factors of production
- goods which can be used in the production process (machinery, factories etc)
Capital goods
Goods produced in order to aid production of consumer goods in the future
Ceteris parabus
‘with all other things equal’
- used when the focus is on changes in one variable while holding others constant
command economy
all factors of production are allocated by the state, so they decide what, how and for who to produce goods
community surplus
consumer surplus + producer surplus
Complementary goods
- Negative XED
- if good B becomes more expensive, demand for good A falls
Consumer goods
Goods bought and demanded by households and individuals
Consumer surplus
The difference between the price the consumer is willing to pay and the price they actually pay
Cross Elasticity of Demand (XED)
- the responsiveness of demand for good A to a change in price of good B
+ve = substitute (coke and Pepsi)
-ve = complement (gin and tonic)
XED formula
(%△ in QD of A) / (%△in P of B)
dinner on plate
Demand
the quantity of a good/service the consumers are willing and able to buy at a given price at any moment in time
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 downsloping
marginal utility
the happiness in consumption gained from the next unit consumed
Division of labour
when labour becomes specialised during the production process so workers do a specific task in cooperation with other workers
Economic problem
- The problem of scarcity
- wants are unlimited but resources are finite so choices have to be made
Efficiency
when resources are allocated optimally, so every consumer benefits and waste is minimised
Enterprise
- one of 4 factors of production
- the willingness and ability to take risks and combine the three other factors of production
Equilibrium price/quantity
where demand = supply so there are no more market forces bringing about change to price or quantity demanded
Excess demand
when price is set too low so demand is greater than supply
excess supply
when price is set too high so supply is greater than demand
externalities
the cost or benefit a third party receives from an economic transaction outside of the market mechanism
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
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.
free rider principle
people who do not pay for public goods still receive benefits from it so the private sector will under- provide the good as they cant make a profit
government failure
when government intervention leads to a net welfare loss in society, worsening allocation of resources
- costs of intervention outweigh benefits
habitual behaviour
- a cause of irrational behavior
- when consumers are in the habit of making certain decisions
incentive function
acts as an incentive to work hard. with ↑ money, buyers can buy more. if suppliers produce ↑ , they will earn more.
low prices incentive for consumers to buy more, high prices incentive for consumers to sell more.
incidence of tax
the tax burden on the taxpayer
Income elasticity of demand
the responsiveness of demand to a change in income
YED formula
(%△ in QD) / (%△ in Y)
dogs on yachts
indirect tax
taxes on goods and services instead of income or profits
inferior goods
YED < 0
- goods which see a fall in demand as income increases
information gap
when an economic agent lacks the information needed to make a rational, informed decision
information provision
when the government intervenes to provide information to correct market failure
labour
- one of the four factors of production
- human
land
- one of the 4 factors of production
- natural resources such as oil, coal, wheat, physical space
luxury goods
YED > 1
- an increase in incomes causes an even bigger increase in demand
market failure
when the market fails to allocate resources efficiently, so there is an inefficient allocation of scarce resources leading to loss in social welfare
Market forces
forces in free market which act to reduce prices when there is excess supply and increase them when there is excess demand
market clearing price
where all goods supplied to market are bought, but no buyers are unable to buy the good
maximum price
a ceiling price which a firm cannot charge above
minimum price
a floor price which a firm cannot charge below
mixed economy
both the free market mechanism and the government allocate resources
model
- a hypothesis which can be proven or tested by evidence
- it tends to be mathematical whilst a theory is in words
-ve externalities of production
where the social costs of producing a good are greater than the private costs of producing the good
non-excludable
- a characteristic of public goods
- someone cannot be prevented from using the good
Non-renewable resources
- resources that cannot be readily replenished or replaced at a level equal to consumption
- the stock level decreases over time as they are consumed
non-rivalry
- a characteristic of public goods
- one persons use of the good does not prevent someone else from using it
Normal goods
YED > 0
- demand increases as income increases
normative statement
- subjective statements based on value judgments and opinions
- cannot be proven or disproven
opportunity cost
the value of the next best alternative forgone
perfectly price elastic good
PED/PES = infinity
- quantity demanded/supplied falls to 0 when price changes
perfectly price inelastic good
PED/PES = 0
- quantity demanded/supplied does not change when price changes
positive externalities of consumption
where the social benefits of consuming a good are larger than the private benefits of consuming that good
positive statement
objective statements which can be tested with factual evidence to be proven or disproven
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
Price elasticity of demand
the responsiveness of demand to a change in price
PED formula
(%△ in QD) / (%△ in P)
have to queue before you pee
Price elasticity of supply
the responsiveness of supply to a change in price
PES formula
(%△ in QS) / (%△ in price)
sugar on pancakes
Price mechanism
the system of resource allocation based on the free market movement of prices, determined by the demand and supply curves
private cost/benefit
the cost/benefit to the individual participating in the economic activity
Private goods
goods that are rivalrous and excludable
producer surplus
the difference between the price the producer is willing to charge and the price they actually charge
public goods
goods that are non-excludable and non-rivalrous
rationality
decision making that leads to economic agents maximising their utility
rationing function
when price ↑, some ppl cant afford, and some have no desire to buy anymore.
means limited resources can be allocated to those who can afford and still want
regulation
laws to address market failure and promote competition between firms
regulatory capture
when govt try regulate monopoly power.
occurs when interests of society are overlooked for interests of CEOs and managers etc.
when CEOs/managers influence regulator, due to close contact/used to work in industry before so knows CEOs in industry.
means Ceos can influence regulator to reduce extent of the regulation
working in interest of firm not of society.
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
relatively price inelastic good
- when PED/PES < 1
- demand/supply is relatively unresponsive to a change in price so a small change in price leads to a small change in quantity demanded/supplied
renewable resources
resources which can be replenished, so the stock of resources can be maintained over a period of time
scarcity
the shortage of resources in relation to the quantity of human wants
signalling function
signals to producers where their resources should be used. if P↑, resources should go there. the price change shows the market has changed, so they should change the quantity bought/sold to reach equilibrium
social cost/benefit
the cost/benefit to society as a whole due to the economic activity
social optimum position
- where social costs equal social benefits
- the amount which should be produced/consumed in order to maximise social welfare
social science
the study of societies and human behaviour
specialisation
the production of a limited range of goods by a company/country/individual so they arent self sufficient and have to trade with others
specific tax
a tax imposed on a good where the value of the tax is dependent on the quantity that is bought
state provision of goods
through taxation, the govt provides public goods or merit goods which are underprovided in the free market
subsidy
govt. payments to a producer to lower their costs of production and encourage them to produce more
substitutes
- positive XED
- if good B becomes more expensive, demand for good A rises
supply
the ability and willingness to provide a particular good/service at a given price at a given moment in time
symmetric information
where buyers and sellers both have access to the same info
trade pollution permits
licenses which allow businesses to pollute up a certain amount.
the govt 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
Unitary price elastic good
when PED/PES = 1
- a change in price leads to a change in output by the same proportion
Utility
the satisfaction derived from consuming a good
Weakness at computation
a cause of irrational behavior
- when consumers are bad at making calculations, estimating problems, and working out future benefits/costs
value judgments
evaluative statement on how GOOD or BAD you think an idea or action is
functions of money
- medium of exchange
- measureof value
- method of deferred payment
- store of wealth
factors shifting demand
P - population
A - advertising
S - substitutes price
I - income
F - fashion/taste
I - interest rates
C - complements price
income effect
- when the price falls people’s ‘real income’ increases so they can afford to buy more
substitutes effect
- when the price of a product falls the product will be relatively more attractive to people than other products whose prices have remained unchanged
Pareto optimality
when a market is at equilibrium with no external influences its said to be at ‘Pareto optimality’
PED values
infinite - perfectly elastic
> 1 - elastic
1 - unitary proportional
< 1 - inelastic
0 - perfectly inelastic
merit goods
goods that would be under provided in a pure free market economy
demerit goods
over provided and thus overconsumed by the free market mechanism
reasons to shift PPF
1) Productive potential increase
2) Increase in resources
3) Improvement in quality of resources
4) New + Improved tech
How to increase productive potential
1) Quality
2) Quantity
3) Efficiency
free good
any good you can get without incurring an opportunity cost - i.e. goods that aren’t scarce
economic growth
an increase in the productive capacity of the economy indicating an increase in real output
normal good
as income rises the demand for the good rises
inferior good
as income rises demand for the product will fall
joint supply
where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by-product
frederich hayek believed in…?
free market economy
adam smith believed in…?
free market economy
karl marx believed in…?
command economy
