Unit 1 Key Definitions Flashcards
Ad valorem tax
a percentage expenditure tax such as VAT
Average cost
the cost per unit of output; also called unit cost
unit cost
the cost per unit of output; also called average cost
Buffer stock
a store of an agricultural good or primary product which is added to in the event of a surplus and released onto the market in the event of a shortage
Competitive market
a market in which the large number of buyers and sellers possess good market information and easily enter or leave the market
Condition of demand
a determinant of demand, other than the good’s own price, that fixes the position of the demand curve
Condition of supply
a determinant of supply, other than the good’s own price, that fixes the position of the supply curve
Cross-elasticity of demand
the proportionate change in demand for a good following an initial proportionate change in the price of another good
Decrease in demand
a leftward shift of the demand curve.
Decrease in supply
a leftward shift of the supply curve
Demand
the quantity of a good or service that consumers are able and willing to buy at given prices in a given period of time. For economists, demand is always effective demand
Demerit good
a good, such as tobacco, for which the social costs of consumption exceed the private costs
Diseconomy of scale
rising average or unit cost as a firm increases its size or scale
Division of labour
this concept goes hand in hand with specialisation. Different workers perform different tasks in the course of producing a good or service. Different workers may also produce different goods or services
Economy of scale
falling average or unit costs as a firm increases its size or scale
Effective demand
the desire of a good or service backed by an ability to pay
Elasticity
the proportionate responsiveness of a second variable to an initial proportionate change in the first variable
Emissions trading
emissions trading systems allow policy-makers to set a pollution target, and then issue tradable permits corresponding to that amount. Companies that wish to pollute must hold permits equal to their emissions
Equilibrium
a state of rest or balance between opposing forces.
Equity
fairness or justness
Excess demand
when consumers wish to buy more than firms wish to sell, with the price below the equilibrium price
Excess supply
when firms wish to sell more than consumers wish to buy, with the price above the equilibrium price
Exchange
specialisation and the division of labour mean that goods and services must be exchanged for each other. Money and the use of barter are mediums of exchange
Expenditure tax
a tax levied by the government on spending by consumers. The firms selling the good pay tax to the government, but consumers indirectly pay via the resulting price rise
Externality
a public good, in the case of an external benefit, or a public bad, in the case of an external cost, that is “dumped” on third parties outside the market
Finite resource
a resource, such as oil, which is scarce and runs out as it is used
Fiscal policy
a government policy that uses the fiscal instruments of taxation, government spending and the government’s budgetary position to achieve particular policy objectives
Free-rider:
somebody who benefits from a good or service without paying for it
Good
a good yields utility, unlike a “bad” which yields disutility
Government failure
occurs when government intervention in an economy is ineffective, wasteful or damaging
Government transfers
a payment of money from a government to an individual for which no good or service is given in return
Immobility of labour
the inability of labour to move from one job to another, either for occupational reasons (e.g. the need for training) or for geographical reasons (e.g. the cost of moving to another part of the country.)
Incentive function
prices create incentives for consumers and firms to behave in certain ways
Income
a flow of money received (e.g. as a wage) from supplying labour
Income elasticity of demand
the proportionate change in demand for a good following an initial proportionate change in consumers’ income
Increase in demand
a rightward shift of the demand curve
Increase in supply
a rightward shift of the supply curve
Inferior good
a good for which demand decreases as income rises
Information problem
this occurs when people make wrong decisions because they don’t possess or ignore relevant information. Very often they are myopic (short-sighted) about the future
Intervention price
a price at which a buffer stock agency starts to buy or sell a good, thereby adding to or depleting the buffer stock
Margin
refers to the last unit undertaken of an activity
Marginal benefit
the benefit resulting from the last unit of a good
Marginal cost
the cost of the last unit of a good
Market demand
the quantity of a good or service that all the consumers in the market are willing and able to buy
Market disequilibrium
when the market failures to clear. The market plans of consumers and firms are inconsistent with each other
Market equilibrium
when planned demand equals planned supply in the market
Market failure
a market completely failing to provide a good or service, or providing the wrong quantity (i.e. a quantity that leads to a misallocation of resources.)
Market supply
the quantity of a good or service that all the firms in a market are willing to sell
Merit good
a good, such a healthcare, for which the social benefits of consumption exceed the private benefits.
Monopoly
a market dominated by one firm
Nationalisation
the state taking over firms or industries previously in the private sector
Natural monopoly
a market in which there is only room for one firm benefiting to the full from economies of scale
Normal good
a good for which demand increases as income rises
Normative statement
a statement of opinion based on a value judgement
Positive statement
a statement of fact, or one that can be scientifically tested
Price ceiling
a price above which it is illegal to trade. Price ceilings, or maximum legal prices, can distort markets by creating excess demand
Price elasticity of demand
the proportionate change in demand for a good following an initial proportionate change in the good’s own price
Price elasticity of supply
the proportionate change in supply of a good following an initial proportionate change in the good’s own price
Price floor
a price below which it is illegal to trade. Price floors, or minimum legal prices, can distort markets by creating excess supply
Private benefit maximisation
occurs when MPC = MPB
Private good
a good, such as an orange, that is excludable and rival
Privatisation
the state selling nationalised firms or industries to the private sector
Production
converts inputs or factor services into outputs of goods
Productive efficiency
occurs when a firms minimises average costs and produces at the lowest point on its average cost curve
Produce efficiency (for the whole economy)
the whole economy is productively efficient when producing on its production possibility frontier
Productivity
output per unit of input (e.g. labour productivity is output per worker.)
Profit
the difference between total sales revenue and total costs of production
Progressive taxation
a progressive tax is where the tax rate increases as income rises. As a result, the rich pay a larger proportion of their income in tax than the poor
Public good
a good, such as a radio programme, that is non-excludable and non-rival
Pure monopoly
one firm only in a market
Rationing / allocative function
prices allocate scarce resources between competing uses
Regulation
involves the imposition of rules, controls and constraints, which restrict freedom of economic action in the marketplace
Renewable resource
a resource, such as timber, that with careful management can be renewed as it is used
Secondary market
a market that comes into existence when the primary market is not allowed to function properly
Signalling function
prices provide information to buyers and sellers
Social benefit
the total benefit of an activity, including the external benefit as well as the private benefit
Social benefit maximisation
occurs when MSC=MSB
Social cost
the total cost of an activity, including the external cost as well as the private cost
Specialisation
a worker only performing one task or a narrow range of tasks
Speculation
occurs when people buy or sell a good or service because they believe the price is going to rise or fall in the future. Successful speculation means people benefit from capital gains or avoid capital losses
Subsidy
a payment made by government, usually to producers, for each unit of the subsidised good they produce. Consumers can also be subsidised: for example, bus passes given to children to enable them to travel on busses for free or at a reduced price
Supply
the quantity of a good or service that firms plan to sell at given prices in a given period of time
Taxation
a tax is a compulsory levy imposed by the government or some other authority to pay for its activities. Taxes can be used to achieve other objectives, such as reduced consumption of demerit goods
Unit tax or specific tax
a tax levied on a unit of a good, irrespective of the good’s price
Utility industry
an industry, such as the post, which delivers its service to millions of separate customers
Wealth
a stock of assets that a person or firm owns
Welfare benefits
transfers of money from the government to people in low income groups or with special needs (e.g. disabled people.)
