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Economics > Unit 1- Markets and Market Failure > Flashcards

Unit 1- Markets and Market Failure Flashcards

0
Q

Positive statements

A

Are value free, objective and testable

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1
Q

Opportunity Cost

A

The next best alternative which is forgone whenever an economic decision is made

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2
Q

Normative statements

A

Are subjective, non- testable value judgements

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3
Q

Scarcity

A

Scarcity results from finite resources being unable to fulfil infinite wants

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4
Q

Renewable Resources

A

Resources that are replenished by natural processes at a rate comparable or faster than its rate of consumption by humans

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5
Q

Sustainable development

A

A pattern of resource use that aims to meet human needs while preserving the environment so that these needs can bet met in the indefinite future

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6
Q

Economic Goods

A

These are scarce, involve opportunity cost and have a price in the market

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7
Q

Free Goods

A

Are not scarce, involve no opportunity costs and have no price in the market

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8
Q

Factor of production: Land

A

Natural resources: Any free gift of nature eg coal reserves. It’s reward is rent

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9
Q

Factor of production: Labour

A

The mental or physical effort of humans in the production process for which they are paid. Its reward is wages.

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10
Q

Factor of production: Capital

A

Producer goods that indirectly satisfy wants eg machinery. Its reward is interest

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11
Q

Factor of production: enterprise

A

Organises and controls the other factors of production and takes risks in the production process. Its reward is profit.

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12
Q

Division of labour

A

The separation of tasks in the production process and their allocation to different groups of workers.

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13
Q

Diminishing Marginal Returns

A

The idea that as successive units of a variable factor are added to a fixed factor that each extra unit adds less output than the previous unit.

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14
Q

Production Possibility Frontier

A

A curve showing the maximum possible alternative combinations of two goods ( eg capital and consumer goods) that an economy can produce using all of its available factors of production efficiently. Moving from one point to another indicates opportunity cost.

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15
Q

Consumer Surplus- the area below the demand curve and above the price level

A

The difference between the price a consumer is willing and able to pay for a good or service and the price they actually pay. This represents the extra utility a consumer gains above the price they pay for it.

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16
Q

Producer Surplus- the area above the supply curve and below the price level

A

The difference between what a producer is paid for a good or service and the lowest price they require to supply that amount.

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17
Q

Price mechanism

A

The process by which the free market, through changes in the supply and demand, signals and gives incentives to allocate scarce resources.

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18
Q

Market economy

A

An economy based on the private ownership of business and allows market factors such as supply and demand and the price mechanism to allocate scarce resources.

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19
Q

Control economy

A

A type of economic system where the resources are state owned and their allocation and use is determined by the centralised decisions of a planning authority.

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20
Q

Mixed economy

A

A combination of market and command economic systems where market forces control most consumer goods but the government directs industry in need areas.

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21
Q

Transition economy

A

An economy in the process of changing from a planned economy to a free market. This often leads to initial high inflation and increased inequality.

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22
Q

Price elasticity of demand (PED)

A

%

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23
Q

Income elasticity of demand (YED)

A

%

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24
Q

Cross elasticity of demand (XED)

A

%

25
Q

Price elasticity of supply (PES)

A

%

26
Q

Normal goods

A

These are goods for which demand increases when income increases. They have a positive YED.

27
Q

Inferior goods

A

These are goods for which demand decreases as income rises. They have a negative YED.

28
Q

Direct Tax

A

A tax collected directly from the individuals or companies on whom it is levied eg income tax or corporation tax. Causes a negative shift in demand.

29
Q

Indirect taxes

A

A tax on the production or sale of a good or service that is passed on the the consumer in the price they pay eg VAT or beer duty. This causes a negative shift in the supply curve

30
Q

Specific tax

A

A tax based on the volume of the product sold.

31
Q

Ad valorem tax

A

A method of taxation using the value of the product taxed to determine the amount of tax eg. VAT at 20%. Causes a pivotal shift in the supply curve to the left.

32
Q

Incidence of tax

A

The way in which the burden of tax eventually falls on the consumer and producer.

33
Q

Subsidy

A

A grant that lowers the price of a good that is usually designed to encourage production or consumption of a merit good. This causes a positive shift in the supply curve.

34
Q

National Minimum wage

A

A wage below which employers may not legally pay employees for specific kinds of employment. First introduced by a labour government in 1999, currently £6.50 an hour for workers 21+

35
Q

Commodity

A

Any product of agriculture or mining that is produced to be traded or sold such as cash crops.

36
Q

Exchange rates

A

The value of one country’s currency expressed in terms of another country’s currency.

37
Q

Market failure

A

When unfettered markets fail to provide the correct signals and incentives so resources fail to be allocated efficiently so social welfare is not maximised

38
Q

Productive efficiency

A

Producing the greatest value output out of the least value inputs (producing at the lowest ATC)

39
Q

Allocative efficiency

A

Producing the correct bundle of goods to maximise social welfare

40
Q

Perfect competition

A

An industry where there are:

1) large numbers of buyers and sellers who are price takers
2) no barriers to entry or exit
3) homogenous products
4) perfect knowledge by consumers or firms
5) perfect access and mobility of factors of production

41
Q

Monopoly

A

Characterised by an industry with:

1) large numbers of buyers and one seller
2) barriers to entry and exit
3) a unique product

42
Q

Public goods

A

Things that can be consumed by everybody in a society or nobody at all. They are characterised by non excludability and non rivalry.

43
Q

Non excludability

A

Goods cannot be confined to those who have paid for it. Non payers can free ride.

44
Q

Non rivalry

A

Consumption by one person does not reduce the availability of a good to others

45
Q

Valuation problem

A

As public goods are not traded they do not have a market determined price. This makes it difficult for governments to measure the benefits that consumers receive in consuming the goods and it is therefore difficult to decide how much of the public good to provide

46
Q

Regulation

A

Legal constraints that set standards for the consumption or production of goods or their externalities

47
Q

Externalities

A

Third party effects which are felt outside the market by those other than the decision maker. They are the divergence between private and social costs and benefits. Can be positive or negative.

48
Q

Private costs

A

Costs which are felt only by the decision makers. They are social costs minus externalities.

49
Q

Social costs

A

Costs which are felt by the whole of society. They are the addition of private and external costs.

50
Q

Cost Benefit Analysis

A

The decision making process of governments over major projects when they must consider social costs and benefits using money as a measure of value.

51
Q

Tradable permits

A

Allowing a regulated quantity of something to be bought and sold.

52
Q

Extending property rights

A

Giving individuals certain rights over things that were previously owned commonly by everyone.

53
Q

Carbon offsetting

A

The counter balancing of carbon emissions through the purchase of a carbon credit or offset from intermediary companies who generate offsets by means such as planting trees or investing in renewable energy

54
Q

Coase Theorem

A

Private negotiations between people will lead to an efficient resolution of externalities regardless of who has the property rights as long as they are defined.

55
Q

Time preference

A

The idea that people would rather have things sooner than later. It requires future cost and benefits to be converted into their present values thorough discounting for accurate comparison.

56
Q

Mobility of factors

A

The ease of movement of resources between occupations or geographical areas.

57
Q

Buffer stocks

A

An attempt to use commodity storage for the purpose of stabilising prices in an entire economy or an individual market.

58
Q

Government failure

A

When government intervention in a failing market, to improve efficiency, leads to an allocation of resources that is less efficient than before.

59
Q

Asymmetric information

A

When agents on one side of the market have much better information than those on the other side.

60
Q

Adverse selection

A

When you choose to do business with people you would be better of avoiding. This is often caused by asymmetric markets.

Economics (3 decks)

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