Definitions

Question 1

Positive statement

Answer 1

is an assertion of fact
can be proved or disproved
value free
(look for words such as ‘will’ or ‘has’ or ‘is’)

Question 2

Normative statement

Answer 2

is a value judgement
can be tested as true or false
contains a value judgement
(look for words such as ‘should’ and if the statement is suggesting one action is better than another)

Question 3

Price mechanism

Answer 3

interaction of supply and demand
Invisible hand
allocates resources according to market signals in prices and quantities

Question 4

Producer surplus

Answer 4

the difference between the price producers are willing to supply a good for and the market price

Question 5

Consumer surplus

Answer 5

the difference between the price a consumer is willing to pay for a good and the market price

Question 6

Price elasticity of demand

Answer 6

% change in quantity demanded/% change in price
responsiveness of demand to a change in price
-ve for normal good
+ve for giffen good

Question 7

Income of elasticity of demand

Answer 7

%change in quantity demanded/%change in income
Responsiveness of demand to a change in income
+ve for normal good
-ve for inferior good

Question 8

Cross elasticity of demand

Answer 8

%change in demand good A /%change in price good B

Question 9

Price elasticity of supply

Answer 9

% change in supplied / % change in price

responsiveness of supply to a change in price

Question 10

Public good

Answer 10

Non-rivalry
Non-excludability 
Characterised by free rider problem
Under provided if left to market
Hard to attach monetary value

Question 11

National minimum wage

Answer 11

Legal minimum firms can pay to workers

Extends supply contracts demand

Question 12

Asymmetric information

Answer 12

Imbalance of information between producer and consumer
A form of market failure
Misallocation of resources

Question 13

Opportunity cost

Answer 13

the value of the next best alternative that is foregone

Question 14

External benefits

Answer 14

Benefits ignored by the price mechanism

Positive third party effects

Question 15

External costs

Answer 15

Costs ignored by the price mechanism

Negative third party effects (ad valorem tax on diagram)

Question 16

Mixed economy

Answer 16

Resources are allocated by the market (price mechanism) and partly by the state (government)

Question 17

Product possibility frontier

Answer 17

The maximum output combinations of two goods an economy can produce when all its resources are fully and efficiently employed

Question 18

Normal good

Answer 18

A good that when price rises demand decreases or contracts (and vice versa) and as income rises demand rises (and vice versa)

Question 19

Giffen good

Answer 19

A good that when price rises demand rises (vice versa), ostentatious goods or goods with snob value, caviar

Question 20

Inferior good

Answer 20

A good that when income rises demand falls (vice versa)

Question 21

Minimum price floor

Answer 21

a minimum price below which price can not fall

Question 22

(Im)Mobility of labour

Answer 22

The (in)ability of labour to move from one place to another

Typically affected by asymmetric knowledge of job market

Question 23

Specific or per unit tax

Answer 23

An indirect tax put on the sales of a good that is a fixed amount (parallel shift)

Question 24

Ad valorem (by value) tax

Answer 24

An indirect tax put on the sales of a good expressed as a % (VAT) pivot/non-parallel shift

Question 25

Buffer stock scheme

Answer 25

When government buys up stock to prevent fluctuations in supply
Common Agricultural Policy

Question 26

Marginal social benefit (MSB) Marginal social cost (MSC)

Answer 26

The extra benefit to society over and above that produced by the market
The extra cost to society over and above that produced by the market

Question 27

Command or planned economy

Answer 27

Where all the means of production are owned by the state

The state provide all the goods and services

Question 28

Factors of production (resources)

Answer 28

Land
Labour
Capital
Enterprise

Question 29

Returns to factors of production

Answer 29

Rent
Wages
Interest
Profit or loss

Question 30

Equilibrium

Answer 30

Where supply and demand in a market are equal

The market is stable

Question 31

Division of labour

Answer 31

Production is broken down into different tasks and labour is allocated to different tasks
Leads to greater productivity
Adam Smith’s pin factory

Question 32

Subsidy

Answer 32

A government grant that makes a product cheaper
Good is underproduced by the market
MSB>MPB

Question 33

Tradable permits

Answer 33

Licences that are tradable to, for example, allow firms to produce pollution

Question 34

Scarcity

Answer 34

limited supply or finite amount so unable to meet human wants.