Key Words

Question 1

Ability to pay

Answer 1

Where taxes should be set according to how well a person can afford to pay.

Question 2

Ad valorem tax

Answer 2

An indirect tax based on a percentage of the sales price of a good or service.

Question 3

Allocative efficiency

Answer 3

Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production (technical definition: price equals marginal cost). Scarce resources are allocated optimally.

Question 4

Asymmetric information

Answer 4

When somebody knows more than somebody else in the market. Such asymmetric information can make it difficult for the two people to do business together.

Question 5

Average cost

Answer 5

Total cost divided by the number of units of the commodity produced.

Question 6

Average fixed cost

Answer 6

Average fixed costs are total fixed costs divided by the number of units of output, that is, fixed cost per unit of output.

Question 7

Basic problem

Answer 7

There are infinite wants but finite (scarce) resources with which to satisfy them

Question 8

Buffer stock

Answer 8

Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.

Question 9

Capital goods

Answer 9

Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future.

Question 10

Collusion

Answer 10

Collusion is any agreement between suppliers in a market to avoid competition. The main aim is to reduce market uncertainty and achieve a level of joint profits similar to that which might be achieved by a pure monopolist.

Question 11

Consumer surplus

Answer 11

Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price).

Question 12

Consumption

Answer 12

The act of buying and using goods and services to satisfy wants.

Question 13

Contestable market

Answer 13

Market with no entry barriers - firms can enter or leave without significant cost.

Question 14

Cross price elasticity of demand

Answer 14

Responsiveness of demand for good X following a change in the price of good Y (a related good). With cross price elasticity we make a distinction between substitute products and complementary goods and services.

Question 15

Demand

Answer 15

Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

Question 16

De-merit goods

Answer 16

The consumption of de-merit goods can lead to negative externalities which causes a fall in social welfare. The government normally seeks to reduce consumption of de-merit goods. Consumers may be unaware of the negative externalities that these goods create - they have imperfect information.

Question 17

Derived demand

Answer 17

Derived demand occurs when the demand for a particular product depends on the demand for another product or activity.

Question 18

Diminishing returns

Answer 18

As more of a variable factor (e.g. labour) is added to a fixed factor (e.g. capital) a firm will reach a point where it has a disproportionate quantity of labour to capital and so the marginal product of labour will fall, thus raising marginal costs.

Question 19

Diseconomies of scale

Answer 19

Disadvantages to the firm, in the form of higher long-run unit costs, from increasing their size of operation.

Question 20

Division of labour

Answer 20

The specialization of labour in specific tasks, intended to increase productivity.

Question 21

Economic growth

Answer 21

An increase in the productive potential of the country – shown by an outward shift of the production possibility frontier.

Question 22

Economy of scale

Answer 22

Benefits, in the form of lower unit costs, from increasing the size of operation.

Question 23

Economy of scope

Answer 23

Economies of scope occur where it is cheaper to produce a range of products.

Question 24

Elastic demand

Answer 24

Demand for which price elasticity is greater than 1.

Question 25

Elastic supply

Answer 25

Where the price elasticity of supply is greater than +1.

Question 26

Elasticity of supply

Answer 26

Price elasticity of supply measures the relationship between change in quantity supplied and a change in price.

Question 27

Emission tax

Answer 27

A charge made to firms that pollute the environment based on the quantity of pollution they emit i.e. the volume of CO2 emissions.

Question 28

Externalities

Answer 28

Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.

Question 29

External cost

Answer 29

External costs are those costs faced by a third party for which no appropriate compensation is forthcoming.

Question 30

Fixed costs.

Answer 30

Costs that do not vary directly with the level of output. Examples of fixed costs include: rent and business rates, the depreciation in the value of capital equipment (plant and machinery) due to age and marketing and advertising costs.

Question 31

Geographical immobility

Answer 31

People may also experience geographical immobility – meaning that there are barriers to them moving from one area to another to find work.

Question 32

Gini Coefficient

Answer 32

The Gini coefficient measures the extent to which the distribution of income (or consumption expenditures) among individuals or households within an economy deviates from a perfectly equal distribution. The coefficient ranges from 0 - meaning perfect equality - to 1- meaning complete inequality.

Question 33

Government failure

Answer 33

Policies that cause a deeper market failure. Government failure may range from the trivial, when intervention is merely ineffective, to cases where intervention produces new and more serious problems that did not exist before.

Question 34

Government spending

Answer 34

Government spending is by central and local government on goods and services.

Question 35

Horizontal integration

Answer 35

Where two firms join at the same stage of production in one industry. For example two car manufacturers may decide to merge.

Question 36

Income elasticity of demand

Answer 36

Measures the relationship between a change in quantity demanded and a change in real income. The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income.

Question 37

Indirect tax

Answer 37

An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax.

Question 38

Inelastic demand

Answer 38

When the co-efficient of price elasticity of demand is less than 1.

Question 39

Inelastic supply

Answer 39

When the co-efficient of price elasticity of supply is less than +1.

Question 40

Inferior good

Answer 40

When demand for a product falls as real incomes increases.

Question 41

Latent demand

Answer 41

Latent demand exists when there is willingness to purchase a good or service, but where the consumer lacks the purchasing power to to afford the product.

Question 42

Law of demand

Answer 42

The law of demand is that there is an inverse relationship between the price of a good and demand.

Question 43

Marginal benefit

Answer 43

Additional benefits received by those consuming or producing one extra product.

Question 44

Marginal cost

Answer 44

Marginal cost is defined as the change in total costs resulting from increasing output by one unit. Marginal costs relate to variable costs only.

Question 45

Marginal revenue

Answer 45

The increase in revenue resulting from an additional unit of output.

Question 46

Market failure

Answer 46

Market failure exists when the competitive outcome of markets is not efficient from the point of view of the economy as a whole. This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity diverge from the benefits to society as a whole.