Theme 1 Definitions Flashcards
(35 cards)
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
Capital
One of the four factors of production; goods which can be used in the production process
Capital goods
Goods produced in order to aid production of consumer goods in the future
Ceteris paribus
All other things remaining the same
Command economy
All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
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 one good (A) to a change in price of another good (B)
Demand
The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment of 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 downward sloping
Divison of labour
When labour becomes specialised during the production process so 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 the four factors of production; the willingness and ability to take risks and combine the three other factors of production
Equilibrium price/quantity
Where demand equals 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 a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit
Government failure
When government intervention leads to a net welfare loss in society
