Tutor2u Glossary Theme 1

Question 1

Behavioural economics

1.1.1 - Economics as a social science

Answer 1

Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Question 2

Ceteris paribus

1.1.1 - Economics as a social science

Answer 2

To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus – i.e. all other influencing factors are held constant.

Question 3

Economic assumptions

1.1.1 - Economics as a social science

Answer 3

In his 1953 essay titled “The Methodology of Positive Economics, Milton Friedman explained why economists need to make assumptions to provide useful predictions. Friedman understood economics couldn’t use the scientific method as neatly as chemistry or physics, but he still saw the scientific method as the basis. Friedman stated economists would have to rely on “uncontrolled experience rather than on controlled experiment.”

Question 4

Economic model

1.1.1 - Economics as a social science

Answer 4

A simplified representation of economic processes. This representation can be used to gain a better understanding of the theory.

Question 5

Microeconomics

1.1.1 - Economics as a social science

Answer 5

Study of economics at the level of the individual firm, industry or consumer/household.

Question 6

Unintended consequences

1.1.1 - Economics as a social science

Answer 6

Outcomes that are not the ones foreseen and intended by a purposeful action. In government intervention in markets there is usually at least one and often many unintended consequences partly because economics is a social science and we cannot predict accurately how producer and consumers will react.

Question 7

Normative statements

1.1.2 - Positive and normative economic statement

Answer 7

Normative statements express an opinion about what ought to be. They are subjective statements - i.e. they carry value judgments. For example, the level of duty on petrol is unfair and unfairly penalizes motorists.

Question 8

Positive statement

1.1.2 - Positive and normative economic statement

Answer 8

Objective statements that can be tested or rejected by referring to the available evidence. Positive economics deals with objective explanation. For example: “A rise in consumer incomes will lead to a rise in the demand for new cars.” Or “A fall in the exchange rate will lead to an increase in exports overseas.”

Question 9

Value judgement

1.1.2 - Positive and normative economic statement

Answer 9

A view of the rightness or wrongness of something, based on a personal view.

Question 10

Barter

1.1.3 - The economic problem

Answer 10

The practice of exchanging one good or service for another without using money.

Question 11

Basic economic problem

1.1.3 - The economic problem

Answer 11

There are infinite wants but finite factor resources with which to satisfy them.

Question 12

Capital goods

1.1.3 - The economic problem

Answer 12

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. Distinguished from “financial capital”, meaning funds which are available to finance the production or acquisition of real capital.

Question 13

Constraints

1.1.3 - The economic problem

Answer 13

Limits to what we can afford to consume – we have to operate within a budget and therefore must make choices from those sets that are feasible/affordable. There is always a set of conceivable things that are actually available, and another set of that are not.

Question 14

Economic agent

1.1.3 - The economic problem

Answer 14

A participant in an economic system – be it a consumer, business or the government.

Question 15

Entrepreneur

1.1.3 - The economic problem

Answer 15

An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. a profit). Entrepreneurs will often invest their own financial capital in a business and take on the risks associated with a business investment

Question 16

Factor incomes

1.1.3 - The economic problem

Answer 16

Factor incomes are the rewards to factors of production. Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit.

Question 17

Factors of production

1.1.3 - The economic problem

Answer 17

Factors of production are the inputs available to supply goods and services:
* Land - Natural resources available for production
* Labour - The human input into the production process
* Capital - goods used in the supply of other products e.g. technology, factories and specialized machinery
* Enterprise - Entrepreneurs organise factors of production and take risks
* Know-how - Information required to develop, produce and bring products to the market.

Question 18

Finite resources

1.1.3 - The economic problem

Answer 18

There are only a finite number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. By producing more for an ever increasing population, we may destroy the natural resources of the planet.

Question 19

Free goods

1.1.3 - The economic problem

Answer 19

Free goods do not use up any factor inputs when supplied. Free goods have a zero-opportunity cost i.e. the marginal cost of supplying an extra unit of a free good is zero.

Question 20

Inputs

1.1.3 - The economic problem

Answer 20

Labour, capital and other resources used in the production of goods and services.

Question 21

Interest

1.1.3 - The economic problem

Answer 21

Interest is the reward to the ownership of capital.

Question 22

Land

1.1.3 - The economic problem

Answer 22

Natural resources available for production

Question 23

Labour

1.1.3 - The economic problem

Answer 23

Physical and mental effort by humans.

Question 24

Manufacturing

1.1.3 - The economic problem

Answer 24

The use of machines, tools and labour to make things for use or sale. The is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale.

Question 25

Needs | 1.1.3 - The economic problem

Answer 25

Humans have many different types of wants and needs - economic, social and psychological. A need is essential for survival; food satisfies hungry people. A want is something desirable but not essential to survival e.g. cola quenches thirst.

Question 26

Non-renewable resources | 1.1.3 - The economic problem

Answer 26

Non-renewable resources are resources which are finite and cannot be replaced. Minerals, fossil fuels and so on are all non-renewable resources.

Question 27

Opportunity cost | 1.1.3 - The economic problem

Answer 27

The cost of any choice in terms of the next best alternative foregone.

Question 28

Rationing | 1.1.3 - The economic problem

Answer 28

Rationing is a way of allocating scarce goods and services when market demand exceeds available supply. There are many ways of rationing including by price, by consumer income, by assessment of need, by education level and by age, gender, nationality

Question 29

Renewable resources | 1.1.3 - The economic problem

Answer 29

Renewable resources (in theory) are replaceable if the rate of extraction of the resource is less than the natural rate at which the resource renews. Examples of renewable resources are solar energy, oxygen, biomass, fish stocks and forestry.

Question 30

Rent | 1.1.3 - The economic problem

Answer 30

Rent is income typically associated with the ownership of land, but which can also include rental income from leasing out other assets such as cars, capital equipment.

Question 31

Scarcity | 1.1.3 - The economic problem

Answer 31

Scarce means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.

Question 32

Allocative efficiency | 1.1.4 - Production possibility frontiers

Answer 32

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.

Question 33

Capital goods | 1.1.4 - Production possibility frontiers

Answer 33

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. Distinguished from "financial capital", meaning funds which are available to finance the production or acquisition of real capital.

Question 34

Concave production possibility frontier | 1.1.4 - Production possibility frontiers

Answer 34

A concave PPF is “bowed outwards”. This means there is a rising marginal opportunity cost as you produce more of one good. This is because there is imperfect factor mobility. E.g. labour/land/capital is more suited towards the production of one good than another.

Question 35

Consumer goods | 1.1.4 - Production possibility frontiers

Answer 35

Goods bought and used by consumers and households. They are the end result of manufacturing.

Question 36

Economic efficiency | 1.1.4 - Production possibility frontiers

Answer 36

Economic efficiency is about making best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time.

Question 37

Economic growth | 1.1.4 - Production possibility frontiers

Answer 37

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

Question 38

Pareto efficiency | 1.1.4 - Production possibility frontiers

Answer 38

In neoclassical economics, an action done in an economy that harms no one and helps at least one person. A situation is Pareto efficient if the only way to make one person better off is to make another person worse off.

Question 39

Production possibility frontier | 1.1.4 - Production possibility frontiers

Answer 39

A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently.

Question 40

Productive potential | 1.1.4 - Production possibility frontiers

Answer 40

The amount of output an economy could produce if all of its resources were fully and efficiently employed.

Question 41

Trade-off | 1.1.4 - Production possibility frontiers

Answer 41

A trade-off implies that choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.

Question 42

Adam Smith | 1.1.5 - Specialisation and the division of labour

Answer 42

One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith's discussion of the advantages of division of labour remains a potent idea.

Question 43

Alienation | 1.1.5 - Specialisation and the division of labour

Answer 43

A sociological term to describe the estrangement many workers feel from their work, which may reduce their motivation and productivity. It is sometimes argued that alienation is a result of the division of labour because workers are not involved with the satisfaction of producing a finished product, and do not feel part of a team.

Question 44

Division of labour | 1.1.5 - Specialisation and the division of labour

Answer 44

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

Question 45

Measure of value | 1.1.5 - Specialisation and the division of labour

Answer 45

A function of money where it can be used to judge the value of a good or service.

Question 46

Medium of exchange | 1.1.5 - Specialisation and the division of labour

Answer 46

Money is any asset that is widely acceptable as a medium of exchange when buying goods and services in markets. It facilitates transactions between buyer and seller.

Question 47

Method of deferred payment | 1.1.5 - Specialisation and the division of labour

Answer 47

A function of money that allows a system of making payments at a later date.

Question 48

Money | 1.1.5 - Specialisation and the division of labour

Answer 48

Money is defined best by what money does. Money – in its various forms – fulfils various key functions including a medium of exchange, a unit of account, a store of value and a standard of deferred payment.

Question 49

Specialisation | 1.1.5 - Specialisation and the division of labour

Answer 49

A method of production where a business or area focuses on the production of a limited scope of products or services to gain greater productive efficiency.

Question 50

Standard of deferred payment | 1.1.5 - Specialisation and the division of labour

Answer 50

A function of money - the accepted way, in a given market, to settle a debt.

Question 51

Store of value | 1.1.5 - Specialisation and the division of labour

Answer 51

A function of money in that it can be used to save and be exchanged at a later time

Question 52

Unit of account | 1.1.5 - Specialisation and the division of labour

Answer 52

A function of money, a nominal unit of measure or currency used to value/cost products, assets (e.g. houses), debts, incomes and spending.

Question 53

Adam Smith | 1.1.6 - Types of economies

Answer 53

One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith's discussion of the advantages of division of labour remains a potent idea.

Question 54

Capitalist economy | 1.1.6 - Types of economies

Answer 54

An economic system organised along capitalist lines uses market-determined prices to guide our choices about the production and distribution of goods. One key role for the state is to maintain the rule of law and protect private property.

Question 55

Command economy | 1.1.6 - Types of economies

Answer 55

An economic system where most factor resources are allocated by the government, with few officially sanctioned private markets (e.g. ex-Soviet bloc countries prior to their transition into market economies, modern-day North Korea and Venezuela).

Question 56

Consumer sovereignty | 1.1.6 - Types of economies

Answer 56

Consumer sovereignty exists when an economic system allows scarce resources to be allocated to producing goods and services that reflect the wishes of consumers. Sovereignty can be distorted by the effects of persuasive or misleading advertising.

Question 57

Economic planning | 1.1.6 - Types of economies

Answer 57

Government policies aimed at influencing trends in the economy.

Question 58

Economic system | 1.1.6 - Types of economies

Answer 58

An economic system is a network of organisations used to resolve the problem of what, how much, how and for whom to produce

Question 59

Free market | 1.1.6 - Types of economies

Answer 59

System of buying and selling that is not under the control of the government, and where people can buy and sell freely, or an economy where free markets exist, and most companies and property are not owned by the state.

Question 60

Friedrich Hayek | 1.1.6 - Types of economies

Answer 60

An Anglo-Austrian economist and philosopher best known for his criticisms of the Keynesian welfare state. His approach stems from the Austrian school of economics and emphasises the limited nature of knowledge. 1899 – 1992

Question 61

Karl Marx | 1.1.6 - Types of economies

Answer 61

A German philosopher, economist and political theorist. He was a hugely influential thinker and co-authored the pamphlet ‘The Communist Manifesto’ which was published in 1948 and asserted that all human history has been based on class struggles, but that these would ultimately disappear with the victory of the proletariat. 1818 – 1883.

Question 62

Mixed economy | 1.1.6 - Types of economies

Answer 62

Where resources are partly allocated by the market and partly by the government

Question 63

Planned economy | 1.1.6 - Types of economies

Answer 63

In a planned economy, decisions about what to produce, how much to produce and for whom are decided by central planners working for the government rather than allocated using the price mechanism.

Question 64

Transition economies | 1.1.6 - Types of economies

Answer 64

Transition economies are involved in a process of moving from a centrally planned economy to a mixed or free market economy.

Question 65

Behavioural economics | 1.2.1 - Rational decision making

Answer 65

Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Question 66

Incentives | 1.2.1 - Rational decision making

Answer 66

Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.

Question 67

Income | 1.2.1 - Rational decision making

Answer 67

Income represents a flow of earnings from using factors of production to generate an output of goods and services. For example, wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital.

Question 68

Invisible hand | 1.2.1 - Rational decision making

Answer 68

Adam Smith - one of the founding fathers of modern economics, described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest.

Question 69

Market incentives | 1.2.1 - Rational decision making

Answer 69

Signals that motivate economic actors to change their behaviour perhaps in the direction of greater economic efficiency.

Question 70

Profit maximisation | 1.2.1 - Rational decision making

Answer 70

The assumption that producers wish to produce an output that will create maximum profit levels.

Question 71

Rational choice | 1.2.1 - Rational decision making

Answer 71

Rational choice involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs.

Question 72

Utility | 1.2.1 - Rational decision making

Answer 72

Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service.

Question 73

Utility maximisation | 1.2.1 - Rational decision making

Answer 73

The assumption that consumers behave rationally in allocating their limited budget between different products so as to maximise total satisfaction from their purchases.

Question 74

Consumer goods and services | 1.2.2 - Demand

Answer 74

Consumer goods and services help satisfy our needs and wants directly There is a sub-division between: * Consumer durables: Products that provide a steady flow of satisfaction / utility over their working life (e.g. a washing machine or using a smartphone). * Consumer non-durables: Products that are used up in the act of consumption e.g. drinking a coffee or turning on the heating) * iii) Consumer services: E.g. a hair cut or ticket to a show or sporting event.

Question 75

Demand | 1.2.2 - Demand

Answer 75

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

Question 76

Demand curve | 1.2.2 - Demand

Answer 76

A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the price falls.

Question 77

Diminishing marginal utility | 1.2.2 - Demand

Answer 77

Marginal utility is the change in satisfaction from consuming an extra unit of a good or service. Beyond a certain point, marginal utility may start to fall (diminish). If marginal utility becomes negative, then consuming an extra unit will cause total utility to fall.

Question 78

Effective demand | 1.2.2 - Demand

Answer 78

Demand in economics must be effective. Only when a consumers' desire to buy a product is backed up by an ability to pay for it do we speak of demand.

Question 79

Law of demand | 1.2.2 - Demand

Answer 79

The law of demand is that there is an inverse relationship between the price of a good and demand. As prices fall, we see an expansion of demand. If price rises, there should be a contraction of demand.

Question 80

Perverse demand curve | 1.2.2 - Demand

Answer 80

A perverse demand curve is one which slopes upwards from left to right. Therefore,an increase in price leads to an increase in demand. This may happen where goods are strongly affected by price expectations.

Question 81

Willingness to pay | 1.2.2 - Demand

Answer 81

The maximum price a consumer is prepared pay to obtain a product.

Question 82

Complements | 1.2.3 - Price, income and cross elasticities of demand

Answer 82

Two complements are said to be in joint demand. Examples include fish and chips, iron ore and steel, hardware and software for digital products.

Question 83

Cross price elasticity of demand | 1.2.3 - Price, income and cross elasticities of demand

Answer 83

Responsiveness of demand for good X following a change in the price of good Y (a related good). With cross price elasticity, we make an important distinction between substitute products and complementary goods and services. | -ve - complements +ve - subsitues

Question 84

Derived demand | 1.2.3 - Price, income and cross elasticities of demand

Answer 84

Derived demand is demand that comes from (is derived) from the demand for something else. Thus, the demand for machinery is derived from the demand for consumer goods that the machinery can make. If there is low demand for consumer goods, there is low demand for the machinery that can make them. Demand for bricks is derived from spending on new construction projects.

Question 85

Elastic demand | 1.2.3 - Price, income and cross elasticities of demand

Answer 85

Demand for which the coefficient of price elasticity of demand is greater than 1.

Question 86

Income elasticity of demand | 1.2.3 - Price, income and cross elasticities of demand

Answer 86

Measures the relationship between a change in quantity demanded and a change in real income..

Question 87

Inelastic demand | 1.2.3 - Price, income and cross elasticities of demand

Answer 87

When the coefficient of price elasticity of demand is less than 1. (Ped<1)

Question 88

Inferior good | 1.2.3 - Price, income and cross elasticities of demand

Answer 88

When demand for a product falls as real incomes increases. Income elasticity is negative.

Question 89

Luxury good | 1.2.3 - Price, income and cross elasticities of demand

Answer 89

Luxury goods and services have an income elasticity of demand with a coefficient of more than +1 i.e. a 5% rise in real incomes might lead to an increase in demand of 20% giving a coefficient of YED of +4

Question 90

Necessities | 1.2.3 - Price, income and cross elasticities of demand

Answer 90

Necessities typically have a low own-price elasticity of demand (consumers are not sensitive to a change in price) and a low but positive income elasticity of demand (YED >0 but <+1). Examples might include milk, cereals, toothpaste and bread.

Question 91

Normal goods | 1.2.3 - Price, income and cross elasticities of demand

Answer 91

Normal goods have a positive income elasticity of demand. Necessities have a coefficient of income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income.

Question 92

Price elasticity of demand | 1.2.3 - Price, income and cross elasticities of demand

Answer 92

Price elasticity of demand measures the responsiveness or sensitivity of demand for a product following a change in its own price.

Question 93

Real income | 1.2.3 - Price, income and cross elasticities of demand

Answer 93

The money earned from employment after the distorting effects of inflation have been removed.

Question 94

Substitutes | 1.2.3 - Price, income and cross elasticities of demand

Answer 94

Goods in competitive demand that act as replacements for another product.

Question 95

Total revenue | 1.2.3 - Price, income and cross elasticities of demand

Answer 95

The amount of money earned by a firm from selling its output. TR = P X Q

Question 96

Unit elasticity of demand | 1.2.3 - Price, income and cross elasticities of demand

Answer 96

A demand curve with unitary price elasticity has a coefficient of PED equal to 1 (unity) throughout. Total spending on the product will be the same at each price level. Government intervention will not affect total spending on the product.

Question 97

Unrelated goods | 1.2.3 - Price, income and cross elasticities of demand

Answer 97

Goods or services that have no relationship between them in which case the cross price elasticity of demand will be zero

Question 98

Competitive supply | 1.2.4 - Supply

Answer 98

Goods in competitive supply are alternative products a firm could make with its resources. E.g. a farmer can plant potatoes or carrots. An electronics factory can produce smart-phones or smart-watches. Land has many uses – e.g. commercial/residential.

Question 99

Excess supply | 1.2.4 - Supply

Answer 99

When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price.

Question 100

Law of supply | 1.2.4 - Supply

Answer 100

The law of supply is that there is a positive relationship between the price of a good and supply. As prices rise, we see an expansion of supply. If price fall, there should be a contraction of supply

Question 101

Market supply | 1.2.4 - Supply

Answer 101

Market supply is the total amount of an item producers are willing and able to sell at different prices, over a given period of time e.g. one month. Industry, a market supply curve is the horizontal summation of all each individual firm’s supply curves.

Question 102

Supply | 1.2.4 - Supply

Answer 102

Quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.

Question 103

Supply chain | 1.2.4 - Supply

Answer 103

Different stages of making, distributing and selling a good or service from the production of parts, through to distribution and sale of the product.

Question 104

Supply curve | 1.2.4 - Supply

Answer 104

The relationship between market price and quantity supplied onto the market.

Question 105

Elastic supply | 1.2.5 - Elasticity of supply

Answer 105

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

Question 106

Elasticity of supply | 1.2.5 - Elasticity of supply

Answer 106

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

Question 107

Inelastic supply | 1.2.5 - Elasticity of supply

Answer 107

When the coefficient of price elasticity of supply is less than +1. (Pes<1)

Question 108

Price elasticity of supply | 1.2.5 - Elasticity of supply

Answer 108

Price elasticity of supply (PES) measures the relationship between change in quantity supplied and a change in price. Supply responds positively to price, so PES is always positive.

Question 109

Disequilibrium | 1.2.6 - Price determination

Answer 109

Prices where demand and supply are out of balance are points of disequilibrium. There is either excess demand (market prices too low) or excess supply (market prices too high).

Question 110

Equilibrium | 1.2.6 - Price determination

Answer 110

Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change. The concept is used in both microeconomics (e.g. equilibrium prices in a market) and also in macroeconomics (e.g. equilibrium national income).

Question 111

Excess demand | 1.2.6 - Price determination

Answer 111

A situation where quantity demanded is greater that quantity supplied.

Question 112

Excess supply | 1.2.6 - Price determination

Answer 112

A situation where quantity supplied is greater than quantity demanded.

Question 113

Health rationing | 1.2.6 - Price determination

Answer 113

Health rationing occurs when the demand for health care services outstrips the available resources leading to waiting lists and delays for health treatment.

Question 114

Shortage | 1.2.6 - Price determination

Answer 114

A situation in which quantity demanded is greater than quantity supplied.

Question 115

Incentives | 1.2.7 - Price mechanism

Answer 115

For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.

Question 116

Price mechanism | 1.2.7 - Price mechanism

Answer 116

The means by which decisions of consumers and businesses interact to determine the allocation of resources. The free-market price mechanism clearly does NOT ensure an equitable distribution of resources and can lead to market failure.

Question 117

Price signals | 1.2.7 - Price mechanism

Answer 117

Changes in price act as a signal about how resources should be allocated. A rise in price encourages producers to switch into making that good but encourages consumers to use an alternative substitute product (therefore rationing the product).

Question 118

Rationing | 1.2.7 - Price mechanism

Answer 118

A rising price can reduce the quantity demanded of a good or service.

Question 119

Signalling | 1.2.7 - Price mechanism

Answer 119

Prices have a signalling function because the price in a market sends important information to producers and consumers.

Question 120

Community surplus | 1.2.8 - Consumer and producer surplus

Answer 120

Community surplus is the sum of consumer and producer surplus at a given market price and output. Community surplus is maximised in competitive markets at an equilibrium output when price = marginal cost.

Question 121

Consumer surplus | 1.2.8 - Consumer and producer surplus

Answer 121

A measure of the welfare that people gain from consuming goods and services, or a measure of the benefits they derive from the exchange of goods. 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 they pay (the market price)

Question 122

Producer surplus | 1.2.8 - Consumer and producer surplus

Answer 122

The difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the current market price.

Question 123

Ad valorem tax | 1.2.9 - Indirect taxes and subsidies

Answer 123

An indirect tax based on a percentage of the sales price of a good or service. An increase in an ad valorem tax causes an inward shift in the supply curve.

Question 124

Alcohol duties | 1.2.9 - Indirect taxes and subsidies

Answer 124

Excise duties on alcohol are a form of indirect tax and are chargeable on beer, wine and spirits according to their volume and/or alcoholic content.

Question 125

Black market | 1.2.9 - Indirect taxes and subsidies

Answer 125

An illegal market in which the market price is higher than a legally imposed price ceiling. Black markets can develop where there is excess demand (or a shortage) for a product.

Question 126

Direct tax | 1.2.9 - Indirect taxes and subsidies

Answer 126

A tax on income and wealth e.g. income tax or corporation tax where the burden of the tax cannot be passed on to someone else.

Question 127

Emission tax | 1.2.9 - Indirect taxes and subsidies

Answer 127

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 128

Excise duties | 1.2.9 - Indirect taxes and subsidies

Answer 128

Excise duties are indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance.

Question 129

Incidence of a tax | 1.2.9 - Indirect taxes and subsidies

Answer 129

How the final burden of a tax is shared out. If demand for a good is price elastic and a tax is imposed, then the tax may fall mainly on the producer as they will be unable to put prices up without losing a lot of demand.

Question 130

Indirect tax | 1.2.9 - Indirect taxes and subsidies

Answer 130

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 131

Specific tax | 1.2.9 - Indirect taxes and subsidies

Answer 131

A specific tax is a set tax per unit imposed by the government, a good example is the specific tax (duty) on fuel sold in the UK.

Question 132

Subsidy | 1.2.9 - Indirect taxes and subsidies

Answer 132

Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.

Question 133

Tax incidence | 1.2.9 - Indirect taxes and subsidies

Answer 133

The manner in which the burden of an indirect tax is shared between participants in the market i.e. consumers and producers.

Question 134

Unit tax | 1.2.9 - Indirect taxes and subsidies

Answer 134

A specific tax per unit sold e.g. the duty on a litre of fuel might be 80 pence.

Question 135

Behavioural economics | 1.2.10 - Alternative views of consumer behaviour

Answer 135

Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Question 136

Computational weakness | 1.2.10 - Alternative views of consumer behaviour

Answer 136

Irrationality arises when consumer’s decisions are dominated by computational weakness. This occurs when consumers find it difficult to calculate the probability of something happening when they make purchasing decisions. For example, people may underestimate the long-term health consequences of eating processed meats or relying heavily on prescription painkillers.

Question 137

Habitual consumption | 1.2.10 - Alternative views of consumer behaviour

Answer 137

Habitual behaviour occurs when people have strong default choices. Repeat choices / purchases often become automatic because default choices don’t involve much mental (cognitive) effort. To get people to change behaviour may require compelling incentives perhaps from government intervention through taxes and subsidies.

Question 138

Herd behaviour | 1.2.10 - Alternative views of consumer behaviour

Answer 138

When individuals in a group act collectively without centralised direction.

Question 139

Externalities | 1.3.1 - Types of market failure

Answer 139

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

Question 140

Information gap | 1.3.1 - Types of market failure

Answer 140

Information gaps exist when either the buyer or seller does not have access to the information needed for them to make a fully informed decision. For example, risks from using tanning salons, the complexity of pension schemes, uncertain quality of second-hand products and knowledge of the nutritional content of foods and drinks.

Question 141

Market failure | 1.3.1 - Types of market failure

Answer 141

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.

Question 142

Public goods | 1.3.1 - Types of market failure

Answer 142

Pure public goods are non-rival – consumption of the good by one person does not reduce the amount available for consumption by another person, and non excludable – where it is not possible to provide a good or service to one person without it being available for others to enjoy.

Question 143

Deadweight loss | 1.3.2 - Externalities

Answer 143

The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure.

Question 144

External benefit | 1.3.2 - Externalities

Answer 144

A benefit to a 3rd party agent arising from production and/or consumption.

Question 145

External cost | 1.3.2 - Externalities

Answer 145

External costs are those costs faced by a third party for which no appropriate compensation is forthcoming. Identifying and then estimating a monetary value for air and noise pollution is a difficult exercise - but one that is important for economists concerned with the impact of economic activity on our environment.

Question 146

Externalities | 1.3.2 - Externalities

Answer 146

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

Question 148

Marginal external benefit (MEB) | 1.3.2 - Externalities

Answer 148

Benefit to third parties from the consumption of extra unit of output.

Question 149

Marginal external cost (MEC) | 1.3.2 - Externalities

Answer 149

Cost to third parties from the production of an additional unit of output.

Question 150

Marginal private benefit (MPB) | 1.3.2 - Externalities

Answer 150

Benefit to the consumer of consuming an extra unit of output.

Question 151

Marginal private cost (MPC) | 1.3.2 - Externalities

Answer 151

Cost to the producing firm of producing an additional unit of output.

Question 152

Marginal social benefit (MSB) | 1.3.2 - Externalities

Answer 152

Total benefit to society from consuming an extra unit, MSB = MPB + MEB

Question 153

Marginal social cost (MSC) | 1.3.2 - Externalities

Answer 153

Total cost to society of producing an extra unit of output. MSC = MPC + MEC.

Question 154

Negative externality | 1.3.2 - Externalities

Answer 154

Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs.

Question 155

Net social benefit | 1.3.2 - Externalities

Answer 155

A measurement of the net impact of an investment project found by estimating the social costs and benefits. Net social benefit may be considered by a government when deciding which project(s) offers the best potential return for society.

Question 156

Positive externalities | 1.3.2 - Externalities

Answer 156

Positive externalities exist when third parties benefit from the spill-over effects of production/consumption e.g. the social returns from investment in education & training or the positive benefits from health care and medical research.

Question 157

Private benefit | 1.3.2 - Externalities

Answer 157

The rewards to individuals, firms or consumers from consuming or producing goods and services. Also known as internal benefit.

Question 158

Private cost | 1.3.2 - Externalities

Answer 158

Costs of an economic activity to individuals and firms. Also known as internal costs

Question 159

Social benefit | 1.3.2 - Externalities

Answer 159

The benefit of production or consumption of a product for society as a whole. Social benefit = private benefit + external benefit.

Question 160

Social cost | 1.3.2 - Externalities

Answer 160

The cost of production or consumption of a product for society as a whole. Social cost = private cost + external cost.

Question 161

Social efficiency | 1.3.2 - Externalities

Answer 161

The socially efficient output is where Social Marginal Cost (SMC) = Social Marginal Benefit (SMB).

Question 162

Spill-over effects | 1.3.2 - Externalities

Answer 162

External effects of economic activity, which have an impact on outsiders who are not producing or consuming a product – these can be negative (creating external costs) or positive (creating external benefits).

Question 163

Excludability | 1.3.3 - Public goods

Answer 163

Property of a good whereby a person can be prevented from using it if they do not pay.

Question 164

Free rider problem | 1.3.3 - Public goods

Answer 164

Because public goods are non-excludable it is difficult to charge people for benefitting once a product is available. The free rider problem leads to under provision of a good and thus causes market failure. Free riders have no incentive to reveal how much they are willing and able to pay for a public good because they can enjoy benefit without paying.

Question 165

Global public goods | 1.3.3 - Public goods

Answer 165

Global public goods benefit every country, irrespective of which ones provide them – they have become more important recently. Examples might include: Security from war, violence, and crime, the rule of law, property rights, and contract enforcement, eradication of smallpox, Ebola and other diseases.

Question 166

Missing market | 1.3.3 - Public goods

Answer 166

Missing markets are associated with the difficulties that the free market has in providing pure public goods. Public goods are non-excludable meaning that the benefits derived from them cannot be confined solely to those who have paid for it. Non-payers can enjoy the benefits of consumption at no financial cost to themselves (aka free riders).

Question 167

Non excludability | 1.3.3 - Public goods

Answer 167

A characteristic of public goods. Benefits derived from pure public goods cannot be confined solely to those who have paid for it. This gives rise to the free-rider problem.

Question 168

Non-rival consumption | 1.3.3 - Public goods

Answer 168

Non-rivalry means that consumption of a good by one person does not reduce the amount available for others. Non-rivalry is one of the key characteristics of a pure public good.

Question 169

Public goods | 1.3.3 - Public goods

Answer 169

Pure public goods are non-rival – consumption of the good by one person does not reduce the amount available for consumption by another person, and non excludable – where it is not possible to provide a good or service to one person without it being available for others to enjoy.

Question 170

Quasi-public good | 1.3.3 - Public goods

Answer 170

A quasi-public good is a near-public good. It has some of the characteristics of a public good. Quasi-public goods are: * Semi-non-rival: up to a point, more consumers using a park, beach or road do not reduce the space available for others. But eventually beaches become crowded as do parks/leisure facilities. Open-access Wi-Fi networks become crowded. * Semi-non-excludable: it is possible but difficult or costly to exclude non-paying consumers. E.g. fencing a park or beach and charging an entrance fee; or building toll booths on congested road routes.

Question 171

Tragedy of the Commons | 1.3.3 - Public goods

Answer 171

When no one owns a resource, it may get over-used, for example fish stocks and deforestation - people use and benefit from a common pool resource such as grazing land without regard to the effects on others. Over-use of a renewable resource can lead to a long-term decline in maximum sustainable yield.

Question 172

Asymmetric information | 1.3.4 - Information gaps

Answer 172

Where parties have unequal access to information in a market.

Question 173

Information failure | 1.3.4 - Information gaps

Answer 173

Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices.

Question 174

Symmetric information | 1.3.4 - Information gaps

Answer 174

For markets to work, there needs to be symmetric information i.e. consumers and producers have the same level of knowledge about the products, and they know everything there is to know about them and the effects of consuming them.

Question 175

Government information | 1.4.1 - Government intervention in markets

Answer 175

Campaigns and sources of information used in order to correct a market failure and/or influence consumer behaviour. An example would be the ‘Don’t drink and drive’ campaigns.

Question 176

Maximum price | 1.4.1 - Government intervention in markets

Answer 176

A legally imposed maximum price in a market that suppliers cannot exceed - in an attempt to prevent the market price from rising above a certain level. To be effective a maximum price has to be set below the free market price.

Question 177

Minimum price | 1.4.1 - Government intervention in markets

Answer 177

A legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price.

Question 178

Polluter pays principle | 1.4.1 - Government intervention in markets

Answer 178

The government may choose to intervene in a market to ensure that the firms and consumers who create negative externalities include them when making their decisions e.g. first parties are forced to internalise external costs & benefits through indirect taxes

Question 179

# FF Pollution permits | 1.4.1 - Government intervention in markets

Answer 179

Permits allocated in an emissions trading system, for example each permit in the EU trading scheme allows a business to pollute 1 tonne of CO2.

Question 180

Price ceiling | 1.4.1 - Government intervention in markets

Answer 180

A price ceiling is a regulated maximum price in a market – sellers cannot legally offer the product for sale at a price higher than the ceiling. To be effective, a ceiling must be set below the normal free market equilibrium price.

Question 181

Price floor | 1.4.1 - Government intervention in markets

Answer 181

A price floor is a minimum price for example a minimum wage in the labour market. Sellers cannot legally under-cut the price floor.

Question 182

Regulated prices | 1.4.1 - Government intervention in markets

Answer 182

Not all prices are set by the free-market forces of supply and demand. In Britain, a number of prices are affected by regulators who may impose a pricing formula on suppliers. Good examples are rail fares, the cost of postage stamps and water bills.

Question 183

Regulation | 1.4.1 - Government intervention in markets

Answer 183

Government rules and laws that can control the behaviour of producers or consumers in a market.

Question 184

State provision | 1.4.1 - Government intervention in markets

Answer 184

Government-provided good or services - funded through tax revenue to provide goods which have positive externalities or are public goods.

Question 185

Government failure | 1.4.2 - Government failure

Answer 185

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 186

Net welfare loss | 1.4.2 - Government failure

Answer 186

An overall loss of economic welfare when compared to the starting position.

Question 187

Regulatory capture | 1.4.2 - Government failure

Answer 187

A form of government failure, happens when a government agency operates in favour of producers rather than consumers

Question 188

Unintended consequences | 1.4.2 - Government failure

Answer 188

A cause of government failure whereby the government’s actions result in unexpected effects. For example, in the 1960s the government cut spending on railway infrastructure and built roads instead. This caused a significant rise in car transport, which in turn has led to a rise in the demand for trains because the roads are so congested.