theme 1 key terms:

what is a command economy?

• an economy in which resource allocation are guided by he state.

what is a complement?

• 2 goods are said to be complements if an increase in the price of one good causes the demand for the other good to fall.

what are consumer goods?

• goods produced for present use.

what is a consumer surplus?

• the value that consumers gain from consuming a good/service over and above the price paid.

what is cross elasticity of demand (XED)?

• a measure of the sensitivity of quantity demanded of a good/service to a change in the price of some other good/service.

what is demand?

• the quantity of a good/service consumers are able and willing to buy at any given price in a given period of time.

what is diminishing marginal utility?

• describes the situation where an individual gains less additional utility from consuming a product, the more of it is consumed.

what is division of labour?

• a process whereby the production procedure is broken down into a sequence of stages, and workers are assigned to a particular stage.

what is elastic?

• a term used where the numerical value of elasticity is greater than 1 but less than infinity.

what is elasticity?

• a measure of the sensitivity of one variable to changes in another variable.

what is excess demand?

• a situation in which the quantity that consumers wish to demand at the going price exceeds the quantity that firms are able and willing to supply.

what is excess supply?

• a situation in which the quantity that firms are able and willing to supply exceeds the quantity that consumers wish to demand at that going price.

what are factors of production?

• resources used in the production process; inputs into production, particularly land, labour, capital and enterprise.

what is a firm?

• an organisation that brings together factors of production in order to produce output.

what is a free market economy?

• an economy in which market forces are allowed to guide the allocation of resources.

what is the free rider problem?

• when an individual cannot be excluded from consuming a good, and thus has no incentive to pay for its provision.

what is gross domestic product (GDP)?

• a measure of the economic activity carried out in an economy over a period.

what is habitual behaviour?

• where consumers persist in acting in a particular way even when conditions have changed.

what is income elasticity of demand (YED)?

• a measure of the sensitivity of quantity demanded to a change in consumer incomes.

what is indirect tax?

• a tax levied on expenditure of goods/services.

what is inelastic?

• a term used when the numerical value is less than 1 but greater than 0.

what is an inferior good?

• one where the quantity demanded decreases in response to an increase in consumer incomes.

what is the law of demand?

• there’s an inverse relationship between quantity demanded and the price of a good/service, ceteris paribus.

what is long run?

• a period in which all the FOP are flexible in supply.

what is a luxury good?

• one for which the YED is positive, and greater than 1, such that as income rises, consumers spend proportionally more on the good.

what is a market equilibrium?

• a situation that occurs in the market when the price is such that the quantity demanded by consumers is exactly balanced by the quantity supplied by firms.

what is market failure?

• a situation in which the free market equilibrium does not lead to a socially optimal allocation of resources, such that too much or little of a good is being produced and or consumed.

what is a mixed economy?

• an economy in which resources are allocated partly through price signals and partly on the basis of intervention by the state.

what is a necessity?

• a good for which the YED is positive, and less than 1, such that as income rises, consumers spend proportionally less on that good.

what is a non renewable resource?

• natural resources that once used cannot be replenished, such as coal or oil.

what is a normal good?

• one where the quantity demanded increases in response to an increase in consumer incomes.

what is a normative statement?

• a statement that involves a value judgement about what ought to be.

what is opportunity cost?

• in decision making, the value of the next-best alternative forgone.

what is a positive statement?

• a statement about what is (i.e. about facts).

what is potential economic growth?

• an expansion in the productive capacity of the economy.

what is price elasticity of demand (PED)?

• a measure of the sensitivity of QD to a change in the price of a good or service.

what is price elasticity of supply (PES)?

• a measure of the sensitivity of QS of a good/service to a change in the price of that good or service.

what is price-elastic supply?

• where the PES is greater than 1.

what is price-inelastic supply?

• where the PES is less than 1.

what is the price mechanism?

• a process by which resource allocation is influenced through rationing, incentives and signalling.

what is a producer surplus?

• the difference between the price received by firms for a good or service and the price at which they would have been prepared to supply that good/service.

what is a PPF?

• a curve showing the maximum combinations of goods/services that can be produced in a given period with available resources.

what is profit?

• the total revenue a firm receives from selling its product minus the total cost of producing it.