Ecomonics 1 edexcel

Maximum pricing

Highest price allowed by law

Minimum pricing

Lowest price allowed by law

Government failure

When government intervention makes resource allocation worse

Unintended consequences

Outcomes that were not planned or expected by the government

Distortion of price signals

Government intervention changes prices and no longer reflect true demand and supply

Excessive administrative costs

When policies are too expensive to run and monitor

Information gaps

When consumers or producers lack sufficient information to make rational decisions

Conflicting objectives

When the government has goals that clash, achieving one makes another harder

Quasi

public goods

Private goods

Goods that have characteristics of rivalry and excludability

Public goods

Goods that are non

Rival

One person’s consumption reduces availability for others

Excludable

People can be prevented from using the good

Moral hazard

Economic agents making decisions in their own best interest, knowing this creates potential risks for third parties

Market bubble

Rising demand drives prices beyond normal equilibrium levels

Speculation

Buying or selling an asset in order to make profit in the future

Positive consumption externality

When consumption creates external benefits to third parties

Negative consumption externality

When consumption creates external costs to third parties

Free rider problem

People benefit from goods without paying for them

Market failure

Occurs when the price mechanism fails to allocate resources efficiently, resulting in welfare loss

Externalities

Costs or benefits of production or consumption that affect third parties

Under

provision of public goods

Positive externality

When consumption or production creates benefits for third parties

Spillover effect

The impact of economic activities on third parties who are not directly involved in the transaction

Private cost

The cost of an economic activity paid by the producer or consumer

Production externality

When production creates external costs or benefits for third parties

Marginal cost

The additional cost of producing one extra unit of output

Indirect tax

A tax imposed upon spending on goods and services

Subsidy

A payment given by the government to producers to reduce production costs

Incidence of tax

How the burden of a tax is shared between producers and consumers

Ad valorem tax

An indirect tax charged as a percentage of the price of a good or service

Subsidy (diagram effect)

A subsidy shifts the supply curve to the right, lowering price and increasing quantity

Indirect tax (diagram effect)

An indirect tax shifts the supply curve to the left, increasing price and reducing quantity

Elastic demand

When quantity demanded is highly responsive to a change in price

Inelastic demand

When quantity demanded is not very responsive to a change in price

Tax incidence (elastic demand)

Producers pay more of the tax when demand is elastic

Tax incidence (inelastic demand)

Consumers pay more of the tax when demand is inelastic

Price elasticity of supply (PES)

A measure of the responsiveness of quantity supplied to a change in price

Excess demand

When quantity demanded is greater than quantity supplied

Excess supply

When quantity supplied is greater than quantity demanded

Price mechanism

The way prices adjust to allocate resources through the interaction of demand and supply

Incentive function

Prices provide incentives for producers and consumers to change their behaviour

Rationing function

Prices ration scarce resources by allocating goods and services to those willing and able to pay

Signalling function

Prices send signals to producers and consumers about changes in demand and supply

Price elasticity of demand (PED)

A measure of the responsiveness of quantity demanded to a change in price

Perfectly inelastic demand

Quantity demanded does not change when price changes

Income elasticity of demand (YED)

A measure of the responsiveness of quantity demanded to a change in income

Cross elasticity of demand (XED)

A measure of the responsiveness of demand for one good to a change in the price of another good

Substitutes

Goods where an increase in the price of one leads to an increase in demand for the other

Complements

Goods where an increase in the price of one leads to a decrease in demand for the other

Inferior goods

Goods for which demand falls as income increases

Normal goods

Goods for which demand increases as income increases

Command economy

An economic system where the government controls the allocation of resources and decides what, how, and for whom to produce

Free market economy

An economic system where resources are allocated through the price mechanism with little or no government intervention

Mixed economy

An economic system where resources are allocated by both the price mechanism and government intervention

Adam Smith

Believed in free markets and the price mechanism, arguing that individuals acting in self

Friedrich Hayek

Supported free markets, arguing that price signals transmit information and governments cannot allocate resources efficiently

Karl Marx

Criticised capitalism, arguing it leads to exploitation of workers and supported state control of resources

Rational decision making

When consumers use all available information to make choices that maximise their utility

The margin

Making decisions based on small or incremental changes in costs and benefits

Herd behaviour

Consumers follow the actions of others

Habitual behaviour

Consumers repeatedly buy the same product out of habit

Computational behaviour

Consumers compare prices and costs before making decisions

Inertia

Consumers do not change their behaviour

Method of deferred payment

Money can be used to settle debts at a future date