Theme 1 Definitions

Flashcards for Edexcel (A) Economics A-level Theme 1: Introduction to Markets and Market Failure Definitions

What is an ad valorem tax?

An indirect tax imposed on a good where the value of the tax is dependent on the value of the good

What is asymmetric information?

Where one party has more information than the other, leading to market failure

What is capital?

One of the four factors of production; goods which can be used in the production process

What are capital goods?

Goods produced in order to aid production of consumer goods in the future

What does 'ceteris paribus' mean?

All other things remaining the same

What is a command economy?

All factors of production are allocated by the state, so they decide what, how and for whom to produce goods

What are complementary goods?

Negative XED; if good B becomes more expensive, demand for good A falls

What are consumer goods?

Goods bought and demanded by households and individuals

What is consumer surplus?

The difference between the price the consumer is willing to pay and the price they actually pay

What is cross elasticity of demand (XED)?

The responsiveness of demand for one good (A) to a change in price of another good (B)

What is 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

What is 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

What is division of labour?

When labour becomes specialised during the production process to do a specific task in cooperation with other workers

What is the economic problem?

The problem of scarcity; wants are unlimited but resources are finite so choices have to be made

What is efficiency?

When resources are allocated optimally, so every consumer benefits and waste is minimised

What is enterprise?

One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production

What is equilibrium price/quantity?

Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded

What is excess demand?

When price is set too low so demand is greater than supply

What is excess supply?

When price is set too high so supply is greater than demand

What are externalities?

The cost or benefit a third party receives from an economic transaction outside of the market mechanism

What is an 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

What is a 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

What is the 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

What is government failure?

When government intervention leads to a net welfare loss in society

What is habitual behaviour?

A cause of irrational behaviour; when consumers are in the habit of making certain decisions

What is incidence of tax?

The tax burden on the taxpayer

What is income elasticity of demand (YED)?

The responsiveness of demand to a change in income

What is an indirect tax?

Taxes on expenditure which increase production costs and lead to a fall in supply

What are inferior goods?

YED<0; goods which see a fall in demand as income increases

What is an information gap?

When an economic agent lacks the information needed to make a rational, informed decision

What is information provision?

When the government intervenes to provide information to correct market failure

What is labour?

One of the four factors of production; human capital

What is land?

One of the four factors of production; natural resources such as oil, coal, wheat, physical space

What are luxury goods?

YED>1; an increase in incomes causes an even bigger increase in demand

What is market failure?

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources

What are market forces?

Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand

What is a maximum price?

A ceiling price which a firm cannot charge above

What is a minimum price?

A floor price which a firm cannot charge below

What is a mixed economy?

Both the free market mechanism and the government allocate resources

What is a model?

A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words

What are negative externalities of production?

Where the social costs of producing a good are greater than the private costs of producing the good

What does Non-excludable mean?

A characteristic of public goods; someone cannot be prevented from using the good

What are non-renewable resources?

Resources which cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed

What does Non-rivalry mean?

A characteristic of public goods; one person’s use of the good does not prevent someone else from using it

What are normal goods?

YED>0; demand increases as income increases

What is a normative statement?

Based on value judgements and opinions; cannot be proven or disproven

What is opportunity cost?

The value of the next best alternative forgone

What is a perfectly price elastic good?

PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes

What is a perfectly price inelastic good?

PED/PES=0; quantity demanded/supplied does not change when price changes

What are positive externalities of consumption?

Where the social benefits of consuming a good are larger than the private benefits of consuming that good

What is a positive statement?

Objective, can be tested with evidence to be proven or disproven

What is a possibility production frontier (PPF)?

Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed

What is price elasticity of demand (PED)?

The responsiveness of demand to a change in price

What is price elasticity of supply (PES)?

The responsive of supply to a change in price

What is the price mechanism?

The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves

What is private cost/benefit?

The cost/benefit to the individual participating in the economic activity

What are private goods?

Goods that are rivalrous and excludable

What is producer surplus?

The difference between the price the producer is willing to charge and the price they actually charge

What are public goods?

Goods that are non-excludable and non-rivalry

What is rationality?

Decision-making that leads to economic agents maximising their utility

What is regulation?

Laws to address market failure and promote competition between firms

What is a relatively price elastic good?

When PED/PES>1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied

What is a relatively price inelastic good?

When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied

What are renewable resources?

Resources which can be replenished, so the stock of resources can be maintained over a period of time

What is scarcity?

The shortage of resources in relation to the quantity of human wants

What is social cost/benefit?

The cost/benefit to society as a whole due to the economic activity

What is the social optimum position?

Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare

What is social science?

The study of societies and human behaviour

What is specialisation?

The production of a limited range of goods by a company/country/individual so they aren’t self-sufficient and have to trade with others

What is a specific tax?

A tax imposed on a good where the value of the tax is dependent on the quantity that is bought

What is state provision of goods?

Through taxation, the government provides public goods or merit goods which are underprovided in the free market

What is a subsidy?

Government payments to a producer to lower their costs of production and encourage them to produce more

What are substitutes?

Positive XED; if good B becomes more expensive, demand for good A rises

What is supply?

The ability and willingness to provide a particular good/service at a given price at a given moment in time

What is symmetric information?

Where buyers and sellers both have access to the same information

What are trade pollution permits?

Allow businesses to pollute up to a certain amount.

• The government controls the number of licenses and so can control the amount of pollution.

• Allowed to sell and buy the permits, which means there may be an incentive to reduce the amount they pollute.

What is a unitary price elastic good?

When PED/PES=1; a change in price leads to a change in output by the same proportion

What is utility?

The satisfaction derived from consuming a good

What is weakness at computation?

A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs