Economics Defenitions

ceterus paribus

the assumption that when studying theories, all other variables remain constant and unchanging

positive statement

a statement about something that was, is or will be true or false

normative statement

a statement about something that ought to be, a subjective opinion or value judgement

rational economic decision making

decision makers behave according to their best self interest, and try to get more rather than less

factors of production

land, labour, entrepreneurship, capital

land

all natural sources that are abotve the ground

capital

machines, tools, equipment, factories, all construction

labour

all human effort or work that goes into producing goods and services

entrepeneurship

the human effort used to organise the other three factors, as well as risk taking, innovation, and management

scarcity

the condition of being limited in relation to the needs and wants of human beings

resource allocation

assigning a particular resource to the production of particular goods and services

reallocation of resources

changing the allocation of resources

underallocation of resources

too few resources are assigned to the production of particular goods and services

overallocation of resources

too many resources are assigned to the production of particular goods and services

misallocation of resources

assigning the wrong amount of resources to the production of particular goods and services resulting in over or underallocation of resources

opportunity cost

the second best option forgone when making a choice

PPC

shows the maximum quantities of two goods that can be produced by an economy with its available resources and technology

competetive market

a market, where the price of a good, service , or factor of production is determined through the interactions of many small buyers and sellers, so no one can influence price

market

any agreement that allows buyers and sellers to come together and make an exchange

demand

the quantity of a good that buyers (and consumers) are willing and able to buy at any given point of time

law of demand

a law stating there is a negative casual relationship between price and quantity of a good demanded

marginal benefits

the additional benefits derived from consuming one more unit of a good

individual demand

demand of a single buyer

market demand

the demands of all the buyers in a market. found by adding up all the individual demands for each price

normal goods

demand for the good increases and consumer income increases

inferior goods

demand for the good decreases as consumer income increases

substitute goods

goods that satisfy a similar need, as the demand of one increases, the other falls

complementary goods

goods that are used together. demand of one increases so does the demand of the other good

supply

the quantity of a good that sellers are willing and able to produce at any given point of time

the law of supply

there is a positive casual relationship between price and quantity of a good

individual supply

the supply of a single seller

market supply

the supplies of all the sellers in a market

indirect tax

tax on spending to buy goods and services paid directly to the government

subsidy

payment by the government to firms in order to lower costs and price, and increase supply

joint supply

when two or more goods are are derived from a single products

Calculating PED

competitive supply

when two or more goods use the same resources

PED

responsiveness of Q demanded to changes in P

price elastic demand

PED > 1, PED is greater than 1

percentage change in Q demanded is greater than the percentage change in P

price inelastic demand

0 < PED < 1

percentage change in Q demanded is smaller than the percentage change in P

prefectly elastic demand

when the percentage change in Q is indefinitely large (horizontal)

perfectly inelastic demand

when the percentage change in Q demanded is 0

unit elastic demand

when the percentage change is equal to the percentage change in P

necessity (contrasted w luxury)

a good that is essential

luxury goods

a good that is not essential

total revenue

a firms total earnings from selling its outputs

primary comodities

goods arising from the factor of production land

YED

responsiveness of demand for good X to changes in income

primary products

goods arising from the factor of production land

PES

responsiveness of Q supplied to changes in p

PES formula

PED formula

YED formula

non price determinants of demand

changes in tastes and preferences, changes in income, changes in # of buyers, changes in the price of related goods

non price determinants of supply

changes in costs of factors of production, the number of firms in the market, indirect tax, expectations

determinants of PED that show if demand is elastic or inelastic

number and closeness of substitutes, degree of necessity and degree of addiction, proportion of income spent on the good, time

determinants of PES that show if supply is elastic or inelastic

mobility of factors of production, unused capacity, ability to store stocks, time

specific tax

a specific amount of money imposed per unit of the good, results in a parallel shift of the supply curve

calculate welfare loss

tax incidence

the particular group bearing the burden of a tax

price controls

government intervention in the market involving the setting of price ceilings or price floors preventing the market from reaching a market-clearing equilibrium price

price ceiling

a maximum price on a good set by the government that is below the equilibrium price of a market resulting in a shortage

price floors

a minimum price set above market equilibrium resulting in a surplus

market failure

the failure of a market to allocate resources efficiently resulting in overallocation, under allocation or no allocation of resources to the production of a good or service relative to what is socially most desirable

externality

the cost or benefit for third parties who are not part of a transaction and whose interests are not taken into account, the market fails to achieve allocative efficiency because MSB does not equal MSC

marginal private benefits

additional benefits from consumers arisingfrom consumption of an additional unit of a good DEMAND

marginal social benefit MSB

additional benefits for society arising from consumption of an additional unit of a good DEMAND

marginal private costs MPC

additional costs to producers arising from production of an additional unit of a good SUPPLY

marginal social costs MSC

additional costs to society arising from the production of an additional unit of the good SUPPLY

4 rules for drawing externalities

1. production externality S curve splits into two; consumption externality the D curve splits into two

2. supply reflects costs, demand reflects benefits

3. negative externality Qe > Qopt Positive externality Qe<Qopt

4. the point of the welfare loss triangle always looks towards Qopt

Negative production externalities: policy responses

command approaches - legislation, regulations

market based policies - indirect tax on output/emissions

positive production externalities: policy responses

direct government provision ++++

common access resources

a natural resouces without ownership, that are traded in a market, have no price, and are non excludable, yet rivalrous

rivalrous

the use by one person makes them less available for use by someone else

sustainability

the use of natural resources at a rate that allows them to reproduce

minimum wages

A minimum price of labour usually set by the government to protext low skilled workers and ensure they can achieve a minimum standard of consumption RESULTS IN UMEMPLOYED LABOUR

market failure 

the failure of a market to allocate resources efficiently, resulting in an overallocation, underallocation, or no allocation of resources to the production of a good or service relative to what is socially most desirable

externality

positive effect (benefit) or negative effect (cost) for third parties who are not part of a transaction and whose interests are not taken into account; the market fails to achieve allocative efficiency

marginal private benefits (MPB)

additional benefits for consumers arising from the consumption of an additional unit of a good

marginal social benefit (MSB)

additional benefits for society arising from the consumption of an additional unit of a good

marginal private costs (MPC)

additional costs to producers arising from the consumption of an additional unit of a good

marginal social cost (MSC)

additional costs to society arising from the consumption of an additional unit of a good

circular flow model

provides an overview of important relationships in the macroeconomy 

income flow = expenditure flow = value of output flow

factors of production

land, labour, capital, entrepreneurship

payment by firms = consumer income

rent, wages, interest, profit

leakage 

money that leaves the circular flow

injection

money that enters the circular flow

GDP

total value of all final goods and services (output) produced within the boundaries of a country, in a year, regardless of who owns the factors of production 

GNI (GNP)

the total income received by the residents of a country in a year, regardless where the factors of production owned by the residents are located

GNI formula

GDP + factor income from abroad - factor income sent abroad = GDP + net income from abroad

nominal GDP/GNI

are measures of output and income in terms of current prices

real GDP/GNI

are measures of output and income in terms of current prices

per capita

divide by population

3 ways to measure economic activity (GDP)

expenditure, income and output approaches

income flow = expenditure flow = value of output flow 

expenditure approach (measuring GDP)

C + I + G + (X-M)

income approach (measuring GDP)

Rent + wages + interest + profit = national income

can be used to calculate GDP (after adjustments)

output approach  (measuring GDP)

adds up the value of each good and service (PxQ) produced in the economy within a year, thus obtaining the value of all final goods and services = to GDP 

the human development index

measures standard of living in three dimensions: per capita income, health and educational attainment

purchasing power parity (PPP) exchange rates

correct for differing price levels in different countries

green GDP

GDP - value of environmental destruction

takes into account environmental destruction