Theme 1-Flashcards

Economics theme 1

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 a command economy?

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

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 to a change in the price of another good

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 in 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 labor?

When labor becomes specialized 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 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 sold

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 it 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 an indirect tax?

Taxes levied on goods and services which increase production and leads to a fall in supply, although this is often partially, or fully, passed onto consumers.

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 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 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 is non-rivalry?

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

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 possibility production frontier (PPF)?

Depicts the maximum productive potential of an economy, using a combination of two goods or services

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 producer surplus?

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

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 a social optimum position?

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

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?

When 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 is supply?

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

What are trade pollution permits?

Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control the amount of pollution. Businesses are allowed to sell and buy the permits which means there may be 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 does weakness at computation refer to?

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