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Ad Valorem Tax
An indirect tax imposed on a good where the value of the tax is dependent on the value of the good.
Asymmetric Information
Where one party has more information than the other, leading to market failure.
Capital
One of the four factors of production; goods which can be used in the production process.
Capital Goods
Goods produced in order to aid production of consumer goods in the future.
Ceteris Paribus
All other things remaining the same.
Command Economy
All factors of production are allocated by the state, so they decide what, how and for whom to produce goods.
Complementary Goods
Negative XED; if good B becomes more expensive, demand for good A falls.
Consumer Goods
Goods bought and demanded by households and individuals.
Consumer Surplus
The difference between the price the consumer is willing to pay and the price they actually pay.
Cross Elasticity of Demand (XED)
The responsiveness of demand for one good (A) to a change in price of another good (B).
(% change in QD of A)/(% change in P of B)
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.
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.
Division of Labour
When labour becomes specialised during the production process so do a specific task in cooperation with other workers.
Economic Problem
The problem of scarcity; wants are unlimited but resources are finite so choices have to be made.
Efficiency
When resources are allocated optimally, so every consumer benefits and waste is minimised.
Enterprise
One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.
Equilibrium Price/Quantity
Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded.
Excess Demand
When price is set too low so demand is greater than supply.
Excess Supply
When price is set too high so supply is greater than demand.
Externalities
The cost or benefit a third party receives from an economic transaction outside of the market mechanism.
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.
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.
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.
Government Failure
When government intervention leads to a net welfare loss in society.
Habitual Behaviour
A cause of irrational behaviour; when consumers are in the habit of making certain decisions.
Incidence of Tax
The tax burden on the taxpayer.
Income Elasticity of Demand (YED)
The responsiveness of demand to a change in income.
(% change in QD)/(% change in Y)
Indirect Tax
Taxes on expenditure which increase production costs and lead to a fall in supply.
Inferior Goods
YED<0; goods which see a fall in demand as income increases.
Information Gap
When an economic agent lacks the information needed to make a rational, informed decision.
Information Provision
When the government intervenes to provide information to correct market failure.
Labour
One of the four factors of production; human capital.
Land
One of the four factors of production; natural resources such as oil, coal, wheat, physical space.
Luxury Goods
YED>1; an increase in incomes causes an even bigger increase in demand.
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.
Market Forces
Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand.
Maximum Price
A ceiling price which a firm cannot charge above.
Minimum Price
A floor price which a firm cannot charge below.
Mixed Economy
Both the free market mechanism and the government allocate resources.
Model
A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words.
Negative Externalities of Production
Where the social costs of producing a good are greater than the private costs of producing the good.
Non-excludable
A characteristic of public goods; someone cannot be prevented from using the good.
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.
Non-rivalry
A characteristic of public goods; one person’s use of the good does not prevent someone else from using it.
Normal Goods
YED>0; demand increases as income increases.
Normative Statement
Subjective statements based on value judgements and opinions; cannot be proven or disproven.
Opportunity Cost
The value of the next best alternative forgone.
Perfectly Price Elastic Good
PED/PES = Infinity; quantity demanded/supplied falls to 0 when price changes.
Perfectly Price Inelastic Good
PED/PES = 0; quantity demanded/supplied does not change when price changes.
Positive Externalities of Consumption
Where the social benefits of consuming a good are larger than the private benefits of consuming that good.
Positive Statement
Objective statements which can be tested with factual evidence to be proven or disproven.
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.
Price Elasticity of Demand (PED)
The responsiveness of demand to a change in price.
(% change in QD)/(% change in P)
Price Elasticity of Supply (PES)
The response of supply to a change in price.
(% change in QD)/(% change in P)
Price Determination
In a free market economy, prices are determined by the interaction of demand and supply in a market
Price Mechanism
The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves. (refers to the way price changes in response to changes in demand or supply, so that a new equilibrium position is reached)
Private Cost/Benefit
The cost/benefit to the individual participating in the economic activity.
Private Goods
Goods that are rivalry and excludable.
Producer Surplus
The difference between the price the producer is willing to charge and the price they actually charge.
Public Goods
Goods that are non-excludable and non-rivalry.
Rationality
Decision-making that leads to economic agents maximising their utility.
Regulation
Laws to address market failure and promote competition between firms.
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.
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.
Renewable Resources
Resources which can be replenished, so the stock of resources can be maintained over a period of time.
Scarcity
The shortage of resources in relation to the quantity of human wants.
Social Cost/Benefit
The cost/benefit to society as a whole due to the economic activity
Social Optimum Position
Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare.
Social Science
The study of societies and human behaviour.
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.
Specific Tax
A tax imposed on a good where the value of the tax is dependent on the quantity that is bought.
State Provision of Goods
Through taxation, the government provides public goods or merit goods which are underprovided in the free market.
Subsidy
Government payments to a producer to lower their costs of production and encourage them to produce more.
Substitutes
Positive XED; if good B becomes more expensive, demand for good A rises.
Supply
The ability and willingness to provide a particular good/service at a given price at a given moment in time.
Symmetric Information
Where buyers and sellers both have access to the same information.
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.
Unitary Price Elastic Good
When PED/PES = 1; a change in price leads to a change in output by the same proportion.
Utility
The satisfaction derived from consuming a good.
Weakness at Computation
A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs.
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