Econ theme 1

scarcity

The great economic problem: unlimited wants with limited resources

Opportunity cost

the next best alternative foregone

Factors of Production

inputs needed to make Goods and services (land, labour, enterprise, capital)

Division of labour

breaking production down into specialised tasks performed by different workers, increasing efficiency

specialisation

focusing on producing a specific good or service to improve efficiency and productivity

Free market economy

an economic system with minimum government intervention where resource allocation is determined by price signals and consumer choices

Mixed economy

an economy combining free market mechanisms with gov intervention to allocate resources

Demand

the quantity of a good consumers are willing and able to buy at each price, ceteris paribus

Supply

the quantity of a good producers are willing and able to sell at each price, ceteris paribus

Ceteris Paribus

all other things being equal

Normal good

A good for which demand increases as income rises

Inferior good

a good for which demand decreases as income rises

Substitute good

a good that can be used in place of another (a rise in price of one increases the demand of another

complementary good

a good consumed alongside another (a rise in price of one decreases the demand for another)

Price elasticity of demand (PED)

measures the responsiveness of quantity demanded to a change in price (%ΔQd ÷ %ΔP)

Income elasticity of demand (YED)

measures the responsiveness of quantity demanded to a change in income (%ΔQd ÷ %ΔY)

Cross elasticity of demand (XED)

Measures the responsiveness of demand for one good to a price change in another (%ΔQd(A) ÷ %ΔP(B))

Price elasticity of supply (PES)

measures the responsiveness of quantity supplied to a change in price (%ΔQs ÷ %ΔP)

Excess demand

when quantity demanded exceeds quantity supplied at a given price (creating an upward pressure on price)

Excess supply

when quantity supplied exceeds quantity demanded at a given price (creating a downward pressure on price)

Consumer surplus

difference between what consumers are willing to pay and what they actually pay

producer surplus

difference between the price producers receive and the minimum they would accept

Allocative efficiency

resources are distributed to their highest-valued use; achieved when P=MC

Productive efficiency

output is produced at the lowest possible average cost on the PPF

social cost

private cost plus external cost; the full cost to society of an economic activity

social benefit

Private benefit plus external benefit (the total benefit to society of an economic activity)

Merit good

A good that is under-consumer if left to the free market because individuals undervalue its long-term benefit

Demerit good

a good that is over-consumed if left to the free market as individuals undervalue its long term costs

Public good

a good that is non-excludable and non-rival, leading to the free-rider problem

Free-rider problem

When individuals can benefit from a good without paying for it, leading to an under provision in the market

Information failure

buyers or sellers lack adequate information to make optimal decisions causing market failure

Asymmetric information

when one party in a transaction has more or better information than the other

Indirect tax

a tax on spending levied on producers who may pass it to consumers (VAT, excise duty)

Subsidy

a payment by the gov to producers to lower costs and encourage production of a good

Maximum price

a gov-imposed price ceiling set below the equilibrium price, causing excess demand

Minimum price

a government-imposed price floor set above the equilibrium price, causing excess supply

Gov failure

When government intervention leads to a worse resource allocation than the free market would have produced