Theme 1 key terms micro full set

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.

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 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).

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.

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.

Government failure

When government intervention leads to a net welfare loss in society.

Income elasticity of demand (YED)

The responsiveness of demand to a change in income.

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.

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, resulting in inefficient allocation of scarce resources.

Maximum price

A ceiling price which a firm cannot charge above.

Minimum price

A floor price which a firm cannot charge below.

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.

Normal goods

YED>0; demand increases as income increases.

Opportunity cost

The value of the next best alternative forgone.

Price elasticity of demand (PED)

The responsiveness of demand to a change in price.

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.

Scarcity

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

Social optimum position

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

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.

Equilibrium price/quantity

when demand is equal to supply so there is no tendency for the price to change

Externalities

the cost or benefit on a third party not involved in the economic decision

free market

An economy where the market mechanism allocates resources so consumers and producers make decisions on how to produce, what is produced and for whom.

government failure

when government intervention leads to a net welfare loss

habitual behaviour

Cause for irrational behaviour, when consumers are in the habit of making certain decisions.

Incidence of tax

tax burden on taxpayer

Indirect tax

tax on expenditure which increases production costs, resulting in a fall in supply.

Information gaps

when an economic agent lacks the information to make a rational and informed choice

Market failure

the misallocation of resources

normative statement

Subjective statements based on value judgements and opinions; cannot be proven or disproven

Possibility production frontier (PPF)

demonstrates maximum productive potential using two goods within an economy.

Price mechanism

system of resource allocation determined by demand and supply curves.

rationality

decisions made by economic agents to maximise utility.