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Command Economy
All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
Ad Valorem tax
An indirect tax imposed on a good where the value of the tax is dependent on the value of the good, e.g. VAT
Asymmetric information
Where one party has more information than the other, leading to market failure
Capital
One of the four factors of production; goods that can be used in the production process
Capital goods
Goods produced in order to aid production of consumer goods in the future
Complementary goods
Negative XED; if price of good A rises, demand for good B falls in proportion
Consumer goods
Goods bought and demanded by households and individuals
Consumer surplus
Difference between the price the consumer is willing to pay and the price they actually pay
Cross Elasticity of Demand (XED)
Responsiveness of demand for one good to a change in the price of another (%change in P of good A/ %change in D for good B)
Demand
The quantity of a good or service that consumers are willing and able to buy at a given price at a given point 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 downwards sloping
Division of Labour
When labour becomes specialised during the production process; workers do a specific task in cooperation with other workers/ tasks, like an assembly line
Economic Problem
Scarcity; infinite needs and desires but finite resources, so choices have to be made
Efficiency
When resources are allocated optimally, so every consumer benefits and waste is minimised
Enterprise
One of four factors of production; willingness to take risks/ innovate
Equilibrium price/ quantity
Where demand equals supply so there are no more market forces bringing about change to price or quantity sold
Excess demand
When demand outweighs supply as prices are set too low
Excess supply
Supply outweighs demand as prices are set too high
Externalities
The cost/ benefit of an economic transaction to a third party 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
Market mechanism allocates resources so consumers and producers make rational decisions about what is produced, how to produce it and for whom; no government intervention in the free market
Free rider principle
People who do not pay for a public good still benefit from it, so the private sector (profit motivated) will under-provide the good
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 Y/ %change in D)
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
Inferior goods
YED<0 (elastic); goods which see a fall in demand as income increases
Information gaps
When an economic agent lacks the information needed to make a rational, informed decision
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 and physical space
Luxury goods
YED>1 (inelastic); an increase in income causes an even bigger increase in demand
Market failure (2)
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 where there is excess supply and increase them when there is excess demand
Minimum price
A floor price which a firm cannot charge below. Often leads to producer surplus, placers above equilibrium
Mixed economy
Both the free market mechanisms 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 marginal social costs outweigh marginal private costs when producing a good
Non-excludability
Characteristic of public goods; someone cannot be prevented from using the good
Non-renewable resources
Resources with a finite supply - cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed
Non-rivalry
Another characteristic of public goods; one person’s use of the good doesn’t prevent someone else from using it
Normal goods
YED>0 (inelastic); demand increases as income increases (necessities, e.g diapers, medicine, etc.)
Normative statements
Subjective statements based on value judgements and opinions, cannot be proven or disproven
Opportunity cost
Value of the next best alternative forgone
Perfectly Price Elastic
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 statements
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
Price Elasticity of Demand
The responsiveness of demand to changes in price (%change in D/ %change in P)
Price Elasticity of Supply
The responsiveness of supply to changes in price
Price Mechanism
System of resource allocation based on the free market movements of prices, determined by the demand and supply curves
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 vs the price they actually charged
Public goods
Non-excludable, non-rivalry, non-rejectable and have zero marginal cost
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
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 the quantity demand/ supplied
Relatively price inelastic good
When PED/PES <1; demand/supply is relatively unresponsive to a change in price
Renewable resource
Resources which can be replenished, so the stock of resources can be maintained over a period of time
Social cost/ benefit
The cost/ benefit to society as a whole due to the economic activity
Social optimum position
Where social cost equals social benefits; the amount which should be produced/ consumed in order to maximise social welfare
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
When the government provides public goods or merit goods which are under-provided in the free market
Subsidy
Government payments to a producer to lower their cost of production and encourage them to produce more
Substitutes
Positive XED; if the price of good B rises, demand for good A rises
Supply
The ability and willingness to provide particular goods/ services at a given price at a given point in time
Symmetrical information
Where buyers and sellers both have access to the same information
Tradable Pollution Permits
Licenses which allow businesses to pollute up to a certain amount (set by the gov.) The gov controls the number of licenses so it can control the level 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
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 costs/ benefits
Allocative Efficiency
When resources are allocated to the best interests of society, where there is maximum social welfare and maximum utility; P = MC
Average cost/ average total cost (AC/ATC)
The cost of production per unit
Average revenue
The price each unit is sold for
Bilateral monopoly
Where there is only one buyer and one seller in the market
Cartels
A formal collusive agreement where firms enter into an agreement to mutually set prices
Collusion
Occurs when firms agree to work together, e.g. by setting a price or fixing the quantity they produce
Competition policy
Government action to increase competition in markets
Competitive tendering
When the government contracts out the provision of a good or service and invites firms to bid for the contract
Conglomerate integration
The merger of firms with no common connection
Constant returns to scale
Output increases by the same proportion that the input increases by
Contestable market
When there is the threat of new entrants into the market, forcing firms to be efficient
Decreasing returns to scale
An increase in inputs by a certain proportion will lead to output increasing by a smaller proportion
Demergers
A single business is broken into two or more businesses to operate on their own, to be sold or to be dissolved
Deregulation
The removal of legal barriers to allow private enterprise to compete in a perviously protected market
Derived demand
The demand for one good is linked to the demand for a related good
Diminishing marginal productivity
If a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit; after a certain point, marginal output falls
Diseconomies of scale
The disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise
Divorce of ownership from control
Firms are owned by shareholders, who have little say in the day to day running of the business, and controlled by managers; this leads to the principal-agent problem
Dynamic efficiency
Efficiency in the long-run; concerned with new technology and increases in productivity which cause efficiency to increase over a period of time
Economies of scale
The advantages of large scale production that enables a large business to produce at a lower average cost than a smaller business
External economies of scale
An advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself
Fixed costs
Costs which do not vary with output
For profit businesses
A business whose main aim is to make money
Game theory
Used to predict the outcome of a decision made by one firm, which has incomplete information about the other firm
Geographical mobility of labour
The ease and speed at which labour can move from one area to another
Horizontal integration
The merger of firms in the same industry at the same stage of production
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