Market Failure, Government Intervention & Failure

T1 CC4 (keywords)

Economics

A social science that studies how individuals, governments, and societies make choices about the allocation of scarce resources.

Scarcity

The basic economic problem that arises because people have unlimited wants but resources are finite.

Opportunity Cost

The value of the next best alternative foregone when a choice is made.

Factors of Production

The inputs used to produce goods and services: Land, Labour, Capital, and Enterprise.

Production Possibility Frontier (PPF):

A curve showing the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed.

Positive Statement

An objective statement based on factual evidence that can be tested or rejected.

Normative Statement

A subjective statement based on value judgements that cannot be tested as true or false

Specialisation

When an individual, firm, or country concentrates on producing a specific range of goods or services.

Division of Labour

The breaking down of the production process into a sequence of individual tasks, with workers allocated to specific tasks.

Demand

The quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

Supply

The quantity of a good or service that producers are willing and able to provide at a given price in a given time period.

Market Equilibrium

The point where the quantity supplied matches the quantity demanded, resulting in no surplus or shortage.

Consumer Surplus

The difference between the price consumers are willing to pay and the price they actually pay.

Producer Surplus

The difference between the price producers are willing to accept and the price they actually receive.

Price Elasticity of Demand (PED)

A measure of the responsiveness of quantity demanded to a change in the price of the good.

Income Elasticity of Demand (YED)

A measure of the responsiveness of demand to a change in real income.

Cross-Price Elasticity of Demand (XED)

A measure of the responsiveness of demand for one good to a change in the price of another good.

Price Elasticity of Supply (PES)

A measure of the responsiveness of quantity supplied to a change in the price of the good.

Market Failure

Occurs when the price mechanism fails to allocate resources efficiently, leading to a net welfare loss.

Externalities

Costs or benefits that are external to a transaction and affect third parties who are not involved in the exchange.

Public Good

A good that is non-excludable (people cannot be stopped from using it) and non-rivalrous (one person's use does not reduce availability for others).

Asymmetric Information

A situation where one party in a transaction has more or better information than the other.

Merit Good

A good that is under-consumed in a free market because individuals underestimate the private benefits or because it provides positive externalities.

Demerit Good

A good that is over-consumed in a free market because individuals underestimate the private costs or because it creates negative externalities.

Indirect Tax

A tax levied on expenditure (e.g., VAT) rather than on income.

Ad Valorem Tax

A tax charged as a percentage of the price of a good.

Specific (Unit) Tax

A fixed-sum tax per unit of a good sold.

Subsidy

A payment made by the government to producers to encourage the production of a good or service and lower its market price.

Maximum Price

A legal limit on the price a seller can charge for a product, set below the equilibrium price to help consumers.

Minimum Price

A legal floor on the price of a product, set above the equilibrium price (often used for demerit goods like alcohol).

Government Failure

Occurs when government intervention in a market leads to a more inefficient allocation of resources than would have occurred without intervention.