1. Definitions

Ad valorem tax

An indirect tax imposed on a good where the value of the tax is dependent of 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

Cetetris 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

When 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

Excess supply

When price is too high so supply is greater than demand

Externalities

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 allocated 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 government intervenes to provide information to correct market failure

Labour

One of the four factors of production

Land

One of the four factors of production

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