Theme 1

Model

A theoretical concept that looks at how differant variables interact.

Ceteris Paribus

All other factors remain the same.

Positive Statement

Objective, factually based comments that can be tested.

Normative Statement

Subjective, questionable comments based on valued judgements that are difficult to test.

Scarcity

When there are unlimited human wants but limited number of resources to meet these wants.

Economic Problem

Making choices on how to allocate scarce resources to best meet our needs and wants.

Renewable Resources

Can be replenished.

Non-Renewable Resources

Finite supply, will run out.

Sustainable Resources

Used for economic activities in such a manner they wont run out.

Oppotunity Cost

The benefit lost of the next best alternative when making a choice.

Production Possibility Frontier

A curve which represents all possible combinations of goods an economy or a firm can produce when all factors of production are fully employed and used efficiently.

Factors of Production

1. Land
2. Labour
3. Capital
4. Enterprise

Productive Efficiency

When the economy uses minimum inputs to produce maximum output at lower cost.

Allocative Efficiency

Social welfare is maximised in the production of goods and services.

Supply-Side Policy

Government attempt to productivly increase supply.

Capital Goods

Goods used to make consumer goods and services.

Consumer Goods

Goods and services that satisfy our needs.

Production

Measure of goods and services produced.

Productivity

Measure of efficiency of factors of production measured by output per person employed or output per person hour.

Specialisation

Occurs when economic units focus on producing specific goods or services.

Division of Labour

Specialised use of workers within an organisation.

Economies of Scale

Buying in bulk and getting goods with deals lowering the unit cost.

Comparative Advantage

Gains you get from specialising in on product.

GDP

Gross Domestic Product. The output of goods and services.

Remuneration

Money of benefits given to workers for their services.

Command Economy

Resources are allocated by the governemt.

Mixed Economy

Resources are allocated by a combination of the market and the government.

Free Market Economy

There is no governmen intervention at all.

Public Goods

Goods and services that are non-excludable and available to everyone.

Market Failure

Occurs when the market is unable to efficiently allocate scarce resources to meet the needs of society.

Government Failure

Occurs when there is no intervention in markets and resources are mis-allocated.

Negative Externalities

Negative effects of consumption and production on third parties. E.g. Congestion causes delays decreasing productivity.

Demerit Goods

Goods that are considered socially undesirable and are over consumed within society. E.g. Cigarettes.

Merit Goods

Goods considered to have a greater benefit that are usually under consumed in society. E.g. Education.

Labour Immobility

How easily labour can be transported to other places. There are two types:
1. Occupational Mobility
2. Geographical Mobility
Firms with bad labour will not be productive or efficient.

Occupational Mobility

The ability of workers to be skilled for more than one job.

Geographical Mobility

The willingness of worker to mive location.

Imperfect Information

Correct information on what to produce is not known leading to over or under production.

Instability in Commodity Markets

Prices of goods in a market are unstable and fluctuate due to a range of factors (e.g. wheat and bad weather).

Private Costs

Those experianced by an individual firm or consumer.

External Costs

Those experianced by third parties.

Social Costs

Private costs and external costs combined.

Marginal Benefit

The benefit to a consumer of consuming more than one unit of a good or service.

Merginal Cost

The cost to a producer of producing one more unit of a good or service.

Margianl Private Benefit (MPB)

The additional amouny of satisfaction a consumer gains from an additional unit of a good or service.

Marginal Private Cost (MPC)

The cost to a producer of producing one additional unit.

Marginal Social Benefits (MSB)

The benefit of the consumption of a good or service on society.

Marginal Private Benefit (MPB)

The benefit to the consumer of consuming the good or service.

Welfare Gain

A situation where social cost is lower than private cost and society gains as it does not have to pay the differance.

Symmetric Information

All relevant information is known by both parties.

Information Asymmetry

Occurs when some parties in a transaction have more information regarding a product than others.

Subsidy

Money given to firms to reduce the costs of production.

Perfect Knowledge

A theoretical concept which occurs when all consumers in a market are fully aware of price, quantity and other relavent information for all products when making buying decisions.

Pure Public Good

One where it is impossible to exclude someone from using it, even if they are unwilling to pay for it. E.g. the air we breathe.

Valuation

A method used to try and estimate the worth of public good.

Quasi-Public Goods

A private good similar to a pure public good but it is possible to exclude those unwilling to pay. E.g. Roads can only be used if you pay road tax.

Technical Change

The process of innovation, invention and the widespread use of technology in society.

Free-Rider Principle

Some can benefit from a good or service without paying for it.

Tangible Goods

Material objects, goods you can touch with your hands.

Intangible Goods

Goods without a physical nature. E.g Downloadable music.

Taxation

Way in which governments finance spending and control the economy. Imposed on products, individuals and businesses.

Indirect Tax

Tax on a good or service.

Direct Tax

Tax on an individual or organisation.

Price Control

Governments set a maximum or minimum price for a good or service.

Pollution Permits

Provide and incentive to businesses ,on a global scale, to reduce emissions.

State Provisions

Government intervenes to ensure the supply of merit and public goods is adequatly available.

Provision of Information

Governments seek to address problems caused by lack of information. Ensures the economic units can maximise decisions when consuming and producing goods and services.

Regulation

Occurs when governments create rules to ensure effective competition. Can help in reducing the over consumption of demerit goods.

Administrative Costs

The expenditure of the government on intervening in markets.

Law of Unintended Consequences

Unexpected events occur due to government intervention.

Social Norms

Behaviour considered socially acceptable in a group.

Nudge Theory

Manipulating social norms through positive reinforcement in a non-coercrive manner.

Heuristics

Best described as rules of thumb for decision making. Helps people make quick, satisfactory, but not perfect, choices.

Habitual Behaviour

Defult behaviour and repeat choices made by consumers. Government uses this to its advantage. E.g. Everyone is an organ doner, you can only opt out instead of opting in.

Choice Architecture

Uses nudge theory to encourage certain behaviour. E.g. Smart building designs encourage people to take the stairs.

Herd Behaviour

Making decisions based on what other people do. E.g Binge drinking on freshers week.

Anchoring

Having a refrance point. E.g. Anchors that establish prices, RRP £349.99 but you pay £59.99.

Priming

Subliminal and sets the consumer up to buy something.

Framing

By framing something in a differant way, you create a differant response. E.g. Low-Fat. Its actually lower fat.

Demand

The relationship between the price of a product and the quantity people want to buy.

Law of Demand

As price increases demand decreases.

Substitutes

Two goods that, if the price for one increases, the demand of the other will increase.

Compliments

Two goods that, if the price of one increases the demand for the other decreases.

Normal Goods

As income (Y) increases the quantity demand for the good increases.

Inferior Goods

As income (Y) increases demand for the good decreases.

Ostentatious Goods

Luxurious goods where, as the price increases, so does the demand for the good.

Effective Demand

Consumer demand is backed up with the ability to purchase.

Latent Demand

Demand and willingness to purchase exist, but consumers lack the purchasing power to afford the product.

Non-Price Factors Affecting Demand

1. Fashion and trends.
2. Population.
3. Price and availability of substitutes.
4. Intrest rates.
5. Advertising.
6. Consumer incomes.
7. Preferance.

Supply

The quantity of a good or service that a producer is willing to supply at a given price.

Non-Price Factors Affecting Supply

1. Cost of production.
2. Random shocks.
3. Government intervention.
4. Profitability of alternative products.
5. Technological change.
6. Subsidies.
7. Taxes.

Equillibrium

The interaction of supply and demand. The point where price and quantity create neither excess supply or excess demand.

Consumer Surplus

The differance between the price the consumer would be prepared to pay and the price they actually pay.

Producer Surplus

The differance between the price that producers would be prepared to supply at and the price they actually supply at.

Specific Tax

A lump sum that does not change in proportion to value.

Ad Valorem Tax

A tax that is a percentage of the value of the good.

Elasticity

The responsiveness of one variable to another.

Price Elasticity of Demand (PED)

The responsiveness of demand to a change in price.

Calculation for PED

% differance in demand ÷ % differance in price.

Inelastic

The responsiveness of demand/supply is less than proportionate to the change in price.