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75 Cards in this Set
- Front
- Back
The economic problem |
The need to make choices regarding how to allocate limited resources between unlimited and competing wants |
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Specialisation |
The concentration of a worker, firm, region or country on a narrow range of tasks or goods and services |
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Opportunity cost |
The next best alternative foregone when a choice is made |
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Production Possibility Frontier (PPF) |
The maximum output combinations of two goods and services that can be produced with all resources fully employed |
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Factors of production |
Land, labour, capital and enterprise |
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Market |
Any interaction between buyers and sellers for the exchange of goods and services |
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Demand |
The quantity of a good or service that consumers are willing and able to purchase at a given price over a specified period of time |
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The conditions of demand |
The price of the good or service The prices of substitutes The prices of complements Households' disposable income and wealth Tastes and fashion |
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Ceteris paribus |
Other things (e.g. the other determinants of demand) remaining equal; essential for ensuring that the effects of changes in only one variable can be analysed |
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Price elasticity of demand (PED) |
The responsiveness of the quantity demanded to a change in price (% change in quantity demanded / % change in price) Demand is price-elastic if PED > 1 (ignoring the -) Demand is price-inelastic if 0 < PED < 1 |
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Cross elasticity of demand (XED) |
The responsiveness of the quantity demanded of product A to a change in the price of product B (% change in the quantity demanded of product A / % change in the price of product B) (remember to comment on the sign and size) |
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Substitutes |
Two goods or services that perform a similar function Products that are in competitive demand Have a positive XED |
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Complements |
Two goods or services that are consumed together Products that are in joint demand Have a negative XED |
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Income elasticity of demand (YED) |
The responsiveness of the quantity demanded to a change in income (% change in quantity demanded / % change in income) (remember to comment on the sign and size) |
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Normal good |
Good or service for which the demand increases as income increases Has a positive YED |
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Inferior good |
Good or service for which the demand decreases as income increases Has a negative YED
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Revenue |
Price multiplied by quantity demanded |
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Consumer surplus |
The difference between the price consumers are willing to pay and the market price actually paid |
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Supply |
The quantity of a good or service that producers are willing and able to sell at a given price over a specified period of time |
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Producer surplus |
The difference between the price that producers are willing to supply at and the market price actually received |
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Allocative efficiency |
Achieved where supply equals demand, resources are allocated in accordance with consumers' wants and consumer welfare is maximised |
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Market failure |
Where the free market mechanism fails to achieve allocative efficiency |
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Externalities |
Spillover effects on third parties arising from production or consumption |
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Private costs |
Costs incurred by the firm to acquire the factors of production necessary to produce the good or service being supplied |
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External costs |
The costs imposed on third parties as a consequence of negative externalities |
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Marginal social cost |
The additional cost to society of producing one more unit of a good or service, equal to marginal private cost plus marginal external cost
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Negative externality |
Adverse or unfavourable spillover effect on a third party arising from production or consumption; exists when the marginal social cost of an activity is greater than the marginal private cost (or the MPB > MSB if arising from consumption) |
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Positive externality |
Beneficial or favourable spillover effect on a third party arising from production or consumption; exists when the marginal social benefit of an activity is greater than the marginal private benefit (or the MPC > MSC if arising from production) |
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Social optimum |
The best possible outcome from society's point of view; exists where marginal social cost equals marginal social benefit |
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Merit good |
A good or service which is better for consumers than they realise; a good or service with more private benefits than consumers realise (consumption also tends to create positive externalities) |
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Demerit good |
A good or service which is worse for consumers than they realise; a good or service with more private costs than consumers realise (consumption also tends to create negative externalities) |
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The conditions of supply |
The price of the good or service The costs of production Changes in productivity Changes in technology / capital investment Taxes and/or subsidies Weather / climate (for primary products) Expected price changes Prices of other goods that could be supplied
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State provision |
Where market failure leads to a good or service being provided by the state, often free at the point of consumption (e.g. roads, health care) (commonly used for public goods, and often alongside private provision for quasi-public goods) |
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The determinants of the PED |
Whether consumption is habitual The percentage of income spent on the good or service The time period available for adjustments to consumer spending patterns The availability of substitutes |
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Information failure |
A lack of information resulting in consumers and producers making decisions that do not maximise welfare |
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Competitive market |
The interaction of supply and demand without government intervention to set an equilibrium price and quantity for a good or service |
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Asymmetric information |
Where information is not shared equally between producers and consumers |
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Public good |
Collectively consumed goods that are both non-excludable and non-rival |
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Non-excludability |
Where an individual cannot be prevented from consuming a good or service |
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Non-rivalry |
Where the consumption of a good or service by one individual doesn't reduce the amount available for others |
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Free rider |
Someone able to enjoy the benefits of consuming a good or service without paying for its provision |
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Quasi-public good |
A good or service having one but not both of the characteristics of a public good |
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Indirect tax |
A tax levied on goods and services, the burden of which can be passed on to others (usually from producers to consumers) |
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Subsidy |
A payment to producers or consumers, usually made by the government, to encourage production or consumption |
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Regulation |
Laws, standards and guidelines imposed by the government to influence the behaviour of producers and consumers and correct market failure |
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Tradable pollution permit |
Gives the holder the right to generate a specified level of pollution |
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Market equilibrium
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The combination of price and quantity that corresponds to the point of intersection of the supply and demand curves
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Private benefits
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The benefits accruing to individuals arising from the consumption of a good or service
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External benefits
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The benefits enjoyed by third parties as a consequence of positive externalities |
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Marginal social benefit
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The additional benefit to society of consuming one more unit of a good or service, equal to marginal private benefit plus marginal external benefit
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Information provision
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Providing information to encourage or discourage consumption of a good or service (may be done directly by the government or as part of the regulation of a particular market) |
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Positive economics
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Fact-based and objective; e.g. the distribution of income in the UK is unequal
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Normative economics
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Opinion- or value-based and subjective; e.g. the distribution of income in the UK is unfair
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Renewable resource
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Natural resources that can be replenished (e.g. solar energy, wave power, managed forests)
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Non-renewable resource
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Natural resources that cannot be replenished once they have been used (e.g. oil, coal, unmanaged forests)
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Capital goods
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Man-made goods used for the future production of other goods and services (e.g. machinery, factories)
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Consumer goods
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Used for immediate benefits / utility; may be durable (e.g. an Apple computer) or non-durable (e.g. an apple)
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Division of labour
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Allocating workers to the specific tasks at which they are most efficient
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The functions of money
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medium of exchange, measure of value, store of value, method of deferred payment |
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Free market economy
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An economy in which the market forces of supply and demand determine the allocation of resources free from state intervention
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Command economy
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An economy in which decisions on what to produce, how to produce it and for whom are made by the state
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Mixed economy
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An economy in which resources are allocated through a combination of free markets and state intervention
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Utility
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A subjective measure of the benefits / satisfaction that an individual gains from the consumption of a good or service; consumers are assumed to aim to maximise utility |
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Law of diminishing utility
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As successive units of a good or service are consumed the additional (or marginal) utility enjoyed by the consumer will become smaller; demand curves are downward-sloping because consumers are only willing to pay lower prices for the additional units that yield less and less marginal utility
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Profit
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The difference between the revenue received from selling a good or service and the cost of the factors of production used to make that good or service; producers are assumed to aim to maximise profits
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Price elasticity of supply (PES)
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The responsiveness of the quantity supplied to a change in price; % change in quantity supplied / % change in price
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The determinants of the PES
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availability of stock, availability of the necessary factors of production, time period need to produce
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Incidence of a tax (or subsidy)
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The way in which the burden of an indirect tax (or subsidy) on expenditure is shared between the producers and consumers
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Behavioural economics
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A relatively new branch of economics that suggests that consumers and producers may not act rationally
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Reasons for irrational consumer behaviour
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peer pressure / herd behaviour, habitual behaviour, inertia, computational problems, research costs
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Welfare loss
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The loss of consumer and producer surplus arising from the overproduction of a good or service where the MSC exceeds the MSB
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Welfare gain
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The consumer and producer surplus foregone arising from the underproduction of a good or service where the MSB exceeds the MSC
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Specific tax (indirect)
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A tax of a fixed monetary amount levied on expenditure (e.g. Air Passenger Duty is currently £13 for standard class passengers on short haul flights)
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Ad valorem tax (indirect)
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A tax of a fixed percentage levied on expenditure (e.g. the standard rate of VAT is 20%); ad valorem means 'according to value' so the amount paid in tax increases as the price of a good increases although the percentage tax rate remains the same
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Government failure
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A misallocation of resources arising from government intervention (e.g. the loss of jobs from the imposition of a sugar tax, or inefficient producers being kept in business through the payment of a subsidy)
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