What is the basic economic problem?
People have unlimited wants but limited resources.
Define Trade Off.
The exchange of one thing for another.
What characterizes a Perfect Market?
Many buyers and sellers, homogeneous products, no barriers to entry/exit, and perfect information.
State the Law of Demand.
As the price of a good or service increases, the quantity demanded decreases.
What are Non-Price Demand Factors?
- Change in Price of Substitutes
- Change in Interest Rates
- Change in Disposable Income
- Effect of Successful Advertising
State the Law of Supply.
As the price of a good or service increases, the quantity supplied increases.
What are Non-Price Supply Factors?
- Change in the Cost of Production
- Technological Change
- Productivity Change
- Climatic Conditions
- Increase in Number of Suppliers
Define Price Elasticity of Demand (PED).
The responsiveness of quantity demanded to a change in price.
What does High PED indicate?
Quantity demanded changes significantly with price.
What does Low PED indicate?
Quantity demanded changes little with price.
List factors influencing PED.
- Availability of substitutes
- Necessity vs luxury
- Proportion of income
- Time since price change
Define Price Elasticity of Supply (PES).
The responsiveness of quantity supplied to a change in price.
What does High PES indicate?
Quantity supplied changes significantly with price.
What does Low PES indicate?
Quantity supplied changes little with price.
What is Market Failure?
When the free market fails to allocate resources efficiently or in a way that maximises national living standards.
Define Government Intervention.
When the government takes action to correct market failure and improve the allocation of resources.
What is Government Failure?
When government intervention causes a less efficient allocation of resources than the market outcome.
Define Public Good.
A good that is non-rivalrous and non-excludable.
What is a Common Access Resource?
Natural resources that are non-excludable but rivalrous.
What is the Free Rider Problem?
Occurs when individuals benefit from a good or service without contributing to its cost.
Define Positive Externality.
A benefit from an economic activity received by third parties, not reflected in the market price.
Define Negative Externality.
A cost from an economic activity imposed on third parties, not reflected in the market price.
What is an Indirect Tax?
A tax placed on the sale of goods or services, collected by sellers and passed on to the government.
Define Inflation.
A sustained increase in the general level of prices over a period of time.
