section 2 definitions

Question 1

What is specialisation in economics?

Answer 1

The production of a limited range of goods by a company/country/individual so they aren’t self-sufficient and have to trade with others

Specialisation allows for increased efficiency and productivity.

Question 2

Define division of labour.

Answer 2

When labour becomes specialised during the production process so do a specific task in cooperation with other workers

This increases efficiency and productivity in the production process.

Question 3

What is demand?

Answer 3

The quantity of a good/service that consumers are able and willing to buy at a given price during a given period of time

Demand is influenced by various factors including price, income, and consumer preferences.

Question 4

What does individual demand refer to?

Answer 4

Demand of an individual or firm, measured by the quantity bought at a certain price at one point in time

Individual demand contributes to the overall market demand.

Question 5

What is market demand?

Answer 5

Sum of all individual demands in a market

Market demand reflects the total quantity demanded by all consumers at various price levels.

Question 6

Define joint demand.

Answer 6

When goods are bought together

Examples include complementary goods like cars and petrol.

Question 7

What is competitive demand?

Answer 7

When goods are substitutes, so buying one means you don’t buy the other

This type of demand affects pricing strategies among competitors.

Question 8

What does composite demand mean?

Answer 8

When the good demanded has more than one use

An example is water, which is used for drinking, irrigation, and industrial processes.

Question 9

Define supply.

Answer 9

The ability and willingness to provide a particular good/service at a given price at a given moment in time

Supply is influenced by production costs, technology, and market conditions.

Question 10

What is individual supply?

Answer 10

Supply of a single firm

Individual supply contributes to the overall market supply.

Question 11

What does market supply refer to?

Answer 11

Sum of all individual supplies in the market

Market supply reflects the total quantity supplied by all producers at various price levels.

Question 12

Define competitive supply.

Answer 12

When a business could make more than one good with its resources, and producing one means they can’t produce the other

This concept is important for understanding opportunity costs.

Question 13

What is composite supply?

Answer 13

When a good or service can be obtained from different sources

This can lead to variations in supply based on source availability.

Question 14

What is consumer surplus?

Answer 14

The difference between the price the consumer is willing to pay and the price they actually pay

Consumer surplus measures the benefit to consumers from purchasing at a lower price.

Question 15

Define producer surplus.

Answer 15

The difference between the price the producer is willing to charge and the price they actually charge

Producer surplus measures the benefit to producers from selling at a higher price.

Question 16

What is a market?

Answer 16

Where demand and supply interact; the collection of many sub-markets

Markets can be physical or virtual and vary in size and scope.

Question 17

What does excess demand mean?

Answer 17

When price is set too low so demand is greater than supply

This often leads to shortages in the market.

Question 18

Define excess supply.

Answer 18

When price is set too high so supply is greater than demand

This often leads to surpluses in the market.

Question 19

What is derived demand?

Answer 19

The demand for one good is linked to the demand for a related good

An example is the demand for steel being linked to the demand for cars.

Question 20

Define joint supply.

Answer 20

Increasing supply of one good causes an increase in the supply of a by-product

An example is beef production leading to leather supply.

Question 21

What is elasticity?

Answer 21

How responsive demand or supply is to a change in price

Elasticity is a key concept in understanding consumer behavior and market dynamics.

Question 22

Define price elasticity of demand.

Answer 22

The responsiveness of demand to a change in price

It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Question 23

What is cross elasticity of demand (XED)?

Answer 23

The responsiveness of demand to one good to a change in price of another good

This helps to understand the relationship between substitute and complementary goods.

Question 24

Define income elasticity of demand (YED).

Answer 24

The responsiveness of demand to a change in income

It helps classify goods as normal, inferior, or luxury.

Question 25

What is **price elasticity of supply**?

Answer 25

The responsiveness of supply to a change in price ## Footnote It is calculated similarly to price elasticity of demand.

Question 26

What is a **perfectly price elastic good**?

Answer 26

PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes ## Footnote This is a theoretical concept rarely seen in real markets.

Question 27

Define a **perfectly price inelastic good**.

Answer 27

PED/PES=0; quantity demanded/supplied does not change when price changes ## Footnote Essential goods often exhibit this characteristic.

Question 28

What is a **price elastic good**?

Answer 28

When PED/PES>1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied ## Footnote Examples include luxury items.

Question 29

Define a **price inelastic good**.

Answer 29

When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a small change in quantity demanded/supplied ## Footnote Examples include necessities.

Question 30

What are **luxury goods**?

Answer 30

YED>1; an increase in income causes an even bigger increase in demand ## Footnote Luxury goods are often non-essential items.

Question 31

Define **normal goods**.

Answer 31

YED>0; demand increases as income increases ## Footnote Most goods fall into this category.

Question 32

What is an **inferior good**?

Answer 32

YED<0; goods which see a fall in demand as income increases ## Footnote Examples include generic brands.

Question 33

What are **complementary goods**?

Answer 33

Negative XED; if good B becomes more expensive, demand for good A falls ## Footnote Examples include printers and ink cartridges.

Question 34

Define **substitutes**.

Answer 34

Positive XED; if good B becomes more expensive, demand for good A rises ## Footnote Examples include butter and margarine.

Question 35

What are **unrelated goods**?

Answer 35

XED=0; if the price of good B changes, it has no impact on the demand for good A ## Footnote Examples include shoes and apples.

Question 36

What does **margin** refer to?

Answer 36

The effect of an additional action ## Footnote Marginal analysis is crucial in decision-making.

Question 37

Define **diminishing marginal utility**.

Answer 37

The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping ## Footnote This concept is fundamental in consumer choice theory.

Question 38

What is **market failure**?

Answer 38

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources ## Footnote Market failures can lead to government intervention.

Question 39

Define **marginal external benefit**.

Answer 39

The extra benefit to a third party not involved in the economic activity, per unit consumed ## Footnote This is often associated with positive externalities.

Question 40

What is **marginal private benefit**?

Answer 40

The extra benefit to the individual per unit consumed ## Footnote This reflects the direct benefits received by the consumer.

Question 41

Define **marginal external cost**.

Answer 41

The extra cost to a third party not involved in the economic activity, per unit consumed ## Footnote This is often associated with negative externalities.

Question 42

What is **marginal social cost**?

Answer 42

The extra cost to society per unit consumed ## Footnote This includes both private and external costs.

Question 43

Define **marginal private cost**.

Answer 43

The extra cost to the individual per unit consumed ## Footnote This reflects the direct costs incurred by the producer.

Question 44

What is **marginal social benefit**?

Answer 44

The extra benefit to society per unit consumed ## Footnote This includes both private and external benefits.

Question 45

What are **externalities**?

Answer 45

The cost or benefit a third party receives from an economic transaction outside of the market mechanism ## Footnote Externalities can be positive or negative.

Question 46

Define **positive externalities of consumption**.

Answer 46

Where the social benefits of consuming a good are larger than the private benefits of consuming that good ## Footnote Examples include education and vaccination.

Question 47

What are **positive externalities of production**?

Answer 47

Where the social costs of producing a good are less than the private costs of producing a good ## Footnote Examples include the production of renewable energy.

Question 48

Define **negative externalities of consumption**.

Answer 48

Where the social benefits of consuming a good is less than the private benefit of consuming a good ## Footnote Examples include smoking.

Question 49

What are **negative externalities of production**?

Answer 49

Where the social costs of producing a good are greater than the private costs of producing the good ## Footnote Examples include pollution.

Question 50

What is **information failure**?

Answer 50

When an economic agent lacks the information needed to make a rational, informed decision ## Footnote This can lead to poor decision-making and market inefficiencies.

Question 51

Define **asymmetric information**.

Answer 51

Where one party has more information than the other, leading to market failure ## Footnote This often occurs in markets like insurance.

Question 52

What is **moral hazard**?

Answer 52

Where individuals make decisions in their own best interests knowing there are potential risks for others ## Footnote This can lead to reckless behavior.

Question 53

Define **merit goods**.

Answer 53

Goods with positive externalities ## Footnote Examples include education and healthcare.

Question 54

What are **demerit goods**?

Answer 54

Goods with negative externalities ## Footnote Examples include alcohol and tobacco.

Question 55

Define a **public good**.

Answer 55

Goods that are non-excludable, non-rivalry, non-rejectable and have zero marginal cost ## Footnote Examples include national defense and public parks.

Question 56

What is a **private good**?

Answer 56

Goods that are rival and excludable ## Footnote Examples include food and clothing.

Question 57

Define a **quasi-public good**.

Answer 57

Goods which aren’t perfectly non-rivalry/non-excludable but aren’t perfectly rivalry/excludable ## Footnote Examples include toll roads.

Question 58

What does **non-diminishability/non-rivalry** mean?

Answer 58

A characteristic of public goods; one person’s use of the good does not prevent someone else from using it ## Footnote This is a key feature that distinguishes public goods from private goods.

Question 59

Define **non-excludability**.

Answer 59

A characteristic of public goods; someone cannot be prevent from using the good ## Footnote This leads to the free rider problem.

Question 60

What is **non-rejectability**?

Answer 60

A characteristic of public goods; people cannot choose not to consume the good ## Footnote This is another feature that complicates the provision of public goods.

Question 61

What is the **free rider problem**?

Answer 61

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 ## Footnote This is a significant issue in the provision of public goods.

Question 62

Define **state provision**.

Answer 62

When the government provides public goods or merit goods which are underprovided in the free market ## Footnote This is often necessary to ensure access to essential services.

Question 63

What is an **indirect tax**?

Answer 63

Taxes on expenditure which increase production costs and lead to a fall in supply ## Footnote Examples include VAT and sales tax.

Question 64

Define a **subsidy**.

Answer 64

Government payments to a producer to lower their costs of production and encourage them to produce more ## Footnote Subsidies can help support industries and reduce prices for consumers.

Question 65

What is a **minimum price**?

Answer 65

A floor price which a firm cannot charge below ## Footnote Minimum prices are often used in agricultural markets.

Question 66

Define a **maximum price**.

Answer 66

A ceiling price which a firm cannot charge above ## Footnote Maximum prices are used to protect consumers from high prices.

Question 67

What are **buffer stock schemes**?

Answer 67

The introduction of both a maximum and minimum price in the market to prevent large fluctuations in prices ## Footnote These schemes are often used in agricultural markets.

Question 68

Define **public/private partnerships**.

Answer 68

When the government and the private sector work together to build and operate projects ## Footnote These partnerships can leverage resources and expertise from both sectors.

Question 69

What is **regulation**?

Answer 69

Laws to address market failure and promote competition between firms ## Footnote Regulations can help protect consumers and ensure fair market practices.

Question 70

Define **tradable pollution permits**.

Answer 70

Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control the amount of pollution ## Footnote Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute.

Question 71

What is **information provision**?

Answer 71

When the government intervenes to provide information to correct market failure ## Footnote This can help consumers make informed decisions.

Question 72

Define **competition policy**.

Answer 72

Government action to increase competition in markets ## Footnote This can include antitrust laws and regulations.

Question 73

What is **government failure**?

Answer 73

When government intervention leads to a net welfare loss in society ## Footnote This can occur when the costs of intervention outweigh the benefits.