1
Q
Basic economic problem
A
Unlimited wants v.s scarce resources
2
Q
Opportunity cost
A
next best alternative forgone
3
Q
Capital
A
equipment used to produce goods and services (factories, machines, tools)
4
Q
Enterprise
A
the willingness to take a risk and make a profit
5
Q
Land
A
All natural resources in and on land (oil, precious metals)
6
Q
Labour
A
the work done by people
7
Q
Non renewable resource
A
A natural resource which is not replenished at the rate at which it is consumed
8
Q
Renewable resource
A
Replenished naturally over time
9
Q
Ceteris Paribus
A
means “all other things being equal”
10
Q
Need
A
something necessary for human survival
11
Q
Want
A
something that is desireable but not necessary
12
Q
Production
A
a process that converts inputs into (finished) outputs
13
Q
Consumer good
A
consumed by individuals/households to satisfy their wants and needs
14
Q
FOP
A
inputs into the production process(CELL)
15
Q
Finite resource
A
is scarce and runs out as it is used
16
Q
Basic/fundamental economic problem tackles…
A
how best to make decisions about the allocation of scarce resources among competing uses
17
Q
Positive statement
A
A statement of fact that can be scientifically tested to see if it is correct or incorrect (using evidence)
18
Q
Normative statement
A
a statement that includes a value judgement and cannot be refuted just by evidence
19
Q
Production possibility frontiers
A
shows the maximum output combinations of two g/s in an economy when it’s resources are fully and efficiently employed
20
Q
Specialisation
A
when a country/firm/region focuses on the production of one type of g/s OR when each worker completes a specific task in the production process
21
Q
Division of labour(second type of specialisation)
A
workers specialise within the production process (focus on certain skills/work)
22
Q
Production
A
process of converting factor inputs into finished goods and services
23
Q
Prodcutivity
A
Output per unit of input (output per worker)
24
Q
Liquidity
A
the ease with which an asset can be converted into cash
25
economic system
a set of social institutions which deal with the production, distribution and consumption fo g/s
26
Price mechanism
when the forces of d/s determine how much is bought and sold and by whom
27
Demand
The quantity consumers are willing and able to buy at a given price in a given time period ceteris peribus
28
Derived demand
goods that are only demanded because they are required for the production of other goods
29
Law of diminishing marginal utility
the utility gained from the last product consumed (each additional unit) falls as a greater number of products are consumed
30
Utility
the satisfaction obtained from consuming a good or service
31
Income effect
When the price of a good falls (inflation, PL inc.), the consumer’s real income increases because they can now afford more of the good or other goods with the same income.(inc. purchasing power)--> inc. demand
32
Supply
the willingness and ability for producers to supply a g/s at a given price in a given time period
33
Consumer surplus
Difference between what consumers are prepared to pay and what they actually pay
34
Producer surplus
Difference between the price producers are prepared to supply at and the market price they recieve
35
PED
the responsiveness of quantity demanded to a change in price
36
PES
responsiveness of supply of goods or services to a change in market price
37
YED
responsiveness of demand to a change in income
38
normal goods
as income rises, demand for this good increases
39
inferior goods
as income rises, demand for this good falls
40
Substitute
goods in competitive demand that act as a replacemnent for another good
41
Complements
goods which tend to be bought with each other(joint demand)
42
XED
measures the responsiveness of quantity demanded of good B to the price of good A
43
rational behaviour
a decision making process based on making choices that result in the optimal level of benefit or utility
44
rational decision making
choosing the option that results in the greatest level of satisfaction
45
utility
satisfaction an individual derives from the consumption of a g/s
46
Marginal utility
the change in satisfaction from consuming an extra unit
47
inertia
consumers tend to do nothing or remain unchanged
48
indirect taxes
taxes imposed on the consumption, sale or use of goods and services (expenditure on a g/s)
49
tax burden
total amount of tax paid by a particular group of people
50
specific tax
imposes a flat rate of tax (charges a fixed amount)
51
ad valorem tax
%-based tax that is imposed depending on its value ie VAT and stamp duty
52
bounded rationality
people's ability to make rational decisions is limited (opt to satisfice)
53
satisfice
accepting satisfactory outcome rather than optimum
54
externalities
costs or benefits to 3rd parties from a transaction that is not reflected in the market price
55
Market failure
in a free market, this is when the allocation of goods and services is not efficient and equitable(fair/impartial)
56
private cost
internal costs to the producer or consumer directly involved in the transaction
57
external cost
a negative effect on the wellbeing of a 3rd party not involved in the transaction
social cost> private cost
58
private benefit
the satisfaction or utility an economic agent derives from the production or consumption of a good
59
external benefit
positive effect of a market transaction on 3rd parties
60
Marginal private cost (MPC)
internal cost to a producer or consumer for supplying/consuming an additional unit
61
Marginal private benefit (MPB)
additional staisfaction or utility to a producer or consumer for supplying/consuming an additional unit
62
MEC (marginal external cost)
Cost to 3rd parties from the consumption/production of an additional unit
63
MSC
total cost to society for the production/consumption of an additional unit
64
negative externality
costs to third-parties from a transaction that is not reflect in market price (MSC> MPC)
65
positive externality
benefits to 3rd parties from a transaction that is not considered in the market price (MSB> MPB)
66
rivalrous
where consumption of the good prevents other people from consuming it
67
excludable
you can prevent someone from using a good/service ie if they dont pay (cinema ticket)
68
private good
excludable and rivalrous
69
public good
non excludable and non rivalrous
70
quasi-public
not fully non-rival and/or non-excludable ie road pricing
71
price ceiling
a regulated max. price in the market (producers cannot legally offer a higher price)
72
price floors
a regulated min. price in the market
73
imperfect information
asymmetrical information between buyers and sellers
74
asymmetric information
where buyers and sellers have different levels of information
75
government failure
where government intervention, intended to improve economic outcomes or correct market failures, actually leads to inefficiencies and a welfare loss
76
moral hazard
lack of incentive to guard against risks where one is protected from consequences ie insurance
77
social science
study of human behaviour and interactions
78
irrational behaviour
where decisions do not optimise utility
79
total economic welfare
producer surplus+ consumer surplus
80
substitute good
goods which can be used in place of each other
81
market failure
Market failure is when a free market fails to allocate resources efficiently, resulting in a loss of economic and social welfare for society
(where price mechanism doesnt result in social optimum price/qty)
82
adverse selection
where info asymmetry leads to a narrower selection in the market
83
merit goods
goods that are under-consumed relative to what would be socially optimal
84
tax
charge levied by the govt
85
producer incidence
proportion of govt revenue taken from producer surplus
86
Deadweight loss
The loss of economic efficiency that occurs when the equilibrium outcome in a market is not socially optimal--> a loss of social/economic welfare
MB not equal to MC
87
barter
exchange of g/s without money
88
allocative efficiency
Allocative efficiency occurs when the value that consumers place on a good or service equals the cost of the resources used up in production (P=MC) --> maxmised utility and welfare (also known as Pareto efficiency)
89
Pareto efficiency
In neoclassical economics, an action done in an economy that harms no one and helps at least one person. A situation is Pareto efficient if the only way to make one person better off is to make another person worse off.
90
Productive potential
The amount of output an economy could produce if all of its resources were fully and efficiently employed
91
Consumer sovereignity
when an economic system allows scarce resources to
be allocated to producing g/s that reflect the wishes of consumers.
Sovereignty can be distorted by the effects of persuasive or misleading advertising.
92
information gap
where either the buyer or seller dont have access to information that will enable them to make fully informed decisions
93
free rider problem
Because public goods are non-ecludable it is difficult to prevent people from benefitting from them once a good is available
94
Command economy
All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
95
Habitual behaviour
A cause of irrational behaviour; when consumers are in the habit of making certain decisions
96
Trade pollution permits
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. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute
97
Effective demand
the desire for a good or service backed by the ability and willingness to pay for it (link to purchasing power)
Relevance:
> Housing affordability
> Min wage
> targeted tax cuts giving a higher MPC
98
Paradox of thrift
though it is rational to save more, savings ratio increase could lead to fall in C and AD, risking deeper recession and fall in real incomes/less money to save >deflation >cash-hoarding
99
unemployment trap
a situation where individuals on benefits find that taking a job provides little to no financial gain due to lost benefits, taxes, and work-related expenses
Economics key terms
flashcards
Decks in class (4)
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