Economics Theme 1 Key Definitions

• What is an ad valorem tax?

  An indirect tax imposed on a good where the value of the tax is dependent on the value of the good.
• What is asymmetric information?

  Where one party has more information than the other, leading to market failure.
• What is capital in economics?

  One of the four factors of production; goods which can be used in the production process.
• What are capital goods?

  Goods produced in order to aid production of consumer goods in the future.
• What does ceteris paribus mean?

  All other things remaining the same.
• What characterizes a command economy?

  All factors of production are allocated by the state, deciding what, how, and for whom to produce goods.
• What are complementary goods?

  Goods that have negative cross elasticity of demand; if good B becomes more expensive, demand for good A falls.
• What are consumer goods?

  Goods bought and demanded by households and individuals.
• What is consumer surplus?

  The difference between the price the consumer is willing to pay and the price they actually pay.
• What does cross elasticity of demand (XED) measure?

  The responsiveness of demand for one good (A) to a change in the price of another good (B).
• What is demand in economics?

  The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment of time.
• What does diminishing marginal utility explain?

  The extra benefit gained from consumption of a good generally declines as extra units are consumed, explaining why the demand curve is downward sloping.
• What is division of labour?

  When labour becomes specialised during the production process so workers do a specific task in cooperation with others.
• What is the economic problem?

  The problem of scarcity; wants are unlimited but resources are finite, so choices have to be made.
• What does efficiency mean in economics?

  When resources are allocated optimally, so every consumer benefits and waste is minimised.
• What is enterprise in economics?

  One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.
• What is equilibrium in economics?

  Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded.
• What is excess demand?

  When price is set too low so demand is greater than supply.
• What are externalities?

  External costs/benefits that affect third parties not involved in an economic transaction.
• What is the incidence of tax?

  The tax burden on the taxpayer.
• What is income elasticity of demand (YED)?

  The responsiveness of demand to a change in income.
• What is an indirect tax?

  Taxes on expenditure which increase production costs and lead to a fall in supply.
• What are inferior goods?

  Goods which see a fall in demand as income increases (YED<0).
• What is an information gap?

  When an economic agent lacks the information needed to make a rational, informed decision.
• What is information provision?

  When the government intervenes to provide information to correct market failure.
• What is labour in economics?

  One of the four factors of production; human capital.
• What is land in economics?

  One of the four factors of production; natural resources such as oil, coal, wheat, and physical space.
• What are luxury goods?

  Goods for which an increase in incomes causes an even bigger increase in demand (YED>1).
• What is market failure?

  When the free market fails to allocate resources to the best interest of society, leading to an inefficient allocation of scarce resources.
• What are market forces?

  Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand.
• What is a maximum price?

  A ceiling price which a firm cannot charge above.
• What is a minimum price?

  A floor price which a firm cannot charge below.
• What is a mixed economy?

  Both the free market mechanism and the government allocate resources.
• What is a model in economics?

  A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words.
• What are negative externalities of production?

  Where the social costs of producing a good are greater than the private costs of producing the good.
• What does non-excludable mean in the context of public goods?

  A characteristic of public goods; someone cannot be prevented from using the good.
• What are non-renewable resources?

  Resources which cannot be readily replenished or replaced at a level equal to consumption.
• What happens to the stock level of non-renewable resources over time?

  The stock level decreases over time as they are consumed.
• What is non-rivalry in the context of public goods?

  One person's use of the good does not prevent someone else from using it.
• What defines normal goods in economics?

  YED>0; demand increases as income increases.