DEFONITIONS

• Ad valorem tax


  An indirect tax imposed on a good where the value of the tax is dependent on the value of the good
• Asymmetric information


  Where one party has more information than the other, leading to market failure
• Capital


  One of the four factors of production; goods which can be used in the production process
• Capital goods


  Goods produced in order to aid production of consumer goods in the future
• Ceteris paribus


  All other things remaining the same
• Command economy


  All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
• Complementary goods


  Negative XED; if good B becomes more expensive, demand for good A falls
• Consumer goods


  Goods bought and demanded by households and individuals
• Consumer surplus


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


  The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment of time
• Division of labour


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


  The problem of scarcity; wants are unlimited but resources are finite so choices have to be made
• Efficiency


  When resources are allocated optimally, so every consumer benefits and waste is minimised
• Cross elasticity of demand (XED)

  The responsiveness of demand for one good (A) to a change in price of another good (B)
• Diminishing marginal utility


  The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping
• Enterprise


  One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production
• Equilibrium price/quantity


  Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded
• Excess demand


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


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


  The cost or benefit a third party receives from an economic transaction outside of the market mechanism
• External cost/benefit


  The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit
• Free market


  An economy where the market mechanism allocates resources so consumers and producers make decisions about what is produced, how to produce and for whom
• Free rider principle


  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
• Government failure


  When government intervention leads to a net welfare loss in society
• Habitual behaviour


  A cause of irrational behaviour; when consumers are in the habit of making certain decisions
• Incidence of tax


  The tax burden on the taxpayer
• Indirect tax


  Taxes on expenditure which increase production costs and lead to a fall in supply
• Inferior goods


  YED<0; goods which see a fall in demand as income increases
• Information gap


  When an economic agent lacks the information needed to make a rational, informed decision
• Information provision


  When the government intervenes to provide information to correct market failure
• Labour


  One of the four factors of production; human capital
• Land


  One of the four factors of production; natural resources such as oil, coal, wheat, physical space
• Luxury goods


  YED>1; an increase in incomes causes an even bigger increase in demand
• Market failure


  When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources
• Income elasticity of demand (YED)

  The responsiveness of demand to a change in income
• Market forces


  Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand
• Maximum price


  A ceiling price which a firm cannot charge above
• Minimum price


  A floor price which a firm cannot charge below
• Mixed economy


  Both the free market mechanism and the government allocate resources
• Model


  A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words