theme 1

• ad valorem tax

  an indirect tax imposed on a good where the value of the tax is dependent on the value of the good

  e.g. VAT
• 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 inn 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
• Cross Elasticity of Demand (XED)

  the responsiveness of demand for one good to change in the price of another good
• demand


  the quantity of a good/ service that consumers are able and willing to buy at a given price at a given moment in time
• diminishing marginal utility

  the extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why demand curve is downward sloping
• 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 by resources are finite so choices have to be made
• efficiency


  when resources are allocated optimally so every consumer benefits and waste is minimised
• 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 sold
• 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 price 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 price mechanism allocates resources so consumers and producers make decisions about what is produced, how to produce it and for whom
• free rider principle

  people who don't pay for a public good still receive benefits from it so the private sector will under-provide the good as they can't make a profit
• government failure


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


  a cause of irrational behavior; when consumers are in the habit of making certain decisions
• incidence of tax

  the tax burden on the taxpayer
• income elasticity of demand

  the responsiveness of demand to a change in income
• indirect tax


  taxes levied on goods and services which increase production and leads o a fall in supply, although this is often partially, or fully passed onto consumers
• inferior goods


  (YED<0) good which see a fall in demand as income increases
• information gaps

  when an economic agent lacks the information needed to make a rational and informed decision
• 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.
• market forces


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

  a floor price which a firm can't charge below
• mixed economy


  both the free market mechanism and the government allocate resources
• negative externalities of production

  where the social costs of producing a good are greater than the private costs of producing the good
• Non-excludability


  a characteristic of public goods; someone can't be prevented from using the good
• non renewable resources


  resources which can't be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed