economics theme 1 key terms

• Adverse selection


  A situation in which a person at risk is more likely to take out insurance
• Allocative efficiency


  Achieved when society is producing an appropriate bundle of goods relative to consumer preferences
• Asymmetric information


  A situation in which some participants in a market have better information about market conditions than others
• Cartel


  An agreement between firms in a market on price and output with the intention of maximising their joint profits
• Ceteris paribus


  A Latin phrase meaning 'other things being equal'; it is used in economics when we focus on changes in one variable while holding other influences constant
• Command economy


  An economy in which decisions on resource allocation are guided by the state
• Comparative static analysis


  Examines the effect on equilibrium of a change in the external conditions affecting a market
• Competitive market


  A market in which individual firms cannot influence the price of the good or service they are selling, because of competition from other firms
• Complements


  Two goods are said to be complements if an increase in the price of one good causes the demand for the other good to fall
• Consumer surplus


  The value that consumers gain from consuming a good or service over and above the price paid
• Consumption externality


  An externality that affects the consumption side of a market, which may be either positive or negative
• External cost


  A cost associated with an individual's (a firm's or household's) production or other economic activities, which is borne by a third party and is not reflected in market prices
• Externality


  A cost or a benefit that is external to a market transaction, and is thus not reflected in market prices
• Factors of production


  Resources used in the production process, particularly including labour, capital, and entrepreneurship
• Firm


  An organisation that brings together factors of production in order to produce output
• Free-rider problem


  When an individual cannot be excluded from consuming a good, and thus has no incentive to pay for its provision
• Government failure


  A misallocation of resources arising from government intervention that causes a divergence between marginal social benefit and marginal social cost
• Gross domestic product (GDP)


  A measure of the economic activity carried out in an economy over a period
• Incidence of a tax


  The way in which the burden of paying a specific tax is divided between buyers and sellers
• Income elasticity of demand (YED)

  A measure of the sensitivity of quantity demanded to a change in consumer incomes
• Indirect tax


  A tax levied on expenditure on goods or services (as opposed to a direct tax, which is a tax charged directly to an individual based on a component of income)
• Inferior good


  One where the quantity demanded decreases in response to an increase in consumer incomes
• Internalising an externality


  An attempt to deal with an externality by bringing an external cost or benefit into the price system
• Law of demand


  A law that states that there is an inverse relationship between quantity demanded and the price of a good or service, ceteris paribus
• Luxury good


  One for which the income elasticity of demand is positive, and greater than 1, such that as income rises consumers spend proportionally more on the good
• Macroeconomics


  The study of the interrelationships between economic variables at an aggregate (economy-wide) level
• Marginal analysis


  An approach to economic decision making based on considering the additional (marginal) benefits and costs of a change in behaviour
• Marginal social benefit (MSB)


  The additional benefit that society gains from consuming an extra unit of a good
• Marginal cost


  The cost of producing an additional unit of output
• Market equilibrium


  A situation that occurs in a market where the price is such that the quantity that consumers wish to buy is exactly balanced by the quantity that firms wish to supply
• Market failure


  A situation in which the free market mechanism does not lead to an optimal allocation of resources, where there is a divergence between marginal social benefit and marginal social cost
• Merit good


  A good that brings hard-core benefits to consumers such that society believes it will be underconsumed in a free market
• Microeconomics


  The study of economic decisions taken by individual economic agents, including households and firms
• Mixed economy


  An economy in which resources are allocated partly through price signals and partly on the basis of intervention by the state
• Private good


  A good that, once consumed by one person, cannot be consumed by somebody else; such a good has excludability and is rivalrous
• Producer surplus


  The difference between the price received by firms for a good or service and the price at which they would have been prepared to supply that good or service
• Production externality


  An externality that affects the production side of a market, which may be either positive or negative
• Production possibility frontier (PPF)


  A curve showing the maximum combinations of goods or services that can be produced in a given period with available resources
• Prohibition


  An attempt to prevent the consumption of a demerit good by declaring it illegal
• Public good


  A good that is non-exclusive and non-rivalrous in consumption, and is thus provided by the state