Key definitions

• What are administrative costs?

  Costs that are not directly related to a business operation, e.g., paperwork.
• What does asymmetric information refer to in a transaction?

  When one party knows more or has better information than the other party.
• What is complete market failure?


  Occurs where the market is missing.
• What is a demerit good?


  A good where production or consumption has a negative impact on the consumer.
• How is economic welfare defined?

  Quality of life of the population.
• What is the free-rider problem?

  Once a public good is produced, there is no way to control who benefits from it.
• What does government intervention mean?

  When a government actively intervenes and affects market operation.
• What is meant by immobility of factors of production?

  When it is hard for factors of production to move across different areas within the economy.
• What is imperfect information?

  When an economic agent does not hold all the necessary information to make an informed decision about a product.
• What is an incentive in economics?

  Something that motivates an agent in the economy.
• What does income inequality refer to?

  Differences in size of earnings between households/individuals.
• What are market distortions?

  Where interference in a market affects behaviour and prices/output.
• What is a market economy?


  Where output and prices are determined by the workings of supply and demand.
• What is market failure?

  Where a market leads to a misallocation of resources.
• What is a merit good?


  A good where production or consumption creates external benefits.
• What does misallocation of resources mean?


  Resources are not distributed optimally.
• What is monopoly power?

  The ability of a firm to be a price maker rather than a price taker; the ability to set prices.
• What is a monopoly?

  A market with only one supplier/one dominant supplier.
• What is a negative externality?

  Where external costs are passed onto third parties through consumption/production of a good.
• What does non-excludable mean?

  A good or service where you are unable to prevent non-paying consumers from benefiting or using the good.
• What is meant by non-rival?

  Where one person’s consumption of a good or service does not decrease the amount available for consumption by another consumer.
• What is partial market failure?

  This is where a market exists but contributes to resource misallocation.
• What is a positive externality?


  Where a good has positive third-party effects when consumed or produced.
• What are price controls?

  Government controls on prices, e.g., maximum or minimum prices.
• What is the price mechanism?

  The way in which prices are determined through forces of supply and demand.
• What is a private benefit?


  Benefits incurred to the individual through consumption or production.
• What is a private cost?


  Costs incurred to the individual through consumption or production.
• What are public goods?

  Goods that benefit and can be used by all members of society.
• What are quasi-public goods?


  Goods that have characteristics of both public and private goods.
• What does rationing mean?

  Limiting the amount or quantity of a good available.
• What are regulations?

  Laws or rules made by the government and other authorities.
• What is signalling in economics?

  Where a change in the price of goods or services shows that supply or demand should be adjusted.
• What are social benefits?

  The sum of private benefits and external benefits.
• What are social costs?

  The sum of private costs and external costs.
• What is state provision?

  Where the government provides a good or service.
• What are subsidies?

  Where the government gives money directly to firms so that firms can continue production.
• What are unintended consequences?

  Actions of people or governments that have consequences which were not anticipated.