Economics Theme 1: Introduction to Markets and Market Failure

An indirect tax imposed on a good where the value of the tax is dependent on the value of the good, a percentage tax

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

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

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

All other things remaining the same

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

Negative XED; if good B becomes more expensive, demand for good A falls, these are goods which are typically purchased together e.g. fish and chips

Goods bought and demanded by households and individuals

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

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

If the cross elasticity of demand is positive, it means that the two products are substitutes, and an increase in the price of one product will lead to an increase in the demand for the other product. If the cross elasticity of demand is negative, it means that the two products are complements, and an increase in the price of one product will lead to a decrease in the demand for the other product.

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

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

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

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

When resources are allocated optimally, so every consumer benefits and waste is minimised

One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production

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

When price is set too low so demand is greater than supply, therefore the market is in disequilibrium.

When price is set too high so supply is greater than demand,therefore the market is in disequilibrium.

The cost or benefit a third party experiences from an economic transaction outside of the market mechanism

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

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

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

When government intervention leads to a net welfare loss in society

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

The tax burden on the taxpayer

The responsiveness of demand to a change in income

The income elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in income.

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

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

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

When the government intervenes to provide information to correct market failure

One of the four factors of production; human capital

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

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

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources

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

A ceiling price which a firm cannot charge above

A floor price which a firm cannot charge below

Both the free market mechanism and the government allocate resources

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

Where the social costs of producing a good are greater than the private costs of producing the good

A characteristic of public goods; someone cannot be prevented from using the good

Resources which cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed

A characteristic of public goods; one person's use of the good does not prevent someone else from using it

YED>0; demand increases as income increases

Subjective statements based on value judgements and opinions; cannot be proven or disproven

The value of the next best alternative forgone

PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes

PED/PES=0; quantity demanded/supplied does not change when price changes

Where the social benefits of consuming a good are larger than the private benefits of consuming that good

Objective statements which can be tested with factual evidence to be proven or disproven

Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed

The responsiveness of demand to a change in price

The equation you are referring to is the price elasticity of demand equation.

The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves

The cost/benefit to the individual participating in the economic activity

Goods that are rivalry and excludable e.g. chocolate bar

The difference between the price the producer is willing to charge and the price they actually charge

Goods that are non-excludable and non-rivalry e.g. street lamp

Decision-making that leads to economic agents maximising their utility

Laws to address market failure and promote competition between firms

When PED/PES>1 meaning a small change in price leads to a large change in quantity demanded/supplied

When PED/PES<1 meaning a large change in price leads to a large change in quantity demanded/supplied

Resources which can be replenished, so the stock of resources can be maintained over a period of time

The shortage of resources in relation to the quantity of human wants

The cost/benefit to society as a whole due to the economic activity

Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare

The study of societies and human behaviour

The production of a limited range of goods by a company/country/individual so they aren't self-sufficient and have to trade with others

A tax imposed on a good where the value of the tax is dependent on the quantity that is bought

Through taxation, the government provides public goods or merit goods which are underprovided in the free market

Government payments to a producer to lower their costs of production and encourage them to produce more

Positive XED; if good B becomes more expensive, demand for good A rises

The ability and willingness to provide a particular good/service at a given price at a given moment in time

Where buyers and sellers both have access to the same information

Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control the amount of pollution. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute

When PED/PES=1; a change in price leads to a change in output by the same proportion

The satisfaction derived from consuming a good

A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs

An imbalance between supply and demand - such that supply exceeds the level of demand or demand exceeds the available supply.