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52 Cards in this Set
- Front
- Back
The Economic Problem |
The need to make choices regarding how to allocate limited resources between unlimited and competing wants |
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Specialisation |
The concentration of a worker, firm, region or country on a narrow range of tasks or goods and services |
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Opportunity Cost |
The next best alternative foregone when a choice is made |
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Production Possibility Curve (PPC) |
The maximum output combinations of two goods and services that can be produced with all resources fully employed |
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Factors of Production |
Land, labour, capital and enterprise |
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Market |
Any interaction between buyers and sellers for the exchange of goods and services |
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Demand |
The quantity of a good or service that consumers are willing and able to purchase at a given price over a specified period of time |
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The Determinants of Demand |
The price of the good or service The prices of substitutes The prices of complements Households' disposable income and wealth Tastes and fashion |
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Ceteris paribus |
All other factors (i.e. the other determinants of demand) remaining constant |
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Price Elasticity of Demand (PED) |
The responsiveness of the quantity demanded to a change in price (% change in quantity demanded / % change in price) Demand is price-elastic if PED > 1 (ignoring the -) Demand is price-inelastic if 0 < PED < 1 |
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Cross Elasticity of Demand (XED) |
The responsiveness of the quantity demanded of product A to a change in the price of product B (% change in the quantity demanded of product A / % change in the price of product B) (remember to comment on the sign and size) |
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Substitutes |
Two goods or services that perform a similar function Products that are in competitive demand Have a positive XED |
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Complements |
Two goods or services that are consumed together Products that are in joint demand Have a negative XED |
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Income Elasticity of Demand (YED) |
The responsiveness of the quantity demanded to a change in income (% change in quantity demanded / % change in income) (remember to comment on the sign and size) |
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Normal good |
Good or service for which the demand increases as income increases Has a positive YED |
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Inferior good |
Good or service for which the demand decreases as income increases Has a negative YED
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Revenue |
Price multiplied by quantity demanded |
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Consumer surplus |
The difference between the price consumers are willing to pay and the market price actually paid |
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Supply |
The quantity of a good or service that producers are willing and able to sell at a given price over a specified period of time |
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Producer surplus |
The difference between the price that producers are willing to supply at and the market price actually received |
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Allocative efficiency |
Achieved where supply equals demand, resources are allocated in accordance with consumers' wants and consumer welfare is maximised |
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Market failure |
Where the free market mechanism fails to achieve allocative efficiency |
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Externalities |
Spillover effects on third parties arising from production or consumption |
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Private costs |
Costs incurred by the firm to acquire the factors of production necessary to produce the good or service being supplied |
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External costs |
The costs imposed on third parties as a consequence of negative externalities |
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Social cost |
The total cost to society of producing a good or service, equal to private costs plus external costs
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Negative externality |
Adverse or unfavourable spillover effect on a third party arising from production or consumption; exists when the social cost of an activity is greater than the private cost |
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Positive externality |
Beneficial or favourable spillover effect on a third party arising from production or consumption; exists when the social benefit of an activity is greater than the private benefit (or the PC > SC) |
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Social optimum |
The best possible outcome from society's point of view; exists where social cost equals social benefit |
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Merit good |
A good or service which is better for consumers than they realise; a good or service with more private benefits than consumers realise (consumption also tends to create positive externalities) |
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Demerit good |
A good or service which is worse for consumers than they realise; a good or service with more private costs than consumers realise (consumption also tends to create negative externalities) |
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The Determinants of Supply |
The price of the good or service The costs of production Changes in productivity Changes in technology / capital investment Taxes and/or subsidies Weather / climate (for primary products) Expected price changes Prices of other goods that could be supplied
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State provision |
Where market failure leads to a good or service being provided by the state, often free at the point of consumption (e.g. roads, health care) (commonly used for public goods, and often alongside private provision for quasi-public goods) |
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The Determinants of the PED |
Whether consumption is habitual The percentage of income spent on the good or service The time period available for adjustments to consumer spending patterns The availability of substitutes |
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Information failure |
A lack of information resulting in consumers and producers making decisions that do not maximise welfare |
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Competitive market |
The interaction of supply and demand without government intervention to set an equilibrium price and quantity for a good or service |
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Asymmetric information |
Where information is not shared equally between producers and consumers |
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Public good |
Collectively consumed goods that are both non-excludable and non-rival |
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Non-excludability |
Where an individual cannot be prevented from consuming a good or service |
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Non-rivalry |
Where the consumption of a good or service by one individual doesn't reduce the amount available for others |
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Free rider |
Someone able to enjoy the benefits of consuming a good or service without paying for its provision |
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Quasi-public good |
Goods or services having some but not all of the characteristics of a public good |
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Indirect tax |
A tax levied on goods and services, the burden of which can be passed on to others (usually from producers to consumers) |
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Subsidy |
A payment to producers or consumers, usually made by the government, to encourage production or consumption |
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Regulation |
Laws, standards and guidelines imposed by the government to influence the behaviour of producers and consumers and reduce market failure |
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Tradable permit |
Gives the holder the right to generate a specified level of pollution |
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Market equilibrium
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The combination of price and quantity that corresponds to the point of intersection of the supply and demand curves
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Private benefits
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The benefits accruing to individuals arising from the consumption of a good or service
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External benefits
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The benefits enjoyed by third parties as a consequence of positive externalities |
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Social benefit
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The total benefit to society of consuming a good or service, equal to private benefits plus external benefits
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Information provision
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Providing information to encourage or discourage consumption of a good or service (may be done directly by the government or as part of the regulation of a particular market) |
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Government failure
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Where an attempt by government to correct a market failure makes the market failure worse or creates an additional market failure
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