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65 Cards in this Set

  • Front
  • Back

Positive Economics

deals with objective or scientific explanations of the economy. Positive statements are value free and can be proved or disproved.

Normative Economics

attempts to describe what ought to be. Normative statements contain a value judgement and they cannot be scientifically proved or disproved.

Basic Economic Problem

rises when human wants are infinite whilst resources are scarce.

Opportunity Cost

is the benefit lost from the next best alternative forgone.

Economics Goods

are resources which are scarce because their use has an opportunity cost.

Free Goods

are resources which are in unlimited supply and which therefore have no opportunity cost.

Production Possibility Frontier (PPF)

is a curve or a boundary which shows the combinations of two or more goods and services that can be produced whilst using all of the available factor resources efficiently.

Land

is the natural resources available for production.

Labour

is our human input into the production process.

Capital

means investment in goods that are used to produce other goods in the future.

Enterprise

is the activity of entrepreneurs. An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e profit).

Specialisation

happens when one individual, region or country concentrates in making one good.

Division of Labour

is a particular type of specialisation where the production of a good is broken up into many separate tasks, each performed by one person.

Supply

is the quantity ofa good or service that firms are willing to sell at a given price over a given time period.

Demand

is the quantity of a good or service that consumers are willing to buy at a given price over a given time period.

Equilibrium Price

is the price at which the quantity demanded is equal to the quantity supplied.

Expansion

when prices fall which causes movement along the demand or supply curve.

Contraction

when prices rise which causes movement along the demand or supply curve.

Price Mechanism (Invisible Hand)

refers to the way price responds to changes in demand or supply for product or factor inputs, so that a new equilibrium position is reached in a market.

Consumer Surplus

is the difference between how much buyers are willing to pay for the good and what they actually pay.

Producer Surplus

is the difference between the market price which firms receive and the price at which they are willing to supply.

Complement Goods

are in joint demand.

Substitute Goods

can be replaced by another good (competitor).

Derived Demand

is when demand for one good is as a result of demand for another good.

Composite Demand

is when a good is demanded for two or more distinct uses.

Joint Supply

is when two or more goods are produced together.

Price Elasticity of Demand (PED)

measures how demand for a product changes in response to a change in price.

Price Elasticity of Supply (PES)

measures the responsiveness of supply to changes in price.

Cross Elasticity of Demand (XED)

measures how demand for a product changes in response to a change in price of another good.

Income Elasticity of Demand (YED)

measures how demand for a product changes in response to a change in consumers' price.`

Normal Goods

where demand for a good increases when income increases and YED is positive.

Inferior Goods

where demand for a good falls when income increases and YED is negative.

Luxury Good

is a good for which demand increases more than proportionally when incomes increases. Luxury goods have a YED greater than 1.

Elastic Demand

means that the change in quantity demanded is proportionately more that the change in price.

Inelastic Demand

means that the change in quantity demanded is proportionately less than the change in price.

Unitary Demand

is when the change is quantity demand is proportionately the same as the change in price.

Perfectly Elastic Demand

means that a change in price leads to an infinite change in the quantity demanded.

Perfectly Inelastic Demand

means that a change in price leads to no change in the quantity demanded.

Total Revenue

is the sum of all money coming into the firm from sales of its product.

Market Economy (Capitalist Economy)

is an economic system which resolves the basic economic problem through the market mechanism.

Command Economy (Planned Economy)

is when the government uses a planning process to allocate resources.

Mixed Economy

is an economy where both the free market mechanism and the government planning process allocate significant proportions of resources.

Market Failure

is when resources are inefficiently allocated due to imperfections in the market mechanism.

Private Cost

is the cost to consumers or firms internal to the exchange.

External Cost

is the negative, unintended spillover effects to third parties.

Social Cost

is the cost to the whole of society, this is the private costs plus the external costs.

Private Benefit

is the benefit to consumers and firms internal to the exchange.

External Benefit

is the positive, unintended spillover effects to third parties.

Social Benefits

is the benefit to the whole of society. This is the private benefits plus the external benefits.

Externalities (or spillover effects)

arise when private costs and benefits are different from social costs and benefits. They occur when the activities of producers and consumers have unintended effects on third parties.

Negative Externality (or External Cost)

occurs when social cost exceeds private cost.

Positive Externality (or External Benefit)

occurs when social benefit exceeds private benefit.

Optimum Provision

of a good is when marginal social benefit (MSB) equals marginal social cost (MSC).

Internalising an externality

an attempt to deal with an externality by bringing an external cost or benefit into the price system.

Subsidy

is a grant which lowers the price of a good, usually designed to encourage production or consumption of a good.

Indirect Tax

is a tax on expenditure and it is levied on the producer.

Ad Valorem Tax

is levied as a % of the value of the good.

Specific Tax (Unit Tax)

increases with the volume of goods produced, not the value.

Incidence of Taxation

refers to who ends up paying, the producer or consumer.

Public Goods

are a 'missing market'; they are not provided by the free market and can only be provided collectively. They have two characteristics of non-excludability (free rider problem) and non-rivalry in consumption.

Quasi-Public Goods

possess some of the characteristics of public goods for some, but not all of the time.

Asymmetric Information

a situation in which some participants in a market have better information about market conditions than others.

Buffer Stock

surplus stock that is bought up when the harvest is good with a view to selling when it is poor, in an attempt to stabilise commodity prices.

Government Failure

occurs when government intervention leads to a net loss in economic welfare.

Equilibrium

Occurs in the marketplace when quantity demanded exactly equals quantity supplied. This is the price at which there is no tendency to change.