Theme 1 Economic Definitions
Theme 1 Economic Definitions
THEME 1 – A LEVEL – DEFINITIONS
Scarcity & The economic problem
Scarcity occurs due to there being a finite amount of resources and unlimited wants.
This is the next best alternative forgone (given up).
All other factors remaining the same
A PPF curve shows the maximum combination of two goods and services an economy can produce when all its resources are fully and efficiently employed.
A direct tax is a tax levied directly on a individual or firm. They do not have choice to pay it or not. E.g Income Tax and Corporation Tax.
A tax imposed on expenditure, it is indirect in that the tax is only paid when the product on which the tax is levied is purchased.
An indirect tax that is a fixed amount per unit of good.
Ad Valorem Tax
This a percentage tax. The higher the price the greater the percentage of the tax will be.
A grant provided by the government to reduce the cost of production, increase output and lower price.
A free market occurs when the forces of supply and demand determine prices. There is no government intervention.
Market failure occurs when the price mechanism of supply & demand fails to efficiently allocate resources. This normally happens in the free market.
Price elasticity of demand (PED) measures the responsiveness of the demand for a good due to a change in its price.
Price elasticity of demand (PES) measures the responsiveness of the supply for a good due to a change in its price.
Cross elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good.
Income elasticity of demand (YED) measures the responsiveness of the quantity demanded for a good or service to a change in income.
Normal Goods (+YED)
Normal goods tend to have a positive YED. This is because as incomes increase consumers tend to purchase what they deem to be better products (Normal Goods)
Inferior Goods (-YED)
Inferior goods tend to have a negative YED. This is because as incomes decrease consumers tend to switch demand from normal goods to inferior goods.
Substitute goods (XED is positive)
These are goods which provide a viable alternative to each other. They are similar goods that compete with each other.
E.g. Butter and Margarine
A rise in the price of butter (Good A) would cause an increase in demand for margarine.
Complementary goods (XED is negative)
These are goods which work in conjunction with each other.
E.g. Tennis racket and tennis balls
Complementary goods work together. A fall in the price of a tennis racket would cause an increase in demand for tennis balls.
Demand is the quantity of a good or service that consumers are prepared to buy at a given time period.
Supply is the quantity of a good or service that producers are willing to supply at a given price.
A Mixed Economy
This is an economy where some resources are allocated by the free market (Supply & Demand) and some by the government.
Most of the world’s economies are mixed such as U.S.A, U.K, China, France, Sweden etc.
Command/ Controlled Economies
A command or planned economy occurs when the government controls all major aspects of the economy and economic production. In a command economy, it is the government that decides what to produce, how to produce goods and how to distribute goods and services within the economy.
There is only one major planned economy in the world (North Korea).
There is a mismatch of information as the buyer or seller possesses more information than the other
The same information exists between the buyer and seller
This refers to goods which can be used in the production process of goods and is therefore one of the four factors of production
Goods which are used in the production process for the development of consumer goods
Goods which are bought by households and individuals
The difference between the price a consumer is paying for the good and the highest price he / she is willing to pay
The difference between the price a producer receives for a good and the lowest price he / she is willing to accept
Diminishing Marginal Utility
The idea that any additional benefit gained from the consumption of a good usually declines as extra units are consumed and supports the theory of the demand curve being downward sloping
Division of Labour
Tasks are split amongst the workers during the production process so that each worker performs specific roles in which they are specialised in
This is one of the four factors of production and refers to the ability of entrepreneurs to use their knowledge / skills to produce new goods / services
It combines the other three factors of production
This is occurs when the quantity demanded equals the quantity supplied and is used to determine the price / quantity in the market
Demand is greater than supply as the price is set too low
Supply is greater than demand as the price is set too high
An economic transaction outside of the market mechanism which results in a third party being faced with an external benefit or cost
External Cost / External Benefit
The difference between social cost / benefit and private cost / benefit
It is the cost / benefit a third party not involved in the economic transaction is faced with
Free Rider Problem
The private sector under provide goods which people do not pay for but are still able to receive the benefits from
Regulatory action taken by the government to help resolve any form of market failure
The government intervenes to correct market failure but insteads ends up creating a worser outcome
One of the factors of production and refers to resources such as oil, coal, and physical space
One of the factors of production and refers to human capital
When YED is above 1 and an increase in incomes causes a bigger increase in demand
These provide a benefit to individuals and society through its positive consumption externalities
These are damaging to individuals and society as they provide negative consumption / production externalities
A price ceiling – occurs when a government sets a legal limit on the price of a good / service
A price floor – these are legally enforced by the government to protect producers as they will receive a guaranteed amount of income
Essential goods and services provided by the government, as they are under-provided by the free market due to the free rider problem
They possess two main characteristics: non-excludability and non-rivalry / non-diminshability
These are opposite to public goods as they are rivalry and excludable
Decision-making which allows economic agents to maximise their utility
The satisfaction from consuming a good
Weakness at computation
Consumers are bad at making calculations, estimating probabilities and working out future benefits / costs due to irrational behaviour
The study of human behaviour and societies
Social Optimum Position
The amount at which should be produced / consumed in order to maximise welfare
This is where social cost = social benefit
This is concerned with value judgements and opinions as they are subjective
They often use sentences which include should, could, better / worse
This is concerned with factual information and can be tested to be true or false. They usually use a scientific approach towards economics