The economic problem is how to allocate scarce resourses amongst alternative uses.
Factors of Production
Land: All natural resources on, above or below the planet surface; eg. raw materials, the site for an office/shop.
Labour: The quantity and quality of human beings; eg. workers.
Capital: Man made means of production; eg. buildings and machines/capital goods - goods bought by firms so they can be used to produce other goods/services.
Enterprise: The factor of production that organises the other factores of production and takes risks; eg. managers.
The cost, or value, of the next best alternative forgone/given up.
The quantity of a product which consumers are willing and able to buy at various prices over a given period of time(under current conditions).
The quantity of a product wich producers are willing and able to supply at various prices over a given period of time.
Price Elasticity of Demand (PED)
A measure of responsiveness of the quantity demanded of a good to a change in the price of the good.
PED = % change in quantity demanded / % change in price
Income Elasticity of Demand (YED)
A measure of the responsiveness of the quantity demanded of a good to a change in income.
YED = % change in quantity demanded / % change in income
Cross Elasticity of Demand (XED)
A measure of the responsiveness of demand for one good to a change in the price of another good.
XED = % change in quantity demanded of one good(good A) / % change in price of another good(good B)
Price Elasticity of Supply (PES)
A measure of the responsiveness of the quantity supplied(not supply) of a good to a change in the price of the good.
PES = % change in quantity supplied / % change in price
The extra amount a consumer is willing to pay for a product above the price that is actually paid.
The difference between the price a producer would supply a good for and the price they actually receive(the market price).
Where scarce resources are used to produce the products most wanted/demanded by consumers.
Where any output is produced using the least possible amount of scarce resources.
Where both allocative and productive efficiency occure in a market as scarce resources are being used in the most efficient way from consumers point of view.
Where scarce reources are not being used in the best possible way. No allocative and productive efficiency.
When the free market mechanism leads to a missallocation of scarce resources and so fails to achieve the optimum allocation of resources.
When an action taken by one party has an effect on the third parties not involved in the transaction.
The total cost to society of a particular action.
Social Cost = Private Cost + External Cost
The costs directly incurred by an individual or firm engaging in an activity.
Where a third party suffers from a negative side effect imposed on them from the spillover effect of an economic decision in which they are not involved.
Social Cost > Private Cost
The total benefit to society of a particular action.
Social Benefit = Private Benefit + External Benefit
The benefits directly gained by an individual/firm engaging in an activity.
Where a third party benefits from the positive side effect from the spillover effect of an economic decision which they are not involved.
Social Benefit > Private Benefit
Goods which are better for consumers than they realise (due to information failure) and which generate external benefits for third parties.
Goods that are worse for consumers than they realise when they consume it due to information failure.
Goods that are both non-excludable and non-rival wih consumption.
Goods that are both excludable and rival/diminish wih consumption.
Once it is provided to one person, it is provided for all.
If one person is consuming the product, there isn't less for others.
Passing laws and/or setting controls on the quality or quantity of what is produced and consumed in the markets or on the information that must be provided for consumers.
A system aiming to create incentives for firms to reduce the amount of negative externalities they produce, E.g. the polluter pays principle.
A levy by the government on the production of a good.
A payment by the government to a business for producing a product/service.