AS Microeconomics definitions

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Wants
The desire to possess or do
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Needs
Require becuase it is necessary, not becuase it is desirebale
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Scarcity
A situation that arises because people have unlimited wants in the face of limited resources.
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Basic Economic Problem
Human wants are unlimited, but the means to satisfy human wants are scarce
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Trade-off
A balancing of factors which are not attainable at the same time
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Opportunity Cost
In decision making, the value of the next best alternative forgone.
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Factors of Production
Resources uses in the production process; inputs into production, including capital, labour, land and entrepreneurship
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Labour
Human input into the production process; a factor of production
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Land
A natural resource, inclusing land itself as well as everything that naturally occurs on it; a factor of production
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Capital
Man-made aid to production;a factor of production
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Entreprise
The risk of taking involved in organising the other factors of production;a factor of production
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Factor Endowment
The amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing
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Free Market Economy
One in which resource allocation is guided by market forces without intervention by the state.
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Economic Goods
Have a benefit to society, a degree of scarcity and an opportunity cost associated with their production
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Free Goods
Can be produced at a zero opportunity cost to society and are not scarce
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Free market Economy
A free market is a market economy system in which the prices for goods and services are set freely by consent between vendors and consumers, in which the laws and forces of supply and demand are free from any intervention by a government
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Command/Centrally Planned Economy
Decisions on resource allocation are made by the state.
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Market Economy
Market forces are allowed to guide the allocation of resources within a society.
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Mixed Economy
Resources are allocated partly through price signals and partly on the basis of direction by government.
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Capitalism
A system of production in which there is private ownership of productive resources, and individuals are free to pursue their objectives with minimal interference from government.
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Invisible Hand
A term used by Adam Smith to describe the way in which resources are allocated in a market economy.
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Production Possibility Frontier/Curve
A curve showing the maximum combinations of goods or services that can be produced in a set period of time given available resources.
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Positive Statement
A statement about what is i.e. about facts.
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Normative Statement
A statement involving a value judgment that is about what ought to be.
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Microeconomics
The study of economic decisions taken by individual economic agents, including households and firms
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Macroeconomics
The study of the interrelationships between economic variables at an aggregate (economy-wide) level.
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Choice
An act of choosing between two or more possibilities
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Model
A simplified representation of reality used to provide insight into economic decisions and events.
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Economic Growth
An expansion in the productive capacity of the economy.
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Gross Domestic Product (GDP)
A measure of the economic activity carried out in an economy during a period.
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Economic Agents
Government, firms and households (consumers) whose decisions influence the allocation of reasources in an economy
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Resource Allocation
The way in which a society's productive assets are used amongst their alternative uses.
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Productive Efficiency
Attained when a firm operates a minimum average total cost, choosing an appropriate combination of inputs (cost efficiency) and producing the maximum output possible from those inputs (technical efficiency).
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Pareto Optimum
An allocation of resources is said to be a pareto optimum if no allocation of resources can make an individual better off without making some other individual worse off.
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Division of Labour
A process whereby the production procedure is broken down into a sequence of stages, and workers are assigned to particular stages.
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Economics
The study of how to allocate scarce resources among alternative uses
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Household
A group of people whose spending decisions are connected
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Production
The output of goods and services
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Specialisation
Refers to a supituation in which individuals, firms or whole economies concentrate on the production of those goods and services in which they have an advantage
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Money
A current medium of exchange in the form of coins and banknotes
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Barter
To trade goods or services without the exchange of money
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Trading Posiblities Curve (TPC)
Shows the consupmtin possibilties under condition of free trade
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Margin
The concept of margin applies to decision making when alteratives are compared against each other by weighing up small (incremental) chnages
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Marginal Principle
The idea that economic agents may takes decisions by considering the effect of small changes from an exisiting situation assuming the aconomic agents are rational and have clear objectives
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Marginal Utility
The additional utility gained from consuming an extra unit of a good (or service)
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Utility
The satisfaction recived from consuming a good or service
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Law of Diminishing Utility
States that th more units of a good are consumed, the lower the utlity from consuming those additonal units
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Homo economicus
the figurative human being characterized by the infinite ability to make rational decisions
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Behavioural economics
A branch of economics that builds on the psycology of human behaviour in decision making
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Rational decision making
A decision that allows an economic agent to maximise their objective, by setting the marginal benefit of an action equal to its marginal cost
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The equi-marginal principle
That a consumer does best in utility terms by consuming at the point where the ratio of marginal utilities from two goods is equal to the ratio of their prices
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Budget line
Shows the boundary of an individual's consumption set, given the amount avaliable to spend and he prices of the goods
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Rationality
the quality or state of being reasonable, based on facts or reason. Rationality implies the conformity of one's beliefs with one's reasons to believe, or of one's actions with one's reasons for action
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Incentive
a thing that motivates or encourages someone to do something
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Economic efficiency
A situation in which both productive efficiency and allocative efficiency have been reached
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Maximisation
Increased to the greatest possible amount or degree
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Objectives
something that one's efforts or actions are intended to attain or accomplish
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Demand
The quantity of a good or service that consumers are willing and able to buy at any possible price in a given period
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Market
A set of arrangements that allows transactions to take place
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Derived demand
When a product is consumed not for its owns sale but for the goods it produces
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Joint demand
Demand for the inter-dependant goods (known as complements)
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Composite demand
Demand for a good which has multiple uses
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Competitive demand
Demand for goods which are in competition with each other
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Ceteris Paribus
A Latin phrase meaning 'other things being equal'; it is used in economics when we focus in changes in one variable while holding other influences constant
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Price
the sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale
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Quantity
a particular or indefinite amount of anything
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Income effect
The income effect is the change in an individual's or economy's income and how that change will impact the quantity demanded of a good or service
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Substitution effect
The idea that as prices rise (or incomes decrease) consumers will replace more expensive items with less costly alternatives
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Normal Good
One where the quantity demanded increases in response to an increase in consumer incomes
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Inferior Good
One where the quantity demanded decreases as a responce to increase in consumer incomes
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Giffen Good
A good where higher price causes an increase in demand (reversing the usual law of demand), the increase in demand is due to the income effect of the higher price outweighing the substitution effect
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Demand Curve
A graph showing how much of a good will demanded by consumers at any given price
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Law of demand
The law that states that there is an inverse relationship between quantity demanded and the price of a good or service, ceteris paribus)
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Non-price determinants of demand
SPITE - substitutes and complements, population (demographics), income, tastes and preferences, expected future prices
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Snobb effect
a phenomenon referring to the situation where the demand for a certain good by individuals of a higher income level is inversely related to the demand for the good by individuals of a lower income level
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Veblen Good
A good where demand rises as price rises
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Consumer Surplus
The value that consumers gain from consuming a god or service over and above the price paid
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Marginal Social Benefit
The additional benefit that society gains from consuming an extra unit of a good
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Supply
The number of goods or services a business is willing and able to supply at a given price over a set period of time
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Joint Supply
When a firm produces more than one product together (e.g. gold and copper)
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Competitive Supply
When a firm uses its factors of production to produce alternative goods (e.g. different root vegetables)
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Composite Supply
Where a product produced by a firm serves more than one purpose (e.g. grapes - wine/raisins)
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Firm
An organisation that brings together the factors of production to produce output
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Competitive Market
Where individual firms can't influence the price of goods/services they are selling because of competition form other firms
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Producer Surplus
The difference between the price received by firms for a good/service and the price at which they would have been prepared to supply that good or service
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Signalling Function of Prices
Prices are adjusted to reflect surpluses and scarcities - they are adjusted to demonstrated where resources are required and where they are not
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Rationing Function of Prices
Prices serve to ration scarce resources when demand in a market outstrips supply; When there is a shortage, the price is bid up – leaving only those with the willingness and ability to pay to purchase the product
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Incentive Function of Prices
For competitive market to work, economic agents must respond to appropriate price signals
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Non-price determinants of supply
SCENT - subsidies & taxes, costs, expected future prices, number of firms, technolgy
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Market Equilibrium
A situation that occurs in a market when the price is such that the quantity that consumers wish to buy is exactly balanced by the quantity that firms wish to supply
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Excess Supply
the quantity of a good or service supplied is more than the quantity demanded, and the price is above the equilibrium level determined by supply and demand
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Excess Demand
Excess demand is created when price is set below the equilibrium price because the price is so low, too many consumers want the good while producers are not making enough of it
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Financial Markets
A financial market is a market in which people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand
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Commodity Markets
A commodity market is a market that trades in primary rather than manufactured products - soft commodities are agricultural products such as wheat, coffee, cocoa and sugar
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Labour Market
A labour market is the place where workers and employees interact with each other
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Derived Demand
Demand for a factor of production or a good which derives not from the factor or good itself but from the goods it produces
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Comparative Static analysis
Examines the effect on equilibrium of a change in the external conditions affecting a market
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Model
A simplified representation of reality used to provide insight to economic decisions and events
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Elasticity
A measure of the sensitivity of one variable to changes in another variable
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Price Elasticity of Demand (PED)
A measure of the responsiveness of quantity demanded to a change in price
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Price Elasticity of Supply (PES)
A measure of responsiveness of quantity supplied to a change in price
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Income Elasticity of Demand (YED)
A measure of responsiveness of quantity demanded to a change in incomes
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Cross Elasticity of Demand (XED)
A measure of responsiveness of quantity demanded of one good to a change in price of another
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Law of Demand
A law that states there is an inverse relationship between between quantity demanded and price of a good or service, ceteris paribus
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Unit Elastic
Describes a supply or demand curve which is perfectly responsive to changes in price; that is, the quantity supplied or demanded changes according to the same percentage as the change in price = 1
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Total Revenue
total receipts from sales of a given quantity of goods or services; it is the total income of a business and is calculated by multiplying the quantity of goods sold by the price of the goods
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Sunk costs
Costs incurred by a firm which cannot be recovered if the firm ceases trading
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Inferior Good
One where the quantity demanded decreases as a response to an increase in consumer incomes; YED
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Normal Good
One where quantity demanded increases in response to an increase in consumer incomes, 0
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Superior Good
One for which income elasticity of demand is greater than 1, such that incomes rise, consumers spend proportionally more on the good
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Necessity
the state or fact of being required
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Substitutes
Two goods are substitutes if consumers regard them as alternatives, so demand for one is likely to rise as price of the other good rises
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Complements
Two goods are complements if people tend to consume them jointly, so that an increase in price of one results in a fall in demand for the other too
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Non-Related Goods
Two goods with that have a cross elasticity of 0, or close to 0, where price of one good changing has no effect on the other goods demand
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Commodities
A raw material or primary agricultural product that can be bought and sold, such as copper or coffee
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Durability
The ability of a good to yield utility over time
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Perishable Goods
Goods that cannot be stores; they lose utility as time goes on
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Stock
the goods or merchandise kept on the premises of a shop or warehouse and available for sale or distribution
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Capacity Utilization
The extent to which a productive asset is being used to produce goods or servies
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Direct Tax
a tax, such as income tax, which is levied on the income or profits of the person who pays it, rather than on goods or services
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Indirect Tax
a tax levied on goods and services rather than on income or profits
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Ad Valorem Tax
A tax levied on a commodity set as a percentage of the selling price
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Per Unit Tax
a tax that is defined as a fixed amount for each unit of a good or service sold; it is thus proportional to the particular quantity of a product sold, regardless of its pric
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Subsidy
A grant given by the government to producers to encourage production of a good or service
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Tax Incidence (burden)
the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately has to pay, the tax
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Mariginal social cost
The cost to society of producing an extra unit of good
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Marginal social benefit
The additional benefit that society gains from consuming an extra unit of good
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Externality
A cost or benefit that is external to the market transaction, and thus is not reflected in market prices
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External cost
A cost that is associated with an individuals (a firm or household's) production or other economic activites, which is bourne by a third party
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Production externality
An externality that effects the production side of a market, which may be either positive or negative
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Private cost
A cost incurred by an individual (firm or consumer) as part of its production or other economic activites
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Private Good
A good that, once consumed by one person cannot be consumed by somebody else; such a good has excludability and rivalrous
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Public good
A good that is non-exclusive and non-rivalrous; consumers cannot be exluded from consuming the good, and consumption by one person does not affect the amoun of the good avaliable for others to consume
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Consumption externality
An externality that affects the consumption side of a market, which may be either positive of negative
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Marginal private benefit
the additional benefit gained by an individual by consuming an etra unit of good
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Marginal private cost
The cost to an indivudual of producing an extra unit of good
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Marginal cost
The cost of producing an additional unit of good
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Private Good
Goods that once consumed by one person, cannot be consumed by someone else; they are both rivalrous and excludable
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Quasi-public Good
Goods that have many but not all characteristics of a public good
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Non-excludability
The producer cannot prevent particular individuals from enjoying the good
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Non-rivalrous (non-dimminishable)
One persons consumption of the good does not prevent others from enjoying it
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Non-rejectability Principle
The collective supply of a public good means it cannot be rejected by certain people (e.g. nuclear defense)
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Zero Marginal Cost
The cost of supplying one extra person a public good is zero (if it is available to one, it is available to all at no extra cost)
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Internalize the exertanilty
The market-driven approach to correcting externalities is to "internalize" third party costs and benefits, for example, by requiring a polluter to repair any damage caused (many cases internalizing is not feasible e.g. can't determine monetary value)
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Ad valorem tax
(Latin for "according to value") A tax levied on a commodity set as a percentage of the selling price
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Hypothecation
the established practice of a borrower pledging an asset as collateral for a loan, while retaining ownership of the assets and enjoying the benefits therefrom
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Under-consumption
inadequate consumer demand relative to the amount produced
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Under-production
produce in a quantity insufficient to meet the need or demand
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Information failure
a type of market failure where individuals or firms have a lack of information about economic decisions
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Market failure
allocation of resources by a free market mechanism in not efficient
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Asymmetric information
A situation in which some economic agents have better information about market conditions than others
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Moral Hazard
When a person who has taken out insurance is prone to taking more risks
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Marginal external benefit
The per unit change that accrues when the activities of one group have a favorable effect on another group
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Positive externality of consumption
occur when there is a positive externality created by the consumption of certain goods
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Negative externality of consumption
occur when there is a negative externality created by the consumption of certain goods
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Positive externality of production
occur when there is a positive externality created by the production of certain goods
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Negative externality of production
occur when there is a negative externality created by the production of certain goods
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Welfare gain
The economic welfare that is gained as a result of increasing or decreasing the production and consumption of goods or resource
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Welfare loss
The economic welfare that is lost as a result of too much or too little production and consumption of a good or resource
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Sustainable development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs
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Environmental Kuznets curve
a hypothesized relationship between environmental quality and economic development: various indicators of environmental degradation tend to get worse as modern economic growth occurs until average income reaches a certain point on the course of devel
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Tragedy of the commons
when individuals neglect the well-being of society in the pursuit of personal gain
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NIMBY (Not In My Back Yard)
a person who objects to the siting of something perceived as unpleasant or hazardous in their own neighbourhood, especially while raising no such objections to similar developments elsewhere
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Renewable resources
a substance of economic value that can be replaced or replenished in the same amount or less time as it takes to draw the supply down
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Non-renewable resources
a resource of economic value that cannot be readily replaced by natural means on a level equal to its consumption
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Deadweight loss
loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable
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Government Intervention
Regulatory actions taken by a government in order to affect or interfere with decisions made by individuals, groups, or organizations regarding social and economic matters
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Taxation
The levying of tax (money paid as tax)
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Government failure
A misallocation of resources arising from government intervention
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Excess burden of sales tax
The deadweight loss to a society following the imposition of a sales tax
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Incidence of a tax
The way in which the burden of paying a sales tax is divided between buyers and sellers
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Tax
a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions
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Specific tax
A tax of a fixed amount imposed of purchases of a commodity
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Subsidy
A grant given by the government to producers to encourage production of a good or service
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State provision
The state providing merit goods, goods with positive externalities that
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Buffer stocks
A scheme intended to stabilise the price of a commodity by buying excess supply in periods when supply is high, and selling when price is low
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Minimum wage
A system designed to protect the low paid by setting a minimum wage rate that employers are permitted to offer workers
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Price controls
a government regulation establishing a maximum price to be charged for specified goods and services, especially during periods of war or inflation
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Prohibition
An attempt to prevent the consumption of a demerit good by declaring it illegal
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Regulation
a rule or directive made and maintained by an authority
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Information dissemination
To spread information and knowledge widely
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State provision
State providing merit good, goods with positive externalities that are not recognized by the market mechanism and public goods (where there is a missing market - the market fails to provide them because of the free rider problem)
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Social CBA (cost-benefit analysis)
process for evaluating the merits of a particular project or course of action in a systematic and rigorous way, where the project has a broad impact across society
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Shadow price
monetary values assigned to currently unknowable or difficult to calculate costs
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Discount
a deduction from the usual cost of something
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NVP (net present value)
a calculation that compares the amount invested today to the present value of the future cash receipts from the investment
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Arbitrage
the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset
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1st degree (perfect) price discrimination
the seller will charge each customer the maximum price that he or she is willing to pay
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Cost-benefit analysis
process for evaluating the merits of a particular project or course of action in a systematic and rigorous way
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Price discrimination
a pricing strategy that charges customers different prices for the same product or service
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Merit good
Goods bring unanticipated benefits to a consumer, MSB>MSC, merit goods are under-consumed in a free market
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Demerit good
Goods bring less benefit to a consumer than they expect, MSC>MSB, demerit goods are over-consumed in a free market
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Price floor
Setting a minimum price level above the market equilibrium
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Price ceiling
Setting a price maximum below the market equilibrium
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Card 2

Front

Require becuase it is necessary, not becuase it is desirebale

Back

Needs

Card 3

Front

A situation that arises because people have unlimited wants in the face of limited resources.

Back

Preview of the back of card 3

Card 4

Front

Human wants are unlimited, but the means to satisfy human wants are scarce

Back

Preview of the back of card 4

Card 5

Front

A balancing of factors which are not attainable at the same time

Back

Preview of the back of card 5
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