Definitions

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Microeconomics
the study of how households & firms make decisions & how they interact in markets
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The basic economic problem
how scarce resources are allocated between infinite wants and needs
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Economic goods
goods which are scarce because their use has an opportunity cost e.g oil
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Free goods
goods which are unlimited in supply & have no opportunity cost e.g sunlight
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Scarcity
when people have unlimited wants in the face of limited resources
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Factors of production
resources used as inputs in the production process including labour, land, capital & entrepenuership
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Opportunity cost
the value of the next best alternative foregone
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Free market economy
the allocation of resources is left to the price mechanism without government intervention
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Mixed economy
resources are allocated partly through price mechanism and partly by government intervention
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Sustainable development
development which meets the needs of the present without compromising the ability of future generations to meet their own needs
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Non-renewable resources
natural resources which cannot be replaced when used up e.g oil
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Renewable resources
natural resources that when used up can be replaces e.g fish and forest
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Production Possibility Frontier
a curve which shows the maximum combination of two goods an economy can produce when all its resources are fully employed
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Economic growth
genuine economic growth is an expansion in productive capacity of the economy (PPF shift to the right)
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Capital Goods
goods that are used to produce other goods or services e.g machinery
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Consumer goods
products used up in consumption e.g clothing, food, fridges
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Specialisation
when individuals or economies in the production of one product
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Division of labour
production is broken down into different tasks and workers are assigned to each task
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Labour productivity
output per worker, or output per hour worked
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Positive statements
a statement based on fact and can be tested as true or false
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Normative statements
a statement based on a value judgement about what ought to be
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Normal good
one where QD rises in response to an increase in consumer incomes. They have positive income elasticity of demand.
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Inferior good
one where QD decreases in response to an increase in consumer incomes e.g public transport. Has negative income elasticity of demandd
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Luxury good
one where as income rises consumers spend proportionally more on the good ie. income elasticity of demand is greater than 1
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Substitutes
goods which are similar and one can be consumed instead of the other. Positive XED
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Complements
goods which are used together such that a rise in the price of one will lead to a fall in demand for another. Positive XED
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PED
measure of the responsiveness of QD following a change in price of a good or service
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YED
measure of the responsiveness of QD following a change in consumer incomes
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XED
measure of the responsiveness of QD of a good or service to the change in price of another good
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PES
measure of the responsiveness of QS following a change in price of a good or service
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Real income
income after the effect of inflation has been taken out
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Indirect taxes
tax on the expenditure on a good or service
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Ad Valorem tax
tax set as a percentage on the price of a good
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Specific tax
a fixed charge imposed per unit of a product (a flat rate tax)
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Subsidy
a grant to firms to encourage an increase in production or reduction in price
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Consumer tax
the amount of tax paid by the consumer
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Producer tax
the amount of tax paid by the producer
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Consumer subsidy
the amount of the subsidy that consumers gain
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Producer subsidy
the amount of the subsidy that producers gain
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Total revenue
Price x Quantity sold
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Percentage change
difference/original x 100
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Consumer surplus
the difference between the price one is prepared to pay and the actual market price
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Producer surplus
the difference between the price a firm is willing to sell a good for and the actual market price
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Price mechanism
where the forces of demand and supply determine the allocation of resources
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Excess supply (surplus)
where the QS exceeds the QD at the current price
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Excess demand (shortage)
where the QD exceeds the QS at the current price
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Derived demand
demand for product X is strongly linked to demand for product Y
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Joint supply
an increase in demand or decrease in supply for one good leads to an increase in demand or decreased supply of another e.g beef and leather
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Composite demand
where a good is demanded for more than one use e.g increase in demand for horse meat means decrease supply for horse riding
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NMW
legal minimum hourly rate of pay per hour below which employers are not allowed to pay
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Market failure
occurs where the price mechanism fails to allocate resources efficiently
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Unstable commodity markets
where commodity markets are characterised by fluctuating prices which makes it difficult to plan for future investment
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Minimum price schemes
a floor price is set by a government agency and the agency purchases any surpluses at this price
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Buffer stock scheme
where and agency sells from its stockpile in times of poor harvest and buys up stock in times of good harvest in order to reduce price fluctuations
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Tradable pollution permits
an allowance on the amount of pollution firms may emit which can be bought and sold on the open market
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Renewable energy certificates
scheme where firms that generate renewable energy are given certificates that they can sell to firms generating carbon emissions
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Carbon offsetting
schemes that enable producers or consumers to offset their carbon emissions by paying for the removal of carbon emissions elsewhere
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Extension of property rights
where the government allocates legal control or ownership of resources and the uses to which those resources can be put.
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Regulation
where the government sets minimum standards or direct controls to correct market failure e.g minimum age for the purchase of alcohol
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Government failure
where government intervenes to correct market failure but makes it worse and leads to a net welfare loss
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Public good
has characteristics of non-rivalry and non-excludability e.g street lighting
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Private good
has characteristics of rivalry and excludability e.g an apple
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Free rider problem
once a good is provided it is possible for people to consume a good without paying for it. Little incentive for producers to supply large quantities
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Imperfect information
where consumers and producers have unequal market information on which to base their decisions; leads to misallocation of resources
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Geographical labour immobility
the inability of labour to move from one area to another to take available work
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Occupational labour immobility
the inability of labour to change occupations to take available work
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Externalities
affects on third parties not involved in the transaction
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External costs
costs external to an exchange or negative third party effects e.g pollution
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External benefits
benefits external to an exchange or positive third party effects
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Private costs
costs internal to an exchange e.g production costs, rent
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Private benefits
benefits internal to an exchange e.g consumer utility, profit
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Social costs
costs that incorporate both private and external costs
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Social benefits
benefits that incorporate both private and external benefits
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Welfare loss
the excess of social cost over social benefit for a given quantity
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Welfare gain
the excess of social benefit over social costs for a given quantity
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Social optimum level of output
where the marginal social benefit (MSB) equal the marginal social cost (MSC)
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Merit goods
goods which tend to be under-consumed if left to the free market e.g vaccinations, fresh fruit and veg
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Demerit goods
goods which tend to be over-consumed if left to the free market e.g cigarettes and alcohol
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Other cards in this set

Card 2

Front

how scarce resources are allocated between infinite wants and needs

Back

The basic economic problem

Card 3

Front

goods which are scarce because their use has an opportunity cost e.g oil

Back

Preview of the back of card 3

Card 4

Front

goods which are unlimited in supply & have no opportunity cost e.g sunlight

Back

Preview of the back of card 4

Card 5

Front

when people have unlimited wants in the face of limited resources

Back

Preview of the back of card 5
View more cards

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