Economics-Theme 1 Defintitions

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  • Created by: Chloe200
  • Created on: 23-01-18 21:11
Social Science
The study of human behaviour using scientific methods as the basis for its investigation
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Model
Theories often expressed in mathematical terms to make them precise
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Cetris Paribus
All other factors remaining constant
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Positive Statement
A fact that can be accepted or refuted by looking at evidence
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Normative Statemnet
A value judgement
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The Economic Problem
Scarce resources and unlimited wants mean choices must be made about the allocation of resources
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Scarcity
Resources are finite
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Infinite wants
Human needs that are unlimited
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Renewable Resource
Natural resource which can reproduce
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Non-renewable Resource
Natural resources which cannot reproduce and are finite
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Factors of Production
Land, Labour, Capital and Enterprise
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Opportunity Cost
The value of the next best alternative foregone
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Production Possibility Frontier (PPF)
The maximum combination of two goods that an economy can produce if all resources are fully and efficiently employed
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Economic Growth
An increase in the productive potential of the economy (caused by an increase in the quantity or quality of factors of production)
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Capital Goods
Bought by firms. Man-made resource used to produce other goods and services
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Human Capital
The skills and abilities endowed in an individual can be increases with education and training
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Consumer Goods
Bought by the final consumer and used up
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Investment
An increase in the capital stock
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Depreciation
The rate at which capital loses value over time e.g. through wear and tear
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Specialisation
Where a factor of production is devoted to a specific job in the production process. Where a country concentrates on production of a particualr good or service e.g. UK specialises in financial services
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Division of Labour
Splitting up the production process into a series of small tasks where one person concentrates on one small task - Adam Smith
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4 Functions of Money
Means of exchange, Measure of value, Store of Value, Method of Deferred Payment
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Economic System
How an economy resolves the basic economic problem: what, how, and for whom to produce
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Free Market Economy
Where markets (demand and supply) determine the allocation of resources with minimal state intervention e.g. USA
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Mixed Economy
Where resources are allocated by the government and market forces e.g. UK
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Command Economy
Where resources are allocated by the government e.g. North Korea
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Adam Smith
Advocate of free market economics. 1776 wrote 'An Enquiry into the Nature and Causes of the Wealth of Nations' explaining the 'invisible hand' of the market (and division of labour in pin making)
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Fredrich Hayek
Advocate of free market economics. 1944 wrote 'The road to Serfdom' which was very influential on Margaret Thatcher and her government in 1980s
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Karl Marx
1867 published first part of 'Das Capital'. He wanted a new democratic society where there was equality and property would be owned by everyone collectively
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Rational Behaviour
Consumers maximise utility, Producers maximise profits, Factor owners maximise rent, wages etc and Government maximises social welfare
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Utility
Satisfaction
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Behavioural Theory
Consumers may not behave rationally due to; Other people's influence, Habit, Computational weakness
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Demand
The quantity consumers are willing and able to buy at a particular price over a period of time
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Marginal Utility
The additional utility (satisfaction) from consuming one extra unit of a good
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Diminishing Marginal Utility
The additional utility from consuming one extra unit of a good falls as more units are consumed (explains why demand curve slopes down)
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Supply
The quantity firms are willing and able to produce at a particular price over a period of time
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Equilibrium
Where D=S
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Price Elasticity of Demand (PED)
Measures the responsiveness of quantity demanded to change in price
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Income Elasticity of Demand (YED)
Measures the responsiveness of quantity demanded to a change in income
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Cross Elasticity of Demand (XED)
Measures of the responsiveness of quantity demanded of one good to a change in price of another good
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Price Elasticity of Supply (PES)
Measures the responsiveness of quantity supplied to a change in price
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Elastic Price Elasticity of Demand
A change in price leads to a more than proportionate change in quantity demanded
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Inelastic Price Elasticity of Demand
A change in price leads to a less than proportionate chnage in quantity demanded
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Unitary Price Elasticity of Demand
A change in price leads to a proportionate change in quantity demanded
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Perfectly Elastic PED
A change in price leads to an infinited change in quantity demanded
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Perfectly Inelaatic Demanded
A change in price leads to no change in quantity demanded
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Normal Good
As income rises demand for a normal good rises e.g. cars
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Inferior Good
As income rises demand for an inferior good falls e.g. prublic transport
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Substitute Goods
Two goods that are in competitive demand e.g. tea and coffee. XED is positive ( if price of tea rises demand for coffee rises)
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Complementary Goods
Two goods that tend to be used together e.g. petrol and cars. XED is negative(if price of petrol rises demand for cars falls)
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Indirect Tax
Tax on spending
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Specific Tax
Tax is fixed by volume e.g. excise duty on petrol
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Ad Valorem
Tax is a % of the price e.g. VAT
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Subsidy
A grant paid by the government to producers to encourage production or consumption of a good
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Short Run
Period of time where at least one factor of production is fixed
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Long Run
Period of time where all factors of production can be varied
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Market Forces
Demand, supply and price determining the allocation of resources
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Price Mechanism
Demand, supply and price allocating resources
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3 Functions of The Price Mechanism
Rationing function, Signalling function and Incentive function
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Rationing Function
When changes in price lead to more or less being produced so increasing or limiting the quantity demanded by buyers
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Signalling Function
When changes in price give information to buyers and sellers which influence their decisions to buy and sell
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Incentive Function
When chnages in price encourage buyers and sellers to change the quantity they buy/sell
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'Invisible hand'
Where resources are allocated by the decentralised decision making of consumers and producers acting through markets , without any centralised (state) planning
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Consumer Sovereignty
The production of goods is directed by consumer demand
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Consumer Surplus
The difference between the price consumers are willing to pay and the market price. The area below the demand curve and above the market price
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Producer Surplus
The difference between the price producers are willing to receive and the market price. The area above the supply curve and below the market price
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Market Failure
Where the price mechanism leads to an inefficient allocation of resources
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Private Cost
Cost paid for by the producer or consumer
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Private Benefit
Benefit received by the producer or consumer
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External Cost (Negative Externality)
Cost paid by a third party
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External Benefit (Positive Externality)
Benefit received by a third party
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Social Cost
Private cost + external cost
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Social Benefit
Private Benefit + External Benefit
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Marginal Private Benefit (MPB)
The additional benefit to producer or consumer from an extra unit of production
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Marginal Private Cost (MPC)
The additional costs to produce or consumer from an extra unit of production
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Marginal External Benefit (MEB)
The additional benefit to third parties from an extra unit of production
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Marginal External Cost (MEC)
The additional cost to third parties from an extra unit of production
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Marginal Social Benefit (MSB)
The additional benefit to society from an extra unit of production
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Marginal Social Cost (MSC)
The additional cost to society from an extra unit of production
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Free Market Equilibrium
MPC=MPB
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Social Optimum Equilibrium
MSC=MSB
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Net Welfare Loss
Loss to society from not producing or consuming at the social optimum
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Public Good
A good which has the characteristics of non-rivalry and non-excludability e.g. street lighting
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Non-rivalry
Where one person's consumption does not diminish the amount availiable to others
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Non-excludability
Once provided the good is availiable to all
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Free Rider Problem
A person who consumes a public good without paying for it
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Goods with Positive Externalities
A good which would be under-consumed in a free market e.g. health and education
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Goods with Negative Externalities
A good which would be over-consumed in a free market e.g. alcohol and cigarettes
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Private Good
Goods which have characteristics of rivalry an excludability
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Information Gap/Asymmetric Information
Buyers or sellers don't have all the information that is availiable to make a decision
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Government Failure
Intervention by government leads to a net welfare loss compared to the free market solution
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Maximum Price
A ceiling above which price is not allowed to rise and can lead to excess demand e.g. maximum rent controls
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Minimum Price
A guaranteed floor price below which price is not allowed to fall and can lead to excess supply e.g. minimum price of alcohol, the minimum wage
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Tradable Pollution Permit
Permission issued, usually by a government, to allow a fixed amount of pollution to be created; this permit can be used by the owner or sold to another firm
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Cap and Trade Scheme
Schemes which set a limit on a particular type of pollution, and then issue pollution permits to the total of that which can be bought and sold between firms which pollute
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Regulation
Governement rules in markets to influence the behaviour of consumers and producers
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Unintended Consequences
Government intervention in markets leads to effects that were not foreseen
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Other cards in this set

Card 2

Front

Model

Back

Theories often expressed in mathematical terms to make them precise

Card 3

Front

Cetris Paribus

Back

Preview of the front of card 3

Card 4

Front

Positive Statement

Back

Preview of the front of card 4

Card 5

Front

Normative Statemnet

Back

Preview of the front of card 5
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