Unit 4 Definitions

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A progressive tax
one that takes a greater percentage of income from richer people than poorer people
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Public deficit
when government spending exceeds government’s income and it must borrow to fund the difference
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Public sector
part of the economy that is controlled or owned by the government and funded from tax revenue
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Public good
one that the free market will not provide at all, no incentive for a producer to supply it, it is impossible to charge for it and make a profit and it is impossible to prevent anyone else from consuming it for free
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Public interest
interests of consumers in general rather than businesses
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A regressive tax
one that takes a greater percentage of income from poorer people than richer people
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Regulatory body
government agency responsible for controlling a sphere of business activity, the government body implements and enforces specific laws
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Regulatory capture
when the regulator is more influenced by the industry’s point of view than the consumers
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Relative poverty
exists when someone does not have enough income to participate in the society in which they live
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Restrictive practices
any action that a business uses to limit competition
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Social benefits
total benefits calculated by adding together the external and private benefits
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Social costs
total costs calculated by adding together the external and private costs
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Supply-side policies
all measures designed to increase the productive capacity of the economy, they influence aggregate supply rather than aggregate demand
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Tacit collusion
when competing firms appear to follow a similar strategy to reach the same aim, but without meeting/having an agreement
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Trade balance
(X-M) difference between exports and imports
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Trade-offs
when two objectives cannot both be achieved, the more you have of one variable the less you have of the other
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Oligopoly
market structure in which a few firms dominate
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Asymmetric information
where one party in a transaction has more information than the others and may use that power to their advantage
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Price inelastic goods
a change in price causes a smaller % change in demand
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Regulate
overseeing business activity to ensure that the business is abiding to rules and regulations
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Inflation
the sustained increase in the aggregate price level in an economy
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Concentration ratio
measure of the total output produced in an industry by a given number of firms in the industry (e.g. The Big Six has a 92.4% concentration ratio in the energy market)
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Cost push inflation
inflation caused by an increase in prices of inputs, e.g. raw materials, increased price of factors of production leads to a decreased supply of these goods
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Demand pull inflation
occurs when total demand for goods and services exceeds total supply
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Brand proliferation
when big firms have smaller braches under different names, can give a false appearance of competition (non-price competition)
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Absolute poverty
not having enough income to provide the basic necessities and survive
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Aggregate demand
total of all the demand in the economy from consumption, investment, government expenditure and the next amount of trade AD = C + I + G + (X-M)
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Aggregate supply
the total of all the goods and services produced in our economy over a period of time
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Allocation of resources
how resources are shared out/distributed in an economic system
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Allocative efficiency
achieved when resources are used to yield the maximum benefit to everyone, it is impossible to redistribute them without making someone worse off
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Animal spirits
phrase used to describe the way business people relied on instinct to make decisions rather than a rational analysis of the facts
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Cartel
agreement between businesses to reduce competition or not to compete with each other, agreement is usually secret and may be implemented in various ways
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The Competition Commission
independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries, it has powers to impose changes on the companies concerned or ban proposed mergers
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Consumer sovereignty
happens when the consumer has control, the buying decisions of the consumer dictates what is produced in the market
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Consumption
total of all the spending by individuals on private consumption
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Cost-benefit analysis
attempts to calculate the potential costs and benefits of a project to make a decision one way or another (if benefits outweigh the costs, then in theory, the project goes ahead, if the costs are greater it does not)
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Demerit goods
are over-produced by the free market, in quantities that are greater than the optimal level for society, thought to be bad for society as a whole
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Direct tax
taken at source and goes directly to the government (e.g. Income Tax)
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Economic shocks
unexpected events that affect the economy and often come from outside of it, they are unexpected and unpredictable
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Equality
means equality of outcome in terms of income and wealth
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Equity
concerned with fairness, the idea that all citizens have the same opportunities and chances in life, does not mean equal outcomes in terms of income or wealth distribution
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Explicit collusion
when there is a meeting or actual agreement between businesses to avoid competing vigorously and to follow a joint strategy
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External benefits
benefits for a third party (neither producer nor consumer)
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External costs
costs for a third party (neither producer nor consumer)
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Fiscal policy
involves changes in levels of taxation and/or government expenditure in order to affect the economy
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Free rider problem
when public goods are under-provided or not provided at all because individuals are able to consume the good despite paying little or nothing towards the cost
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The Gini coefficient
objective measure of income inequality and can range from 0 to 1, higher the Gini coefficient, the higher the level of inequality
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Government expenditure (G)
total spending of the government over the year
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Government failure
when government intervention makes the situation worse rather than better
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Incentive
any factor (financial or non-financial) that enables or motivates a particular course of action
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Indirect taxes
added onto prices and go indirectly to the government from the seller e.g. VAT, green taxes
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Investment (I)
total of all the spending by businesses on premises and capital equipment
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Marginal Social Benefit (MSB)
change in total social benefit to society as a whole for producing one further unit, or taking one further action, in an economy
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Market
any medium where buyers and sellers interact and agree to trade at a price
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Profit signalling mechanism
means by which resources are allocated, presence of profit in a market attracts more resources and loss sends them away
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Market failure
when a market does not efficiently allocate resources to achieve the greatest possible consumer satisfaction, reallocation of resources would make some people better off
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Market power
ability of a producer to exert some level of control over a market, e.g. setting prices, setting barriers to entry
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Merit goods
can be provided by the private sector, but the quantity that the free market provides is lower than the optimum level for society, they are under-provided by the market mechanism
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Monetary policy
uses interest rates to vary the costs of borrowing and influence the level of aggregate demand
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Monopoly power
when a business is big enough to behave like a monopoly and has some control over price (or quantity supplied) and can maintain some barriers to entry
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Natural monopoly
when the most efficient scale of production is a monopoly, more than one supplier would involve wasteful duplication of resources, firm can benefit from economies of scale
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Non excludable
impossible to prevent people who have not paid for a good from consuming it
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Non rivalrous
means that one person consuming a good does not affect or reduce the amount left for someone else to consume
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Overheating
expression describing the onset and spread of inflation throughout an economy
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The poverty trap
situation where someone would be even poorer or not much richer if they had a job because they would no longer receive financial support from the government
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Private sector
part of the economy that is controlled or owned by individuals, or companies, that are owned by individuals
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Other cards in this set

Card 2

Front

when government spending exceeds government’s income and it must borrow to fund the difference

Back

Public deficit

Card 3

Front

part of the economy that is controlled or owned by the government and funded from tax revenue

Back

Preview of the back of card 3

Card 4

Front

one that the free market will not provide at all, no incentive for a producer to supply it, it is impossible to charge for it and make a profit and it is impossible to prevent anyone else from consuming it for free

Back

Preview of the back of card 4

Card 5

Front

interests of consumers in general rather than businesses

Back

Preview of the back of card 5
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