Economics Unit 1 Definitions

Control economy

Resources state owned, centralised decisions of a planning authority determine allocation and use of resources. Cooperation. Eg North Korea.

Scarcity

Results from finite resources unable to produce enough to fulfil infinite wants

Economic models

Seek to derive verifiable implications about economic behaviour

XED

a measure of the responsiveness of the qd of a product to a change in the price of another product, in percentage terms

PPF

A curve showing the maximum possible alternative combinations , of 2 goods eg. Capital and consumer goods, that an economy can produce using all the available FOP efficiently. Moving from one point to another indicates the opportunity cost of increasing one items production in terms of the units of the other foregone.

Subsidy

A grant given that lowers the price of a good, usually designed to encourage production or consumption of a good. Positive shift in the supply curve.

PES

A measure of the responsiveness of the qs of a product to a change in its price, in percentage terms

Behavioural economics

A method of economic analysis that applies psychological insights into human behaviour to explain economic decision making.

Ad valorem tax

A method of taxation using the value of the product taxed to determine the amount of tax. VAT is an example of an ad valorem tax because it is charged at 20% of the value of product or service sold. Supply curve shift is nonparallel.

Specific (or unit) tax

A tax based on the volume of the product sold. An example would be tax of £1 per bottle of whisky, or 50p per litre of petrol. The supply curve shifts parallel to itself.

Indirect tax

A tax on the production or sale of s good or service. Indirect taxes are included in the price paid for the good or service by its final purchaser. Examples include VAT and beer duty. Negative shift in the supply curve.

Effective demand

Quantity of the good people are willing and able to buy at any given price over a period of time

Renewable resource

Replenished by natural resources at a rate comparable or faster than its rate of consumption by humans or other users

Rational economic behaviour

Aim to maximise their welfare

Long run

All factors are variable

Ceteris Paribus

All other things being equal

Mixed economy

An economic system which is a combination of market and command economic systems. Market forces control the allocation of some resources but also government's intervene in the allocation to try to correct market failures.

Transition economy

An economy which is changing from a planned economy to a free market. The economic change ( letting market forces set prices, lowering trade barriers, and moving from public to private ownership of resources) often leads to initial high inflation and may often lead to increased inequality of incomes and wealth.

Commodity

Any product of agriculture, fishing or mining that is produced to be traded or sold, such as cash crops. It can be a food, a fibre such as cotton, or tobacco, gold, and copper.

Diminishing Marginal Returns

As successive units of a variable factor are added to a fixed factor that each extra unit of the variable factor affairs less output than the one before it.

Short run

At least one factor of production is fixed

Competitive markets

Characterised by large numbers of buyers and sellers, freedom to enter and exit the market and a homogenous product.

Direct tax

Collected directly by the gov from the individuals or the companies on whom it is levied. Examples include income tax and corporate taxes. More likely to influence the demand curve

Substitutes

Compete for the same market. Positive XED

Market economy

Competition, private ownership of factors, little gov intervention, price mechanism determines the allocation of scarce resources through the market forces of supply and demand

Social science

Concerned w/ society + the relationships among individuals within society

Inferior goods

Demand decreases when income rises. YED is negative.

Normal goods

Demand increases as income increases. YED is positive.

Complements

Goods that are used in conjunction with each other. Negative XED

Consumer goods

Goods that directly satisfy wants

Labour

Mental or physical effort of humans in the production process for which they are paid. Reward is wages

Land

Natural resource any free gift of nature . It's reward is rent

Opportunity cost

Next best alternative foregone whenever an economic decision is made

Enterprise

Organises and controls the other factors and takes risks in the production process. It's reward is profit.

Capital

Producer goods that only indirectly satisfy wants eg. Machinery. Reward is interest

Allocative efficiency

Producing the correct value of goods to maximise welfare. For a firm it means producing where price= marginal cost.

Productive efficiency

Producing the greatest value output out of the least value inputs. Form a firm it means producing the lowest average total cost.

Normative

Subjective, non testable, value judgements

Producer surplus

The difference between a producer is paid for a quantity of a good and he lowest price he producer requires in order to supply that quantity . The area above the supply curve and below the price level.

Consumer surplus

The difference between what a person would be willing to pay and what they actually pay to buy a certain quantity of a good. This represents the extra utility that a consumer gains above the price that they pay for it. The area below the demand curve and above the price level.

Price mechanism

The method through which the market allocates scarce resources by responding to changes in the conditions of supply and demand. Prices create signals and incentives to determine what is produced, how it's produced and who receives the product.

Exchange rate

The price of one country's currency expressed in terms of another country's currency.

Supply

The quantity of the good firms are willing and able to offer for sale at any given price over a period of time

YED

The responsiveness of the qd of a product to a change in income, in percentage terms

PED

The responsiveness of the qd of product to a change in its price, in percentage terms

Division of labour

The separation of tasks in the production process and their allocation to different groups of workers.

Incidence of tax

The way in which the burden of tax eventually falls on the consumer and producer.

Positive

Value free, objective and testable

DMU

the satisfaction received from each extra unit consumed falls