Notesale: Turn your study into money

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Theme 1 key terms
1
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Nature of economics
● Ceteris paribus = all other things being equal
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It does not carry a value judgement
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● Value judgement = a view of the rightness or wrongness of something, based
on a personal view
...

● Opportunity cost = the value of the next best alternative foregone
...
g
...

● Non-renewable resource = one whose stock level decreases over time as it
is consumed (e
...
coal, oil and steel)
...

● Free goods = do not require any scarce resources to be used in their
production, therefore have no opportunity cost
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g
...

● Capital goods = used to produce more consumer goods and services and
therefore will generally provide utility to consumers indirectly
...

● The Law of Increasing Costs = the opportunity costs of additional units of a
good generally increases as society attempts to produce more of that good
...
Labour receives
wages and salaries, land earns rent, capital earns interest and enterprise
earns profit
...

● Division of labour = a form of specialisation where individuals concentrate
on the production of a particular good or service - the production process is
broken down into a sequence of stages (e
...

● Money = anything that is generally acceptable in the payment of a good or
service, or of a debt
...

● Medium of exchange = eliminates the double coincidence of wants which is
necessary with barter
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● Store of value = money can be saved to spend at a later date, without it
losing its value (issue: inflation)
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● Standard of deferred payment = enables borrowing and lending so that
people who currently do not have money can take out loans and pay back
their debts over time
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No government intervention
...

● Command (or centrally planned) economy = all resources are allocated
entirely by the government
...

● The invisible hand = the unobservable market forces which mean that
demand and supply will automatically meet an equilibrium (Adam Smith)
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2 How markets work
● Market = where consumers and producers come into contact with each other
to exchange goods and services
...

● Rational decision making = where consumers allocate their expenditure on
goods and services that will maximise utility, whilst producers allocate their
resources to maximise profit
...

● Demand curve = shows the quantity of a good or service that would be
bought over a range of different price levels in a given period of time
...
g
...

● Marginal utility = the utility gained from consuming one extra unit of a good
or service
...

● Equilibrium = when demand equals supply
...


● Income effect = when prices rise but real incomes stay the same so demand
decreases
...

● Substitution effect = spending money on a cheaper product
...
g
...
g
...

● PED = a measure of how responsive demand is to a change in price
...

● Inelastic = if a similar price change leads to a much smaller change in
demand
...

● Total revenue = the price per unit of a good multiplied by the quantity sold
...

● YED = a measure of how responsive demand is as a result of a change in
income
...

● Normal good = a good with a positive YED, as income rises so does the
demand for the good
...

● Luxury good = a good with a positive YED of above 1
...

● XED = when the quantity demanded of good X changes as a result of a
change in the price of good Y
...

● Supply = the amount of a good or service that firms are willing and able to
supply at a range of price levels
...

● Law of supply = as price increases, quantity supplied increases (and vice
versa - direct relationship)
...
g
...

● Competitive supply = when an increase in the price of good x, leads to a
contraction in the supply of good y (because producers reallocate their
production to good x)
...


● PES = % change in quantity supplied / % change in price
...

● Excess supply = where the quantity supplied exceeds the quantity
demanded for a good at the current market price
...

● The Price Mechanism = where the free market allocates resources through
the interaction of supply and demand
...

● Consumer surplus = the difference between what consumers are willing and
able to pay for a good and the price that they actually pay
...

● Society’s surplus = producer surplus + consumer surplus
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● Direct taxes = paid directly to the government by the taxpayer (e
...
income
tax)
...
g
...

● Ad valorem tax = a tax which is taken as a percentage of the value of a
product, like VAT = 20%
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5p
...

● Subsidy = a grant provided by the government to encourage the production
and consumption of a particular good or service
...
3 Market failure
● Market failure = when the price mechanism leads to an inefficient allocation
of resources, leading to a net welfare loss
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● External costs = negative third party effects outside of a transaction (e
...

passive smoking)
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● Social costs = external costs + private costs
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● External benefits = positive third party effects outside a transaction (e
...

vaccinating someone against measles reduces the possibility of others
catching measles)
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● Social benefits = external benefits + private benefits
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● Social optimum = where marginal social benefit equals marginal social cost
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● Missing market = associated with the difficulties the free market has in
providing pure public goods, meaning that they are simply not provided
...

● Non-excludability = when benefits derived from pure public goods cannot be
confined to those who have paid for it, giving rise to the free rider problem
...
g
...

● The free rider problem = because public goods are non-excludable it is
difficult to charge people for benefitting once a product is available
...
Free riders have no incentive to reveal how much they are willing and
able to pay for a public good because they can enjoy the benefits without
paying
...

● Information gaps = where consumers, producers or the government have
insufficient knowledge to make rational economic decisions
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● Asymmetric information = where consumers and producers have unequal
access to information about a good or service in the market (e
...
“lemon
markets” emerge, such as in the market for used cars where producers have
more knowledge about their condition than consumers)
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● Merit goods = goods which have external benefits to society (e
...
education)
...
4 Government intervention
● Tax = a compulsory financial contribution to state revenue
...
g
...

● Indirect taxes = taxes levied on the expenditure of goods or services (e
...

VAT)
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● Specific tax = a tax which is a fixed rate per unit, like the tax on a pint of beer
is 41
...

● Incidence of tax = the distribution of the tax paid between consumers and
producers
...

● Maximum price = a ceiling price set by the government on a good or service,
above which it cannot rise
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● Shadow market = includes any unregulated private market in which
individuals can purchase goods or services that are not publicly traded
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It may be enforced through government legislation
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The main aim of these
schemes is to protect producer incomes
...
They are an attempt to solve the problem of pollution by creating a
market for it and are allocated through an emissions trading system (e
...
the
EUETS)
...

● State provision = government-provided goods or services which are funded
through tax revenues (these are normally merit/public goods)
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● Regulatory capture = a form of government failure, happens when a
government agency operates in favour of producers rather than consumers
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● Net welfare loss = an overall loss of economic welfare compared to the
starting position
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● Administration costs = the costs which arise in the formulation, monitoring
and enforcing of government measures to correct market failure
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