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AS91399 [3.1] Demonstrate understanding of the efficiency of market equilibrium
Terms in this set (74)
Basic Economic Problem/Scarcity
An economy's finite resources are insufficient to satisfy all human wants and needs. Human wants are unlimited, but the means to satisfy human wants are scarce.
Factors of Production
The inputs available to supply goods and services. They are classified as land, labour, enterprise and capital
The next best alternative given up when a decision is made.
Latin phrase which roughly means "all other things being equal"
Goods that are used in the production of other goods, rather than being bought by consumers.
Goods which are consumed by individuals or household to satisfy their needs or wants.
Willingness to buy backed up by the ability to pay.
Demand for a good/service which results from demand for another good/service e.g. demand for labour comes from demand for the good/service the worker produces.
The utility or value of an additional unit
Production Possibility Curve
An economic model showing the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed.
The use of goods and services by households.
The purchase of goods that used in the future to create wealth, rather than be consumed today
The quantity purchased of a good at any given price
The line on a price/quantity diagram which shows the quantity demanded at any given price
Market price where supply is equal to demand. Also known as the market clearing price.
Shift of the demand curve
A movement of the whole demand curve to the right or left of the original caused by a change in a non-price factor of demand.
Non-price factors of demand
Factors other than price which lead to changes in demand and to shifts of the demand curve
Where the price elasticity of demand is greater than 1
Where the price elasticity of demand is less than 1
Price elasticity of demand
Measures the extent to which the demand for a good changes in response to a change in the price of that good.
Percentage Change in Quantity Demanded/Percentage Change in Price
Price elasticity of supply
Measures the responsiveness of supply to changes in price.
Percentage Change in Quantity Supplied/Percentage Change in Price
% change in quantity = % change in price i.e = 1
Income earned by a business from the sale of goods/services. Calculated by quantity sold x price
Any goods for which demand increases when income increases
Any good that decreases in demand when consumer income rises
goods that could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise.
any good for which demand is increased when the price of another good is decreased
Income elasticity of demand
Measures the responsiveness of demand to changes in income
Percentage change in Quantity Demanded/percentage change in Income
Cross elasticity of demand
% change in Quantity Demanded of product X/% change in price of Product Y
the quantity of a good or service that all firms plan to sell at in a given period of time
Non-price factors of supply
Factors other than price which lead to changes in supply and to shifts of the supply curve
A graphical representation of the relationship between the price of a good or service and the quantity supplied for a given period of time
When producers wish to sell more than consumers wish to buy. The price will be above the equilibrium price and there will be excess supply.
When consumers wish to buy more than producer wish to sell. The rice will be below the equilibrium price and there will be excess demand.
The conversion of inputs or factor services into outputs of goods and services
Output per unit of input
Output per worker
A situation in which the allocation of goods and services is not efficient.
The cost born by the private agent. They are internal costs of production or consumption.
The benefit received by the private agent. They are internal benefits of production or consumption.
The difference between social and private costs; i.e. those incurred by third parties.
The difference between social and private benefits; i.e. those received by third parties.
All the costs accrued by society (private cost + external cost).
All the benefits received by society (private benefit + external benefit).
The difference between social costs and benefits and private costs and benefits.
Social Cost > Private cost. They occur outside of the market i.e. they affect economic agents not directly involved in the production and/or consumption of a good or service.
Social benefit > Private benefit. They occur outside of the market i.e. they affect economic agents not directly involved in the production and/or consumption of a good or service.
Can be found where social cost is equal to social benefit and produces an allocatively efficient output.
a good for which the social benefits of consumption exceed the private benefits (e.g healthcare)
a good for which the social costs of consumption exceed the private costs
a good which is both non excludable and non rival
A payment made by government usually to producers, for each unit of the good they produce. Consumers can also receive this payment to reduce the costs of purchasing the good (e.g to enable them to travel on buses at a lower price)
A tax levied on goods and services rather than on income or profits.
A tax levied on income or profits.
Involves the imposition of rules, controls and constraints, which restrict freedom of economic action in the market place.
Governments step on to provide good which are 'free at the point of use', financing the provision out of general taxation. Subsidies can often be used to encourage production and consumption of merit goods.
A one-way payment to a person for which no money, good, or service is given or exchanged. Used to redistribute income.
The lowest price that may legally be set in a market. Also known as a price floor.
The highest price that may legally be set in a market. Also known as a price ceiling.
Division of a burden or benefit between buyers and sellers.
Measure of consumer benefit. The difference between the highest price consumers are willing and able to pay for a good or service and what they actually do pay.
Measure of producer benefit. The difference between the lowest price producers are willing and able to accept for their good or service and what they actually do receive.
A loss of allocative efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable and consumer and producer surpluses are not maximised.
The transfer of a business, industry, or service from public to private ownership and control.
Transfer of a business, industry, or service from private to public ownership and control.
A tax system that takes a larger percentage of income from high-income earners than from low-income earners.
A tax system that takes a larger percentage of income from low-income earners than from high-income earners.
A tax system where everyone pays the same percentage of tax.
An upper limit to the quantity of a good that may be produced in a specified period
A tax on imported goods
A state of the economy in which production is in accordance with consumer preferences, where consumer and producer surpluses are both maximised.
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