AS ECONOMICS | Definitions quiz
What are needs?
Man's essentials - the basics of life we cannot live without
What are wants?
The item's, activities or services that increase one's quality of life
What are the three decisions to be made by each society?
What to produce?
How to produce it?
For whom to produce?
Define opportunity cost
The benefits of the next best alternative forgone
What is/does a PPF show?
The different combinations of economic goods which an economy is able to produce if all its resources are fully and efficiently utilised
Why are real-world PPFs concave?
Not all resources in the economy are as productive in one use as compared to another
Define demand
The quantity of a good or service that consumers are able and willing to buy at a given price in a given time period
What's effective demand?
When the desire to buy a product is backed up by an ability to pay for it
What's market demand?
The sum of the individual demand for a product
Why does the demand curve slope downwards?
Income effect
Substitution effect
Diminishing marginal utility
Define supply
The quantity of a product a producer is able and willing to supply (onto the market) at a given price in a given time period
What's ceteris paribus?
All other things being equal
Why does the supply curve slope upward?
Profit motive
Marginal costs rise
New firms decide to enter the market
What determines/shifts supply?
Changes in costs of production
Changes in technology
Govt taxes and subsidies
Weather
Joint supply
What is joint supply?
When an increase or decrease in the supply of one good leads to an increase or decrease of a by-product
Define equilibrium
A state of balance between market demand and supply
What's disequilibrium?
Where market demand and supply are out of balance
What's the revenue formula?
price x quantity
Define consumer surplus
The difference between the total amount consumers are able and willing to pay for a good or service and the actual price paid
Define producer surplus
The difference between what producers are willing and able to supply a good for and the price they actually receive
Define price elasticity of demand
The responsiveness of demand following a change in price (of a product)
What determines PED?
The number of close substitutes for a good
The price of the product in relation to income
The cost of switching products
Habitual consumption and brand loyalty
The degree of necessity and whether the good is a luxury
Peak and off peak demand
What is tax incidence?
How the burden of a tax is distributed between firms and consumers
Define YED
The responsiveness of demand to a change in real income
Define XED
The responsiveness of demand for good x following a change in price for good y
Define PES
The responsiveness of quantity supplied to a change in price
What impacts PES?
Spare productive capacity
Stocks of finished products and components
The time period involved in the production process
What are complementary goods?
goods in joint demand
What are substitute goods?
Goods that can be replaced with another good
What is meant by derived demand?
Goods are demanded because they are needed for the production of other goods
What is meant by composite demand?
When a good or service has alternative uses e.g. milk can become cheese OR yogurt
Define aggregate demand
The total spending for goods and services produced in the economy over a period of time
What is the positive multiplier?
One person's spending is another person's income
What is a paradox of thrift?
Where the economy becomes even worse off because everyone saves at once
What is a liquidity trap?
Dirt cheap money no one is taking (record low I.Rs)
What was the NICE decade?
non inflationary continuous expansion period
Define aggregate supply
The volume of goods and services produced each year
What are the four macroeconomic objectives?
stable low inflation (2% plus or minus one)
low unemployment
sustainable economic growth
sustainable balance of payments
What is fiscal policy?
The use of government expenditure and taxation to influence aggregate demand
What is the replacement ratio?
Benefits/post-tax income
What is demand-pull inflation?
When there is too much money chasing too few goods
What is cost-push inflation?
When firms increase prices to protect profit margins after experiencing a rise in costs of production
What is a currency war/competitive devaluation?
Where countries compete against each other to achieve a relatively low exchange rate for their own currency (typically to boost exports)
What are market-led policies?
Focused on making markets work better and reducing the size of the state (NO GOVT SPENDING)
What other type of supply-side intervention is there?
State/govt intervention to overcome market failure
Define market failure
A misallocation of resources caused by unrestricted operation of the free market and/or causes a net welfare loss to society
Define externalities
Third-party (or spillover) effects arising from the production or consumption of goods and services, for which no appropriate compensation is paid
What's a social cost?|
Private cost + external cost
What's a social optimum?
Where marginal social costs = marginal social benefits
How do negative externalities occur?
- the absence of clearly defined property rights
- no legal control or ownership of the good
- no economic incentive to protect it from abuse
- leads to overuse of common land
- leads to long term permanent damage to the stock
- The Tragedy of the Commons
Define merit goods
Goods which are socially desirable but underprovided in a market economy
Why are merit goods underprovided?
Information failure - private benefits are underestimated, private benefits are underestimated because they occur largely in the future, and external benefits are discounted
What are demerit goods?
Goods which are socially undesirable but over-provided in the market economy (generating negative externalities)
Why are demerit goods overprovided?
Information failure - private costs are underestimated (long term), external costs are not considered
Define public goods
Goods which are not provided by the market so as a result the market fails
Why are public goods not provided?
Non-excludable - consumers can not be prevented from their consumption
Non-diminishable - additional consumers do not decrease the amount left over for other people
Suffer from the 'free rider' problem - no consumer would pay for a good they could consume for free if it were purchased by another household
(DIMINISHABLE AND EXCLUDABLE are qualities of private goods)
Define quasi (non pure) public goods
Goods which are public in nature but do not fully exhibit features of non-excludability and non-diminishability, e.g. roads + tolls, beaches
Define asymmetric information
When the buyer or seller possesses more information than the other party, making it difficult for the two people to do business together
Define government failure
Government failure occurs if there are negative consequences to their policies to address market failure (may lead to a deepening of the failure or create a new failure altogether)
What is monetary policy?
interest rates
What is protectionism?
Any measure that reduces, limits or prevents free international trade