Podcast
Questions and Answers
What is the term for the cost or benefit to a third party not involved in the economic activity?
What is the term for the cost or benefit to a third party not involved in the economic activity?
- Social cost/benefit
- Private cost/benefit
- Market failure
- External cost/benefit (correct)
In a free market, the government allocates resources.
In a free market, the government allocates resources.
False (B)
What is the free rider principle?
What is the free rider principle?
People who do not pay for a public good still receive benefits from it, so the private sector will under-provide the good as they cannot make a profit.
The incidence of tax refers to the ____________ on the taxpayer.
The incidence of tax refers to the ____________ on the taxpayer.
Match the following terms with their definitions:
Match the following terms with their definitions:
What is the term for the responsiveness of demand to a change in income?
What is the term for the responsiveness of demand to a change in income?
Indirect taxes are levied on goods and services and decrease production, leading to an increase in supply.
Indirect taxes are levied on goods and services and decrease production, leading to an increase in supply.
What is government failure?
What is government failure?
The _____________ occurs when people do not pay for a public good but still receive benefits from it.
The _____________ occurs when people do not pay for a public good but still receive benefits from it.
What is the term for taxes levied on goods and services that increase production costs and lead to a fall in supply?
What is the term for taxes levied on goods and services that increase production costs and lead to a fall in supply?
What is the main problem of scarcity?
What is the main problem of scarcity?
Division of labour leads to increased productivity.
Division of labour leads to increased productivity.
What is the difference between the price the consumer is willing to pay and the price they actually pay?
What is the difference between the price the consumer is willing to pay and the price they actually pay?
The responsiveness of demand for one good to a change in the price of another good is known as ______________________.
The responsiveness of demand for one good to a change in the price of another good is known as ______________________.
What is an example of an externality?
What is an example of an externality?
Market equilibrium occurs when demand is greater than supply.
Market equilibrium occurs when demand is greater than supply.
What is the term for the extra benefit gained from consumption of a good?
What is the term for the extra benefit gained from consumption of a good?
The willingness and ability to take risks and combine the three other factors of production is known as ______________________.
The willingness and ability to take risks and combine the three other factors of production is known as ______________________.
Ad valorem tax is a direct tax imposed on a good.
Ad valorem tax is a direct tax imposed on a good.
What is the main characteristic of a public good?
What is the main characteristic of a public good?
The price mechanism is a system of resource allocation based on the government's decisions.
The price mechanism is a system of resource allocation based on the government's decisions.
What is the difference between a positive statement and a normative statement?
What is the difference between a positive statement and a normative statement?
The responsiveness of demand to a change in price is known as _________.
The responsiveness of demand to a change in price is known as _________.
Match the following terms with their definitions:
Match the following terms with their definitions:
What is the term for the value of the next best alternative forgone?
What is the term for the value of the next best alternative forgone?
A perfectly price inelastic good has a PED/PES of infinity.
A perfectly price inelastic good has a PED/PES of infinity.
What is the difference between a producer surplus and a consumer surplus?
What is the difference between a producer surplus and a consumer surplus?
The possibility production frontier (PPF) depicts the maximum ______________ of an economy.
The possibility production frontier (PPF) depicts the maximum ______________ of an economy.
What is the term for the laws that address market failure and promote competition between firms?
What is the term for the laws that address market failure and promote competition between firms?
Flashcards
Ad valorem tax
Ad valorem tax
An indirect tax where the tax value depends on the good's value.
Asymmetric information
Asymmetric information
One party in a transaction has more information than the other, leading to market failure.
Capital
Capital
Goods used in production, like machinery or tools.
Capital goods
Capital goods
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Enterprise
Enterprise
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Command economy
Command economy
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Complementary goods
Complementary goods
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Consumer goods
Consumer goods
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Consumer surplus
Consumer surplus
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What is Cross elasticity of demand?
What is Cross elasticity of demand?
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Demand
Demand
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Diminishing marginal utility
Diminishing marginal utility
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Equilibrium price/quantity
Equilibrium price/quantity
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Externalities
Externalities
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External cost/benefit
External cost/benefit
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Free market
Free market
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Ceteris paribus
Ceteris paribus
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Division of labor
Division of labor
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Economic problem
Economic problem
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Efficiency
Efficiency
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Excess demand
Excess demand
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Excess supply
Excess supply
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Free rider principle
Free rider principle
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Government failure
Government failure
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Habitual behaviour
Habitual behaviour
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Incidence of tax
Incidence of tax
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Indirect tax
Indirect tax
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Inferior good
Inferior good
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Market failure
Market failure
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Market forces
Market forces
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Minimum price
Minimum price
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Mixed economy
Mixed economy
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Model
Model
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Negative externalities of production
Negative externalities of production
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Non-excludability
Non-excludability
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Non-renewable resources
Non-renewable resources
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Non-rivalry
Non-rivalry
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Study Notes
Economic Concepts
- Ad valorem tax: An indirect tax imposed on a good where the value of the tax is dependent on the value of the good.
- Asymmetric information: A situation where one party has more information than the other, leading to market failure.
Factors of Production
- Capital: One of the four factors of production; goods which can be used in the production process.
- Capital goods: Goods produced in order to aid production of consumer goods in the future.
- Enterprise: One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.
Market Concepts
- Command economy: An economy where all factors of production are allocated by the state, deciding what, how, and for whom to produce goods.
- Complementary goods: Goods that are used together, where an increase in the price of one good leads to a decrease in demand for the other good.
- Consumer goods: Goods bought and demanded by households and individuals.
- Consumer surplus: The difference between the price the consumer is willing to pay and the price they actually pay.
- Cross elasticity of demand (XED): The responsiveness of demand for one good to a change in the price of another good.
Demand and Supply
- Demand: The quantity of a good or service that consumers are able and willing to buy at a given price at a given moment in time.
- Diminishing marginal utility: The extra benefit gained from consumption of a good generally declines as extra units are consumed, explaining why the demand curve is downward sloping.
- Equilibrium price/quantity: Where demand equals supply, so there are no more market forces bringing about change to price or quantity sold.
Market Failure
- Externalities: The cost or benefit a third party receives from an economic transaction outside of the market mechanism.
- External cost/benefit: The cost or benefit to a third party not involved in the economic activity, the difference between social cost/benefit and private cost/benefit.
Market Structure
- Free market: An economy where the market mechanism allocates resources, so consumers and producers make decisions about what is produced, how to produce it, and for whom.
Other Concepts
- Ceteris paribus: All other things remaining the same.
- Division of labour: When labour becomes specialized during the production process to do a specific task in cooperation with other workers.
- Economic problem: The problem of scarcity, where wants are unlimited, but resources are finite, so choices have to be made.
- Efficiency: When resources are allocated optimally, so every consumer benefits and waste is minimized.
- Excess demand: When price is set too low, so demand is greater than supply.
- Excess supply: When price is set too high, so supply is greater than demand.
- Free rider principle: People who do not pay for a public good still receive benefits from it, so the private sector will under-provide the good as they cannot make a profit.
- Government failure: When government intervention leads to a net welfare loss in society.
- Habitual behaviour: A cause of irrational behaviour, when consumers are in the habit of making certain decisions.
- Incidence of tax: The tax burden on the taxpayer.
- Indirect tax: Taxes levied on goods and services, which increase production and lead to a fall in supply, although this is often partially, or fully, passed onto consumers.### Economic Concepts
Inferior Goods
- An increase in income leads to a decrease in demand
- Example: buying inferior goods like cheap bread when income increases
Market Failure
- The free market fails to allocate resources in the best interest of society
- Results in an inefficient allocation of scarce resources
Market Forces
- Forces that act to reduce prices when there is excess supply and increase prices when there is excess demand in a free market
- Help to allocate resources efficiently
Minimum Price
- A floor price that a firm cannot charge below
- May be set by governments to protect consumers or producers
Mixed Economy
- A system that combines elements of capitalism and socialism
- Both the free market and the government allocate resources
Model
- A hypothesis that can be tested and proven or disproven by evidence
- Tends to be mathematical, whereas a theory is in words
Negative Externalities of Production
- The social costs of producing a good are greater than the private costs
- Example: pollution caused by a factory
Non-Excludability
- A characteristic of public goods, where someone cannot be prevented from using the good
- Example: national defense, where everyone benefits regardless of payment
Non-Renewable Resources
- Resources that cannot be replenished or replaced at a level equal to consumption
- Example: fossil fuels, minerals, and metals
Non-Rivalry
- A characteristic of public goods, where one person's use of the good does not prevent someone else from using it
- Example: a public park, where many people can use it simultaneously
Demand and Supply
Normal Goods
- Demand increases as income increases
- Example: buying more expensive bread when income increases
Price Elasticity of Demand
- The responsiveness of demand to a change in price
- Can be measured using the PED formula
Price Elasticity of Supply
- The responsiveness of supply to a change in price
- Can be measured using the PES formula
Perfectly Price Elastic Good
- PED/PES = Infinity; quantity demanded/supplied falls to 0 when price changes
- Example: a perfectly competitive market with many substitutes
Perfectly Price Inelastic Good
- PED/PES = 0; quantity demanded/supplied does not change when price changes
- Example: a life-saving medicine with no substitutes
Possibility Production Frontier (PPF)
- Depicts the maximum productive potential of an economy, using a combination of two goods or services
- Shows the opportunity cost of producing one good over another
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Description
Flashcards covering Theme 1 of Edexcel A-Level Economics, introducing markets and market failure.