Substitute goods: Goods, which satisfy the same want. They are in competitive demand. E.g. a rise in the price of ‘Good A’ causes an increase in the demand of ‘Good B’ and vice versa.
Complementary goods: Goods, which are jointly demanded. Both goods are needed to satisfy a want. E.g. a rise in the price of ‘Good A’ causes a decrease in the demand of ‘Good B’ and vice versa.
Positive statements: Statements which include facts and can be proven using figures. Can be tested as true or false.
Normative Statements: Statements, which include value-judgements and express an opinion (Key words: ought, should, fair, unfair, better or worse).
PPC: Shows all possible combinations of two goods produced in an economy using all available existing resources.
Division of labour: The breaking down of a job into simpler tasks. Each individual concentrates on the production of a particular good or service.
Free-market economy: All resources are allocated by the price mechanism. No government intervention.
Mixed economy: Some resources are allocated by the price mechanism and some by the government.
Centrally planned economy: All resources are allocated by the government. No price mechanism. Consumer surplus: It is shown by the area above the equilibrium price line and below the demand curve. It shows what consumers gain by paying a lower price for a good or a service than they were willing to.
Producer surplus: It is shown by the area below the equilibrium price line an above the supply curve. It shows what producers gain by selling a good or a service at a higher price than they were actually willing to.
Tax: A compulsory charge on goods, services, income and/or capital made by the government in order to raise revenue.
Direct taxes: Tax charged directly on income. E.g. income tax.
Indirect taxes: Tax charged on the expenditure of goods and services. E.g. VAT. • Specific: Fixed/does not change with the price (parallel shift) • Ad-valorem: It is a fixed % of tax (e.g. VAT). The % varies. (non-parallel shift)
Subsidy: A grant given by the government to firms to encourage production thus increasing supply and decreasing prices of a good or service.
Price elasticity of demand: Shows how sensitive the demand is given a % change in price. • Price elastic demand: A % change in price causes a larger % change in quantity demanded • Price inelastic demand: A % change in price causes a smaller % change in quantity demanded • Unitary price elasticity of demand: A % change in price causes an equal change in the quantity demanded
Price elasticity of supply: Shows how sensitive the supply is given a % change in price. • Price elastic supply: A % change in price causes a larger % change in quantity supplied • Price inelastic supply: A % change in price causes a smaller % change in quantity supplied • Unitary price elasticity of supply: A % change in price causes an equal change in the quantity supplied
Income elasticity of demand: Shows how demand changes given a % change in income. • >1 Luxury good • + Normal good • - Inferior good
Cross elasticity of demand: Shows how a change in the price of good A affects the quantity demand of good B. • + Substitutes • - Complementary • 0 No relation
Demand for labour: Shows how many workers firms need at each wage levels. It is a derived demand (comes from the demand of goods).
Supply of labour: Shows how many workers are willing and able to work at different wage levels.
Mobility of labour: The ability of workers to move from one job to the other (occupational) or from one place to another (geographical) in order to find a better paying job.
Elasticity of demand for labour: Shows the effect on quantity demanded of labour given a change in wages.
Elasticity of supply for labour: Shows the effect on quantity supplied of labour given a change in wages.
Trade union: A group of workers that negotiate with employers on wage and working conditions.
Non-renewable resources: Resources, which once used will never be replaced. Renewable resources: Resources, which can be used and replaced.
Sustainable resources: Are a type of renewable resources. They are the ones which can be exploited economically and which will not diminish or run out.
Non-sustainable resources: Are resources, which are diminished over time due to economic exploitation.
Sustainable development: Development which meets the needs of the present without compromising the ability of future generations to meet their own needs.
Economies of scale: Falling average costs, as a firm grows larger in size.
Diseconomies of scale: Increasing average costs, as a firm grows larger in size.
Market efficiency: Exists when the market produces the maximum output, using the best resource allocation, while all resources are fully employed.
Market failure: Exists when the market causes an inefficient allocation of resources. There might be an overproduction or underproduction or no production of goods and services.
Government failure: When intervention by the government leads to a net welfare loss. There might be an inefficient allocation of resources.
Public goods: Goods, which are provided by the government for free since they are unprofitable to be provided by the private sector. E.g. Street lighting. • Non-rivalry in consumption (non-diminishable) – consumption by one individual does not reduce the amount available for other individuals to consume • Non-exclusion in consumption – all consume the good whether people want to or not.
Merit goods: Goods, which are provided by the government for free because the government believes everyone should benefit from them even if some cannot afford them. They are also provided by the private sector. E.g. schools and hospitals.
Demerit goods: Goods which society over-produces and are not in people’s best interest. E.g. Tobacco.
Private goods: Are the opposite of public goods. For example if a candy bar is consumed by person A then it cannot be consumed by anyone else.
External costs: Negative effects of an economic activity on third party, ignored by the price mechanism. It is the difference between PC and SC.
Private costs: Expenses to the firms resulting from their production activity considered by the price mechanism. (A direct cost to the producer or consumer)
Social costs: Total costs to society. [SCs = PCs + ECs].
External benefits: Positive effects of an economic activity on third party. It is the difference between PB and SB.
Private benefits: Revenues to the firms resulting from their production activity.
Social benefits: Total benefits to society. [SBs = PBs + EBs].
Barriers to entry: Possible restrictions on the entry of firms in an industry.
Barriers to exit: They discourage firms from exiting an industry.
Monopoly: A firm, which supplies almost 100% of the market. Legally a firm with 25% or more market share
Symmetric information: When consumers and producers have perfect market information upon which they make their economic decisions.
Asymmetric information: When one party has less market knowledge than the other party – usually consumers have less knowledge than producers.