Unit 1 Economics Markets - Revision Glossary
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The document contains a comprehensive overview of key economic terms and concepts, including definitions of various taxes, market conditions, demand and supply dynamics, and economic systems. It explains the principles of consumer and producer behavior, such as consumption patterns, elasticity, and market structures. Also covered are ideas related to resource allocation, income distribution, and the role of government in the economy.
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Unit 1 Economics Markets - Revision Glossary
- 1. Term Definition Ability to pay Where taxes should be set according to how well a person can afford to pay Ad valorem tax An indirect tax based on a percentage of the sales price of a good or service Air passenger duty APD is a charge on air travel from UK airports. The level of APD depends on the country to which an airline passenger is flying. Alcohol duties Excise duties on alcohol are a form of indirect tax and are chargeable on beer, wine and spirits according to their volume and/or alcoholic content Asking price The price at which a security, commodity or currency is offered for sale on the market - generally the lowest price the seller will accept Automation Production technique that uses capital machinery / technology to replace or enhance human labour and bring about a rise in productivity Basic problem There are infinite wants but finite resources with which to satisfy them Behavioural economics Branch of economics that studies the impact of psychological and social factors on economic decision making Black market An illegal market in which the market price is higher than a legally imposed price ceiling. Black markets can develop where there is excess demand Bottlenecks Any factor that causes production to be delayed or stopped – this may reduce the price elasticity of supply of a product Buffer stock Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low Buyer’s market A market that favours buyers because supply is plentiful relative to demand and therefore prices are relatively low. The opposite of a seller's market By-product Something produced as a consequence of producing another good or service Capacity utilisation The extent to which a business is making full use of existing factor resources e.g. 80% capacity utilisation means that 20% of capacity is not being used (spare) Capital goods Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from "financial capital", meaning funds which are available to finance the production or acquisition of real capital Capital-intensive A production technique which uses a high proportion of capital to labour Capitalist economy Economic system organised along capitalist lines uses market-determined prices to guide choices about the production and distribution of goods. One key role for the state is to maintain the rule of law and protect private property Ceteris paribus To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus - all other influencing factors are held constant Command economy Economic system where resources are allocated by the government Competitive market A market where no single firm has a dominant position and where the consumer has plenty of choice. There are few barriers to the entry of new firms Competitive supply Alternative products a firm could make with its resources. E.g. a farmer can plant potatoes or carrots. An electronics factory can produce VCRs or DVDs Complements Two complements are said to be in joint demand Composite demand Where goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other. E.g. milk which can be used for cheese, yoghurts, cream, butter and other products Congestion charging A direct charge for use of roads in a defined zone e.g. central London
- 2. Conspicuous consumption Conspicuous consumption is consumption designed to impress others rather than something that is wanted for its own sake Constraints Limits to what we can afford to consume – we have to operate within budgets, and make choices from those sets that are feasible/affordable Consumer durable A good such as a washing machine or a digital camera that lasts a period of time, during which the consumer can continue getting utility from it Consumer sovereignty Consumer sovereignty exists when the economic system allows scarce resources to be allocated to producing goods and services that reflect the wishes of consumers. Sovereignty can be distorted by the effects of persuasive advertising Consumer surplus Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price) Consumption The act of buying and using goods and services to satisfy wants Cross price elasticity of demand Responsiveness of demand for good X following a change in the price of good Y (a related good). With cross price elasticity we make a distinction between substitute products and complementary goods and services Cyclical demand Demand that change in a regular way over time depending on the part of the economic (business) cycle that a country is in or the time of year Demand Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period Demand curve A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the price falls Derived demand Derived demand occurs when the demand for a particular product depends on the demand for another product or activity Disequilibrium A situation where there is a state of imbalance and so a tendency for change Division of labour The specialization of labour in specific tasks, intended to increase productivity Effective demand Demand in economics must be effective. Only when a consumers' desire to buy a product is backed up by an ability to pay for it do we speak of demand Elastic demand Demand for which price elasticity is greater than 1 Elastic supply Where the price elasticity of supply is greater than +1 Elasticity of supply Price elasticity of supply measures the relationship between change in quantity supplied and a change in price Entrepreneur An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. a profit). Entrepreneurs will usually invest their own financial capital in a business and take on the risks associated with a business investment. Equilibrium Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change Equity Fairness; a view on the ‘rightness’ of an issue based on opinion rather than fact - requires a value judgement Excess demand The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price Excess supply When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price Excise duties Excise duties are indirect taxes levied on goods and services such as cigarettes, fuel and alcohol. There are duties on air travel, car insurance
- 3. Factor incomes Factor incomes are the rewards to factors of production. Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit Finite resources There are only a finite number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. By producing more for an ever-increasing population, we may destroy the natural resources of the planet Free market In a free market, the forces of supply and demand alone determine price and output without any government intervention. Free markets are totally unregulated Goods Tangible, physical products e.g. cars and computers Incentives Incentives matter! For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market Incidence of a tax How the final burden of a tax is shared out. If demand for a good is elastic and a tax is imposed then the tax will fall mainly on the producer as they will be unable to put prices up without losing a lot of demand Income Income represents a flow of earnings from using factors of production to generate an output of goods and services. For example wages and salaries. Income elasticity of demand Measures the relationship between a change in quantity demanded and a change in real income. The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income Independent goods Two products that have no price-quantity demanded relationship: XED=0 Indirect tax An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax Inefficiency When the best use of resources is not being made Inelastic demand When the price elasticity of demand is less than 1 Inelastic supply When the price elasticity of supply is less than +1 Inferior good When demand for a product falls as real incomes increases Inputs Labour, capital and other resources used in the production of goods and services Inventories Unsold products, finished and unfinished, and the raw materials used to make them Invisible hand Adam Smith - one of the founding fathers of modern economics, described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest Joint supply Joint supply describes a situation where an increase or decrease in the supply of one good leads to an increase or decrease in supply of another by-product e.g. a contraction in supply of lamb will reduce the supply of wool Land Quantity and quality of natural resources available in an economy Latent demand Latent demand exists when there is willingness to buy a product, but where the consumer lacks the purchasing power to be able to afford the product Law of demand The law of demand is that there is an inverse relationship between the price of a good and demand Living Wage The living wage is an hourly rate of pay set annually by reference to the basic cost of living in the UK and London. Unlike the National Minimum Wage, employers may choose to pay the living wage on a voluntary basis.
- 4. Long run The time period when firms can adjust all factors used in production Market equilibrium Equilibrium means a state of equality between demand and supply. Without a shift in demand and/or supply there will be no change in market price. Prices where demand and supply are out of balance are termed points of disequilibrium Market incentives Market signals that motivate economic actors to change their behaviour (perhaps in the direction of greater economic efficiency) Market shortage Where demand exceeds supply at a given price Market supply Market supply is the total amount of an item producers are willing and able to sell at different prices, over a given period of time egg one month. Industry, a market supply curve is the horizontal summation of all each individual firm’s supply curves Maximum price A legally-imposed maximum price in a market that suppliers cannot exceed. To be effective a maximum price has to be set below the free market price Minimum price A legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price. A good example of this is minimum wage legislation currently in force in the UK Mixed economy Where resources are partly allocated by the market and partly by the government Needs Humans have many different types of wants and needs e.g.: economic, social and psychological. A need is essential for survival e.g. food satisfies hungry people. A want is something desirable but not essential to survival e.g. cola quenches thirst Non-renewable resources Non-renewable resources are resources which are finite and cannot be replaced. Minerals, fossil fuels and so on are all non-renewable resources Normal goods Normal goods have a positive income elasticity of demand. Necessities have an income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income Normative statements Normative statements express an opinion about what ought to be. They are subjective statements - i.e. they carry value judgments Opportunity cost The cost of any choice in terms of the next best alternative foregone. Ostentatious consumption Some goods are luxurious items where satisfaction comes from knowing both the price of the good and being able to flaunt consumption of it to other people Persuasive advertising Designed to manipulate consumer preferences and cause a change in demand Perverse demand curve A perverse demand curve is one which slopes upwards from left to right. Therefore an increase in price leads to an increase in demand Planned economy In a planned economy, decisions about what to produce, how much to produce and for whom are decided by central planners rather than using the price mechanism Positional goods Goods which are at least in part demanded because their possession or consumption implies social or other status of those acquiring them Positive statement Objective statements that can be tested or rejected by referring to the available evidence. Positive economics deals with objective explanation Preferences Our tastes, likes, rankings reflected in the choices that people make in markets Price elasticity of demand Responsiveness of demand for a product following a change in its own price. Also called own price elasticity of demand.
- 5. Price elasticity of supply Relationship between change in quantity supplied and a change in the price of a product Price mechanism The means by which decisions of consumers and businesses interact to determine the allocation of resources between different goods and services Price rigidity Situation where the price of a product rarely changes Price signals Changes in price act as a signal about how resources should be allocated. A rise in price encourages producers to switch into making that good but encourages consumers to use an alternative substitute product (therefore rationing the product) Producer surplus The difference between what producers are willing and able to supply a good for and the price they actually receive Production possibility frontier A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently Productivity A measure of efficiency = output per unit of input or output per person employed Rational choice ‘Rational choice’ involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs Redistribution Measures taken by government to transfer income from some individuals to others Regressive tax A tax is said to be regressive when low income earners pay a higher proportion of their income in tax than high income earners Regulations Regulations are legally enforced rules that restrict or ban specified activities Regulator A government agency that monitors the performance of firms in an industry such as OFCOM or the Office of Rail Regulation Relative poverty Relative poverty measures the extent to which a household's financial resources falls below an average income threshold for the economy Road pricing A direct charge to road users for their use of a particular road e.g. a motorway toll Scarcity Scarce means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire Self sufficiency Where people meet their own wants and needs without producing a surplus to trade Seller’s market A market where demand exceeds supply, allowing the sellers of a product to have greater control over prices, terms, etc. The opposite of a buyer's market Shortage A situation in which quantity demanded is greater than quantity supplied Signalling Prices have a signalling function because the price in a market sends important information to producers and consumers Spare capacity Where a firm or economy can produce more with existing resources. When there is plenty of spare capacity, elasticity of supply tends to be high Specialisaton A method of production where a business or area focuses on the production of a limited scope of products or services to gain greater productive efficiency Speculation Speculation is the activity of buying a good or service in anticipation of a change in the price/market value e.g. currency or stock-market speculation Stakeholders Groups who have an interest in the activity of a business e.g. shareholders, managers, employees, suppliers, customers, government and local communities. Different stakeholders have different objectives e.g. owners want maximum profits, customers low prices and workers high wages and rising living standards
- 6. State provision Government-provided good or services - funded through tax revenue, in order to provide goods which have positive externalities or are public goods Subsidy Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price Substitutes Goods in competitive demand and act as replacements for another product Substitutes in production A substitute in production is a product that could have been produced using the same resources. Take the example of barley. An increase in the price of wheat makes wheat growing more attractive Substitution effect When a price fall encourages consumers to buy more of a relatively lower priced product and less of a higher priced substitute Supply Quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period Supply chain Different stages of making, distributing and selling a good or service from the production of parts, through to distribution and sale of the product Supply shock An event that directly alters firms' costs and prices shifting the supply curve either to the right (lower costs) or to the left (higher costs). Examples include unexpected changes in the global prices of commodities such as oil, gas and metals Technology The application of knowledge to production Time lags Time lags occur in production, particularly in agriculture, when decisions about the quantity to be produced are made well ahead of the actual sale. Demand and the price may change in the interval, creating a problem for the producer Trade-off The process of making a choice between alternatives e.g. deciding if is worth sacrificing a new car for a holiday Value judgement A view of the rightness or wrongness of something, based on a personal view. Welfare loss The excess of social cost over social benefit for a given output Willingness to pay The maximum price a consumer is prepared pay to obtain a product