Economics: Topic 5, Year 1 Definitions

This is a revision quiz for A-Level Economics, Topic 5, Year 1. This topic is on: The market mechanism, market failure and government intervention in markets.
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Last updated: September 14, 2020
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First submittedApril 8, 2020
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Definition
Answer
Refers to the way in which low prices act as an incentive for consumers to buy more of a product in order to increase their satisfaction, while high prices act as an incentive for suppliers to supply more in order to increase profit.
Incentive Function of Prices
Arises because it is not possible to satisfy the unlimited wants of consumers with the scarce resources available. Price acts as a rationing device, as only consumers prepared to pay the market price are able to purchase. If a good becomes scarce, its price will rise, discouraging buyers and so preserving stocks.
Rationing Function of Prices
Refers to the importance of price in helping buyers and sellers make decisions about whether it is worthwile to buy or sell a product.
Signalling Function of Prices
Occurs when a market economy does not achieve an efficient allocation of resources.
Market Failure
Occurs when a market exists but where the level of production is too low or too high.
Partial Market Failure
Occurs when a good or service is not supplied at all.
Complete Market Failure
Occurs when an economy fails to produce goods at the lowest average total costs and/or fails to achieve the goal of providing those goods to the consumers to whom they provide.
Misallocation of Resources
The effects of economic activity on third parties, who are not involved and have no say in the economic activity that has taken place.
Externalities
Describes the benefits that accrue to third parties not involved in an economic activity. These benefits can be passed on due to either the consumption or production of a commodity by other members of society.
Positive Externalities
Describes the problems experienced by third parties not involved in an economic activity. These problems can be passed on due to either the consumption or production of a commodity by other members of society.
Negative Externalities
Describes a good that is underproduced in a pure market economy.
Merit Goods
Describes a good that is overproduced in a pure market economy.
Demerit Goods
Goods or services that possess the three features of excludability, rejectability and rivlary.
Private Goods
A feature of a good or service whereby if an individual pays for that good or service, it is possible to prevent others from having access to that good or service.
Excludability
A feature of a good or service whereby any individual can choose not to consume that good.
Rejectability
A feature of a good or service wherby if a person consumes that good or service, the quantity available diminshes and so it is not available for others to consume.
Rivalry
Goods that are at least non-excludable and non-rivalry, and may be non-rejectable.
Public Goods
A feature of a good or service whereby if that good or service is provided, it is impossible to prevent others from having access to the benefits of that good or service.
Non-excludability
A feature of a good or service whereby if that good or service is provided, an individual must accept it, even if they would chose not to consume that good or service.
Non-rejectability
A feature of a good or service whereby if a person consumes that good or service, it does not reduce the quantity available for others to consume.
Non-rivalry
Goods that are partly excludable or partly rivalrous.
Quasi-public Goods
Someone who benefits from a good or service without paying for it.
Free-rider
Benefits to outsiders/third parties arising from the manufacturing or provision of a good or service.
Positive Externalities in Production
The adverse consequences to outsiders/third parties arising from the manufacturing or provision of a good or service.
Negative Externalities in Production
The benefits to outsiders/third parties arising from the purchase or use of a good or service.
Positive Externalities in Consumption
The adverse consequences to outsiders/third parties arising from the purchase or use of a good or service.
Negative Externalities in Consumption
The financial costs to an individual or firm of an economic transaction undertaken by that individual or firm.
Private Costs
The financial benefits to an individual or firm of an economic transaction undertaken by that individual or firm.
Private Benefits
The value of negative externalities arising from the production and consumption of a particular good.
External Costs
The value of positive externalities arising from the production and consumption of a particular good.
External Benefits
The full costs to society of an economic activity, taking into consideration both private costs and external costs.
Social Costs
The full benefits to society of an economic activity, taking into consideration both private benefits and external benefits.
Social Benefits
When a buyer or seller lacks the information needed to make the best choice in a transaction.
Imperfect Information
When both the seller and the buyer are well informed about the goods and services and prices in the market.
Symmetric Information
When either the seller or the buyer has more information than the other party in a transaction.
Asymmetric Information
A tax and takes the same proportion of taxpayers' incomes, regardless of their income level.
Proportional Tax
A tax that takes a higher proportion of taxpayers' incomes increase.
Progressive Tax
A tax that takes a lower proportion proportion of taxpayers' incomes as their incomes increase.
Regressive Tax
Describes government actions that are designed to affect economic activity economic activity and the allocation of resources.
Government Intervention
Describes spending by the government on the provision of goods and services and spending on cash benefits.
Government Expenditure
Taxes levied on income or wealth such as income tax.
Direct Taxation
Paid on spending by firms, households and other organisations such as VAT.
Indirect Taxation
A payment to a producer in order to encourage greater production of a good.
Subsidies
Exist when government takes action to affect directly the price paid for a good.
Price Controls
Occurs when government intervention in the economy leads to a net loss in economic welfare and a misallocation of resources.
Government Failure
Occurs when the actions of participants in economic decisions, such as government, producers and consumers, are not the actions that were expected.
Law of Unintended Consequences
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