Definition
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Answer
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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.
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Incentive Function of Prices
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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.
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Rationing Function of Prices
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Refers to the importance of price in helping buyers and sellers make decisions about whether it is worthwile to buy or sell a product.
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Signalling Function of Prices
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Occurs when a market economy does not achieve an efficient allocation of resources.
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Market Failure
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Occurs when a market exists but where the level of production is too low or too high.
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Partial Market Failure
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Occurs when a good or service is not supplied at all.
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Complete Market Failure
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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.
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Misallocation of Resources
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The effects of economic activity on third parties, who are not involved and have no say in the economic activity that has taken place.
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Externalities
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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.
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Positive Externalities
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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.
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Negative Externalities
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Describes a good that is underproduced in a pure market economy.
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Merit Goods
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Describes a good that is overproduced in a pure market economy.
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Demerit Goods
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Goods or services that possess the three features of excludability, rejectability and rivlary.
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Private Goods
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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.
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Excludability
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A feature of a good or service whereby any individual can choose not to consume that good.
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Rejectability
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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.
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Rivalry
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Goods that are at least non-excludable and non-rivalry, and may be non-rejectable.
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Public Goods
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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.
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Non-excludability
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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.
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Non-rejectability
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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.
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Non-rivalry
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Goods that are partly excludable or partly rivalrous.
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Quasi-public Goods
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Someone who benefits from a good or service without paying for it.
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Free-rider
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Benefits to outsiders/third parties arising from the manufacturing or provision of a good or service.
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Positive Externalities in Production
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The adverse consequences to outsiders/third parties arising from the manufacturing or provision of a good or service.
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Negative Externalities in Production
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The benefits to outsiders/third parties arising from the purchase or use of a good or service.
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Positive Externalities in Consumption
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The adverse consequences to outsiders/third parties arising from the purchase or use of a good or service.
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Negative Externalities in Consumption
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The financial costs to an individual or firm of an economic transaction undertaken by that individual or firm.
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Private Costs
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The financial benefits to an individual or firm of an economic transaction undertaken by that individual or firm.
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Private Benefits
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The value of negative externalities arising from the production and consumption of a particular good.
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External Costs
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The value of positive externalities arising from the production and consumption of a particular good.
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External Benefits
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The full costs to society of an economic activity, taking into consideration both private costs and external costs.
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Social Costs
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The full benefits to society of an economic activity, taking into consideration both private benefits and external benefits.
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Social Benefits
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When a buyer or seller lacks the information needed to make the best choice in a transaction.
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Imperfect Information
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When both the seller and the buyer are well informed about the goods and services and prices in the market.
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Symmetric Information
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When either the seller or the buyer has more information than the other party in a transaction.
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Asymmetric Information
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A tax and takes the same proportion of taxpayers' incomes, regardless of their income level.
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Proportional Tax
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A tax that takes a higher proportion of taxpayers' incomes increase.
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Progressive Tax
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A tax that takes a lower proportion proportion of taxpayers' incomes as their incomes increase.
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Regressive Tax
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Describes government actions that are designed to affect economic activity economic activity and the allocation of resources.
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Government Intervention
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Describes spending by the government on the provision of goods and services and spending on cash benefits.
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Government Expenditure
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Taxes levied on income or wealth such as income tax.
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Direct Taxation
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Paid on spending by firms, households and other organisations such as VAT.
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Indirect Taxation
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A payment to a producer in order to encourage greater production of a good.
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Subsidies
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Exist when government takes action to affect directly the price paid for a good.
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Price Controls
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Occurs when government intervention in the economy leads to a net loss in economic welfare and a misallocation of resources.
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Government Failure
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Occurs when the actions of participants in economic decisions, such as government, producers and consumers, are not the actions that were expected.
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Law of Unintended Consequences
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