Unit 1 Markets and market failure Definitions

Market mechanism The means by which demand and supply determine the price and
quantity of a good or service in a market OR the process by which markets solve the
problem of allocating scarce resources between competing uses
Price mechanism The means by which decision taken by consumers and producers
interact to allocate scarce resources
Supply - The quantity of a good or service producers are willing and able to sell at a given
price over a period of time.
Demand - The quantity of a good or service that consumers are willing and able to purchase
at a given price over a given time period
Compositedemand Demand for a good that has multiple or at least two uses
Jointdemand Goods which are bought together (complements and have a negative cross
elasticity of demand)
Deriveddemand Good or service whose demand depends on the demand for another
good
Jointsupply - A situation where an increase or decrease in the supply of one good leads to
an increase or decrease in supply of another.
Substitutes Goods which are in competing demand and act as a replacement for another
product.
IncomeElasticityofDemand Measures the responsiveness of demand to a change in
income
Normalgood A good for which demand increases as income increases OR a good for
which demand falls as income falls
Inferiorgood A good for which demand falls as income increases OR a good for which
demand rises as income falls
Free good - Is one which is abundantly available for everyone to use. It can be obtained
without limit to satisfy your needs and wants. An example of a free good would be air.
Economicgood A good which is scarce and has a value and therefore can be bought
Priceelasticityofdemand Measures the responsiveness of demand to a change in price
Priceinelastic When percentage change in demand is less than the percentage change in
price
Priceelastic When the percentage change in demand is greater than the percentage
change in price
Unitelasticity When the percentage in demand equals the percentage change in price

Crosselasticityofdemand Measures the responsiveness of demand of one good resulting

from a change in the price of another
Priceelasticityofsupply Measures the responsiveness of supply to a change in price
Subsidy Payment from the government that reduces the cost of production for firms and
leads to lower prices
Sparecapacity The extent to which an industry is operating below the maximum
sustainable level of production
Costofproduction Costs directly related to the making of a good or service
Equilibriumprice The price at which quantity demanded and quantity supplied is equal
Marketfailure Occurs when there is a misallocation of resources and it leads to a loss of
social and economic welfare
Externalcost The cost imposed on a third party from the consumption or production of a
good or service
Externalbenefit The benefit imposed on a third party from the consumption or production
of a good or service
Marginalprivatecost The cost borne by the party involved in an activity due to the
consumption or production of an extra unit
Marginalsocialcost the private cost plus external cost of consuming or producing an extra
unit of output, for example by a firm or by a consumer
Marginalsocialbenefit The private benefit plus the external benefit of consuming or
producing an extra unit of output, for example by a firm or by a consumer
Marginalprivatebenefit The benefit borne by the party involved in an activity due to the
consumption or production of an extra unit
Socialcost - the private cost plus external cost of any decision or action, for example by a
firm or by a consumer
Socialbenefit The private benefit plus external benefit of any decision or action, for
example by a firm or by a consumer
External economies of scale Occurs outside a firm but inside an industry, this means
every organisation within the industry benefits from falling average costs
Economiesofscale Arises when average costs fall as output of a firm increases
Technicaleconomiesofscale Arises when average costs fall as output of a firm increases
caused by improvements in machinery.
Marketing economies of scale The ability of big firms to have large advertising budgets
and launch national campaigns to increase sales
Managerial economies of scale This is a form of division of labour, allowing large firms to
employ specialist managers, improving the quality of management and productivity

Financial economies of scale The ability of large firms to borrow large sums of money at
low interest rates. They can also raise money through the stock market
Bulk buying/ purchasing economies of scale The ability of big firms to buy in bulk,
receiving discounts and lowering cost per unit, giving them a competitive advantage
Diseconomiesofscale Arise when the average costs increase as output of a firm
increases
Positiveexternalities Arise when the production or consumption of a good or service
imposes external benefits to the third party.
Negativeexternalities Arise when the production or consumption of a good or service
imposes external costs on society for which no appropriate compensation is paid.
Deadweightwelfareloss The cost to society created by market inefficiency
Demeritgood A good which generates negative externalities when consumes
Meritgood A good which generates positive externalities when consumed
Factorofproduction An economic resource used to produce goods and services
Scarceresources Factors of production that are limited in supply
Capitalgoods Goods which can be used to produce other consumer goods and services
Commandeconomy An economy where the state allocates scarce resources
FreemarketeconomyThe price mechanism (The forces of demand and supply) allocate
scarce resources
Mixedeconomy A mixture of the market (supply and demand) and the state allocate scarce
resources
ProductionPossibilityCurve A curve which shows the maximum combination of two or
more goods that can be produced by a country using all its factors of production
Productiveefficiency Producing at the lowest possible point on the average cost curve
Opportunitycost Measures the cost of any choice in terms of the next best alternative
foregone
Positivestatement Objective statements that can be tested or rejected using available
evidence
Normativestatement An opinion about what ought to be. They are subjective statements
Privategood A good that is excludable and rival
Publicgood A good that is non-excludable and has non rivalry in consumption
Quasi-Publicgood A good that has some characteristics of a public good but not all of
them, i.e. it might be non-excludable but has rivalry in consumption

Indirecttaxation Tax, such as VAT, that is levied on goods and services rather than
individuals
Maximumprice A legally imposed price ceiling the market cannot exceed
Minimumprice A legally imposed price floor below which the market price cannot fall
Governmentfailure An attempt by the government to correct market failure which leads to
no impact or negative unintended consequences
Monopoly A situation in which the market is dominate by one single seller or producer
Economics - Study of how individuals needs and wants are met through the allocation of
scarce resources.
Supply curve -Shows the relationship between price and quantity supplied. A fall in price will
lead to a fall in quantity supplied. A rise in price will lead to a rise in quantity demanded.
Excess demand- A situation were demand is greater than supply.
Excess supply- A situation were supply is greater than demand.
Unit tax- this is a fixed amount of tax regardless of the price of the good or service.
Ad valorem tax- This is a fixed percentage of the value or price of the good or service. With
these taxes the amount rises with the value of the good or service.
Concentration ratio This is the extent to which the industry is dominated by a few firms
Low concentration ratio Refers to a competitive market in which intense competition
leads to low prices and increased output
High concentration ratio A market dominated by a few firms and therefore likely to exhibit
signs of monopoly power
Dynamic efficiency Technological progressiveness and innovation, refers to efficiency
over time and is concept often associated with Joseph Schumpeter
Allocative efficiency Where supply equals demand. It is where the consumers and
producers are happy with the level of output produced
Specialisation- A method of production where a business or country focus on the
production of a limited scope of products or services or occurs when workers are
assigned specific tasks within a production process.
Division of labour- when production is broken down into many separate tasks.
Occupational immobility of labour-This occurs when there are barriers to the mobility of
factors of production between different sectors of the economy leading to these factors to
remain unemployed or to be used in ways which are not efficient.
Geographical immobility of labour- The difficulty faced by workers to move from one
geographical area to another.

National minimum wage- Is the minimum pay per hour all workers are entitled to by law.
Fixed cost- These are costs that stay the same and do not change as output changes.
Variable cost- These are costs that change as output changes.
Total cost- Total economic cost of production.FIXED COST+VARIABLE COST
Average cost- The cost per unit produced. TOTAL COST TOTAL OUTPUT
Average output- TOTAL OUTPUT LABOUR
Marginal cost-The cost of producing an extra unit of output.
CHANGE IN TOTAL COSTMARGINAL OUTPUT
Marginal output-Extra output produced by an extra unit of labour.
Short run- A period of time where at least one factor of production is fixed, this is usually
land or capital. Labour is usually a variable which you can change.
Long run- A period of time where all the factors of production are variable.