Handy Definitions For Unit 1: Markets: How They Work and Why They Fail?

(1) Production possibility frontier (PPF). A curve that shows the combination of two goods that can be produced in an economy shall all resources are fully & efficiently used

(2) Opportunity cost. The next best alternative forgone

(3) Specialisation. Process of breaking up a task into a number of repetitive operations each done by different workers

(4) Free market economy. An economy where resources are all privately owned & price mechanism will act to allocate resources

(5) Command economy. An economy where all resources are publicly owned & state government will intervene to allocate resources

(6) Mixed economy. An economy where resources are owned & allocated by both private sector & government

(7) Positive statement. Statement that can be proven true or false by referring to facts

(8) Normative statement. Value judgement & cannot be proven true or false

(9) Substitutes. Goods that can be used in place of another

(10) Complements. Goods that are jointly used with another

(11) Consumer surplus. The difference between what the consumers are willing to pay & what they are actually paying

(12) Producer surplus. The difference between the actual price a producer receives for its good & the lower price it is willing to accept

(13) Price elasticity of demand (PED). Measures the responsiveness of demand for a good to a change in its price

(14) Cross elasticity of demand (XED). Measures the responsiveness of demand for a good (say Good X) to a change in the price of another good (say Good Y)

(15) Income elasticity of demand (YED). Measures the responsiveness of demand for a good to a change in income

(16) Price elasticity of supply (PES). Measures the responsiveness of supply for a good to a change in its own price

(17) Taxes. Fee charged onto a particular good or service to discourage its production or consumption

(18) Subsidies. Grants given by the government to encourage the production or consumption of a particular good or service

(19) Incidence of tax. Means upon who the tax fall onto

(20) Minimum guaranteed price. Price floor set by government onto agriculture produce in order to protect farmers’ income

(21) National minimum wage. Price floor on wages set by government, below which is illegal for employers to hire workers

(22) Economies of scale. Fall in long run average cost curve associate with an increase in output

(23) Private cost. Costs directly incurred by an individual consumer or producer when they engage in an economic activity

(24) External cost. Costs incurred by a third party not directly involved in an economic activity

(25) Private benefits. Benefits directly gained by an individual consumer or producer when they engage in economic activity

(26) External benefit. Benefits gained by a third party not directly involved in an economic activity

(27) Public goods. Must have two characteristics, non-rivalry & non-excludability. Non-rivalry means consumption of a good by an individual will not reduce the amount available for others to consume. Non-excludability means once the good is provided, no one can be excluded from benefiting it

(28) Free rider. Someone who receives the benefits that others have paid for without making any contribution themselves

(29) Government failure. When the government intervention into an economic activity leads to net loss in economic welfare

(30) Market failure. When price mechanism fails to allocate resources efficiently