Markets and Market Failure Concept Glossary

Excise duties

Excise duties are indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance.

Absolute poverty

The number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services. The United Nations definition is a severe and persistent deprivation of basic human needs

Adam Smith

One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith's discussion of the advantages of division of labour remains a potent idea

Air passenger duty

A per passenger charge on air travel from UK airports. The level of duty varies depending on the class of travel (with economy class having a smaller charge) and the distance travelled.

Alienation

A sociological term to describe the estrangement many workers feel from their work, which may reduce their motivation and productivity. It is sometimes argued that alienation is a result of the division of labour because workers are not involved with the satisfaction of producing a finished product, and do not feel part of a team.

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

A production technique that uses capital machinery / technology to replace or enhance human labour

Average fixed cost

Fixed costs are costs of production which are constant whatever the level of output. Average fixed costs are total fixed costs divided by the number of units of output, that is, fixed cost per unit of output

Barter

The practice of exchanging one good or service for another, without using money

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 (or a shortage) for a commodity

Brand

A distinctive product offering which is created by the use of a logo, symbol, name, design, packaging or combination thereof. The key in designing and building a brand is to differentiate it from competitors.

Bulk-buying

The purchase by one organisation of large quantities of a product or raw material, which often results in a lower price because of their market power and because it is cheaper to deal with one customer and the deliveries can be on a larger scale.

By-product

A by-product is a good or service that is produced as a consequence of producing another good or service.

Capacity-building

Efforts to develop human skills or infrastructures within a community or organisation

Capital-intensive

A production technique which uses a high proportion of capital to labour

Carbon capture and storage

The process of trapping and storing carbon dioxide produced by burning fossil fuels

Cartel

A cartel is a formal agreement among firms. Cartel members may agree on prices, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. Cartels are illegal under UK and European competition laws.

Cigarette duties

Cigs in the UK are taxed on 16.5% retail price + £154.95 per thousand cigarettes.

Command and control

Laws and regulation backed up by inspection and penalties for non-compliance

Common resources

Goods or services that have characteristics of rivalry in consumption and non-excludability - grazing land or fish stocks are examples. The over-exploitation of common resources can lead to the "tragedy of the commons"

Competitive market

A market where no single firm has a dominant position and where the consumer has plenty of choice when buying goods or services. There are few barriers to the entry of new firms

Complements

Two complements are said to be in joint demand. Examples include: fish and chips, DVD players and DVDs, iron ore and steel,

Conspicuous consumption

Conspicuous consumption is consumption designed to impress others rather than something that is wanted for its own sake.

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 gaining utility from it.

Consumer surplus

A measure of the welfare that people gain from the consumption of goods and services, or a measure of the benefits they derive from the exchange of goods. 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)

Contestable market

Market with no entry barriers - firms can enter or leave an without significant cost.

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 an important distinction between substitute products and complementary goods and services.

Deadweight loss

The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure

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

The demand for a product X might be strongly linked to the demand for a related product Y - giving rise to the idea of a derived demand.

Disposable income

Income that remains after direct taxes and government charges has been paid.

Division of labour

The specialization of labour in specific tasks, intended to increase productivity

Economic efficiency

Economic efficiency is about making the best use of our scarce resources among competing ends so that economic and social welfare is maximised over time

Economic planning

Government policies aimed at influencing trends in the economy.

Economy of scope

Economies of scope occur where it is cheaper to produce a range of products.

Elastic demand

Demand for which price elasticity 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.

Excess demand

The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price. This will result in queuing and an upward pressure on price

Excludability

The property of a good whereby a person can be prevented from using it

External growth

When a company increases its sales and profits by buying other companies, rather than from its own operations.

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.

First mover advantage

The first company to introduce a new product to market, has the opportunity to extract the greatest long term benefit from the product introduction compared to that which following companies would be able to gain.

Flexible working

A workforce that is multi-skilled and able to work variable hours in response to changing demand

Freemium

A business model, especially on the Internet, whereby basic services are provided free of charge while more advanced (premium) features must be paid for

Gini Coefficient

The Gini coefficient measures the extent to which the distribution of income (or, in some cases, consumption expenditures) among individuals or households within an economy deviates from a perfectly equal distribution. The coefficient ranges from 0 -meaning perfect equality -to 1- complete inequality.

Government failure

Policies that cause a deeper market failure. Government failure may range from the trivial, when intervention is merely ineffective, to cases where intervention produces new and more serious problems that did not exist before

Health rationing

Health rationing occurs when the demand for health care services outstrips the available resources leading to waiting lists and delays for health treatment.

Horizontal equity

Horizontal equity requires equals to be treated equally e.g. people in the same income group should be taxed at the same percentage rate

Incentives

Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.

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 are a factor reward to labour and interest is the flow of income for the ownership of capital.

Income gap

A measure of the gap between the incomes of various groups shown by plotting the average incomes of the between the lowest and highest decile (10% grouping)

Inelastic demand

When the price elasticity of demand is less than 1

Inferior good

When demand for a product falls as real incomes increases

Information failure

Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially 'wrong' choices.

Inputs

Labour, capital and other resources used in the production of goods and services

Internalised

Internalising is where any spill-over effects from economic activity are absorbed by the consumer or firm themselves. This may arise for example, where a pollution tax has been charged on the good that makes them pay the external costs themselves

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

Just in time

Production that produces goods to order. The business does not hold any significant level of stock

Latent demand

Latent demand exists when there is willingness to purchase a good or service, but where the consumer lacks the purchasing power to be able to afford the product. Latent demand is affected by persuasive advertising - where the producer is seeking to influence consumer tastes and preferences.

Local monopoly

A monopoly limited to a specific geographical area

Manufacturing

Manufacturing is the use of machines, tools and labour to make things for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale

Marginal revenue

The increase in revenue resulting from an additional unit of output

Market failure

Market failure exists when the competitive outcome of markets is not efficient from the point of view of the economy as a whole. This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity diverge from the benefits to society as a whole

Market power

Market power refers to the ability of a firm to influence or control the terms and condition on which goods are bought and sold. Monopolies can influence price by varying their output because consumers have limited choice of rival products.

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.

Means tested benefits

Welfare payments which are only paid to households who can prove they are poor

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

Monopoly

A single seller of a product in a given market or industry

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

Niche market

A specialist section of a larger market e.g. hand-made chocolates

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

Objectives

A specific target an organisation sets itself to achieve through its activity

Opportunity cost

The cost of any choice in terms of the next best alternative foregone.

Out-sourcing

Subcontracting a process, such as design or manufacturing, to another company

Pareto efficiency

In neoclassical economics, an action done in an economy that harms no one and helps at least one person. A situation is Pareto efficient if the only way to make one person better off is to make another person worse off.

Peak pricing

When a business raises prices at a time when demand is strongest

Persuasive advertising

Designed to manipulate consumer preferences and cause a change 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 working for the government rather than allocated 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. For example: “A rise in consumer incomes will lead to a rise in the demand for new cars." Or “A fall in the exchange rate will lead to an increase in exports overseas."

Preferences

Our tastes, likes, rankings – e.g. I have a preference for organic foods and I prefer the Independent newspaper to the Guardian

Price elasticity of supply

Price elasticity of supply measures the relationship between change in quantity supplied and a change in price.

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).

Private cost

Costs of an economic activity to individuals and firms. Also known as internal costs.

Producer surplus

The difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the market price.

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

Property rights

Property rights confer legal control or ownership of a good. For markets to operate efficiently, property rights must be clearly defined and protected - perhaps through government legislation and regulation

Public goods

Pure public goods are non-rival – consumption of the good by one person does not reduce the amount available for consumption by another person, and non-excludable – where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy.

Purchasing power

A measure of money's value in terms of what it can buy. Purchasing power tends to change over time, mainly because of inflation.

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

Relative poverty

Relative poverty measures the extent to which a household's financial resources falls below an average income threshold for the economy

Scarcity

Scarce means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.

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.

Signalling

Prices have a signalling function because the price in a market sends important information to producers and consumers

Social cost

The cost of production or consumption of a product for society as a whole. Social cost = private cost + external cost

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

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.

State provision

Government-provided good or services - funded through tax revenue,in order to provide goods which have positive externalities or are public goods

Substitutes

Goods in competitive demand and act as replacements for another product

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 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 hard metals.

Tax incidence

The manner in which the burden of an indirect tax is shared between participants in the market i.e. consumers and producers

Tragedy of the Commons

When no one owns a resource, it gets over-used, for example fish stocks and deforestation - people use and benefit from it without regard to the effect on others

Transfer payments

Government welfare benefits made available through the social security system

Variable cost

Variable costs vary directly with output. I.e. as production rises, a firm will face higher total variable costs because it needs to purchase extra resources to achieve an expansion of supply. Common examples of variable costs or a business include the costs of raw materials, labour costs and consumables.