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Economic Terms

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Demerit good

A good that is over-provided by the market and as a result becomes over-consumed by consumers. Tobacco, alcohol and fast food are all examples of this type of good. This is the opposite of a merit good.

The market failure created in these types of goods is caused by a divergence between the marginal private benefit and the marginal social benefit curves. This is because when individuals consume demerit goods it releases negative consumption externalities onto society. As a result, this means that the MSB curve always lies below the MPB curve and this leads to the good being over-consumed in the market. For instance, individuals that smoke cigarettes enjoy the private benefits of smoking - the satisfaction they receive from smoking today. However, it also creates several external costs, which get passed onto society (third parties) that perhaps - due to the presence of imperfect information - the smoker does not acknowledge. The external costs of smoking include: second hand smoke, smell of cigarettes and the strain it puts on a country's health service as a result of smokers developing diseases later in life such as lung cancer. It is the fact that the smoker underestimates the long run health problems they could face from smoking, which creates the over-consumption of the good.

Below is a diagram to show an example of a market for a demerit good:

It is important to consider that not all goods which create a negative externality can instantly be recognised as a demerit good. Because classing a good as a demerit good depends on the valued judgement of the consumer i.e. smokers may not class cigarette as a demerit good.

As these types of goods always create negative externalities the government will try to intervene in the market to either reduce or eliminate the externality and the dead weight loss triangle, increasing welfare in the process. The ability to implement these policies and more importantly the effectiveness of them depends on how large the externality in the market is. For some goods, the magnitude of the externality is greater than other goods and this means the level of government intervention needs to be larger as a result. For instance, in markets such as the drugs market, government impose outright bans on the good as the externality imposed on society is so large. However, if the negative externality is smaller, then the government can use an indirect tax or educational policies to internalise the externality. 

Deposit Insurance

Is a gurantee to savers that all or a fraction of their deposits will be reimbursed if a bank fails. This is funded by the taxpayer. This is put in place to ensure that destructive bank runs do not occur by ensuring that depositors do not have a marginal propensity to run. Therefore savers will feel confident that there savings are safe even if the bank is troubled. As of 2015 the Bank of England increased the protection of up to £1million on certain depsoits.


Money placed into a financial intermediary for security and wealth generating purposes. This money gets placed into deposit accounts such as savings accounts and checking accounts. The placement of deposits allow banks to use these funds to lend to borrowers and that in turn allows banks to make their profits through the interest income channel.

Below is a diagram which highlights how banks act as an intermediary of funds between surplus units (total income exceeds total expenditure) and deficit units (total income exceeded by total expenditure). This is done by taking depostis from these savers and transferring them to borrowers through loans.

Depreciating exchange rate

A fall in the value (Exchange Rate) of a currency due to excess supply. This will result in lower export prices and higher import prices.


A sustained reduction in economic activity and GDP that lasts for a long period of time (typically 2 years or more) and leads to very high levels of unemployment e.g. the depression that followed the Wall St crash in 1929 lasted for 3 1/2 years and GDP fell by over 25% and the unemployment rate rose to 25%.


A form of government policy when existing regulations are loosened or removed to encourage supply or demand of a good or service.

Derived demand

When the demand for one good or service results in the demand for another good or service that is a necessary part of the production process.

Below is a set of diagrams to illustrate derived demand in a demand and supply framework. If there is an increase in demand for cars, then ultimately more cars need to be produced to meet the extra demand. However, more cars can only be made if more steel is made. So therefore similtaneously an increase in demand for cars will lead to an increase in demand for steel, as steel has demand derived from cars.

Determinant of demand

The factors that will determine the level of demand at a given price e.g. population.

Below is a list of factors that will cause the demand of a given product to change. If the price of substitute goods change this will change the demand for a product as consumers will always switch to the cheapest versions of a product. If the price of complementary goods change this will affect the demand for a product as consumers will always consume both complimentary goods together. Changes in real income will affect the demand of a good because the more income that consumers have available to them the mre goods they are likely to demand and consume. The persuasion of advetising and marketing campaigns can sway consumers towards purchasing goods. Finally a change in fashion, tastes and preferences can also affect demand for products, this often happens in the clothing industry when certain clothing items come back into fashion .

Determinant of supply

A factor that will determine the level of supply at a given price.

Below is a list of factors that will cause the supply of a given product to change. If the costs of production change this will change the supply because it will ultimately affect the cost at which firms can produce products at and therefore their profit margins will be affected. New technology being introduced can increase the producitvity and efficiency of the production process and this can lead to an increase in supply at a given price. Goevernment taxes and subsidies can affect the overall cost of producing a good. For instance if a subsidy is granted to a firm it will encourage them to produce more as it is now cheaper to produce. Finally external factors such as the change in climate can affect the amount of goods that can be produced particuarly in the agricultural market (primary sector).



An essential element of both a normal good and a private good. It means the consumption of a good or service by one consumer will diminish the amount available to another.

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