Studied by 40 people
Positive Statement
a statement that is objective and can be tested by referring to the evidence available and so can be scientifically proven
Normative Statement
a statement that is subjective as it includes a value judgement, therefore not possible to test as it is based on opinion
Need
something that is necessary for human survival, such as food, clothing, warmth or shelter
Want
something that is desirable such as fashionable clothing, but is not necessary for human survival
The basic economic problem
There are a limited amount of resources to fulfil our infinite number of wants
Economic Welfare
the economic well-being of an individual, a group within society, or an economy. It is maximised when scarce resources are allocated efficiently in economic activity to produce a good people want/need
Production
a process, or set of processes, that converts inputs into outputs of goods
Capital Good
a good which is used in the production of other goods or services. Also known as a producer good
Consumer Good
a good which is consumed by individuals or households to satisfy their needs or wants
Factors of Production
inputs into the production process, such as land, labour, capital and enterprise
Finite Resource
a resource, such as oil, which is scarce and runs out as it is used. Also known as a non-renewable resource
Renewable Resource
a resource, such as timber, that with careful management can be renewed as it is used
Fundamental Economic Problem
how best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare
Scarcity
results from the fact that people have unlimited wants but resources to meet these wants are limited. In essence, people would like to consume more goods and services than the economy is able to produce with its limited resources
Opportunity Cost
is the cost be the next best alternative foregone when a decision is made
Production Possibility Curve (PPC)
combinations of two products (or types of product) that can be produced when all the available resources are fully and efficiently employed
Economic Growth
the increase in the potential level of real output the economy can produce over a period of time
Full Employment
when all who are able and willing to work are employed at the current wage rate
Unemployment
when not all those who are able and willing to work are employed
Resource Allocation
the process through which the available factors of production are assigned to produce different goods and services
Productive Efficiency
for the economy as a whole occurs when it is impossible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised MC=AC producing at the bottom of the ATC
Allocative Efficiency
occurs when all the available economic resources are used to produce the combination of goods and services that best matches people's tastes and preferences P=MC
Competitive Market
a market in which the large number of buyers and sellers possess goods market information and can easily enter or leave the market
Equilibrium Price
the price at which planned demand for a good or service exactly equals planned supply
Supply
the quantity of a good or service that firms are willing or able to sell at given prices in a given period of time
Demand
the quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time. For economists, demand is always effective demand
Market Demand
the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices
Increase in Demand
a rightward shift of the demand curve
Decrease in Demand
a leftward shift of the demand curve
Normal Good
has a positive elasticity of demand as demand increases as income rises and demand decreases as income falls
Normal necessities
have an income elasticity of demand between 0 and 1 so demand is rising less proportionately to income
Luxury good
have an income elasticity of demand above 1 as demand rises more than proportionate to a change in income
Inferior Good
has a negative income elasticity of demand so demand decreases as income rises and demand increases as income falls. These exist where superior goods are available if the consumer has the money to be able to buy it
Sales forecasting
how much they will expect to make in the future so a firm can forecast the impact of a change in income on sales volume and sales revenue
Elasticity
the proportionate responsiveness of a second variable to an initial change in the first variable
Price Elasticity of Demand
measures the extent to which the demand for a good changes in response to a change in the price of that good
Income Elasticity of Demand
measures the extent to which the demand for a good changes in response to a change in income; it is calculated by dividing the percentage change in income
Cross-Elasticity of Demand
measures the extent to which the demand for a good changes in response to a change in the price of another good; it is calculated by dividing the percentage change in quantity demanded of ne good by the percentage change in the price of the other good
Market Supply
the quantity of a good or service that all firms plan to sell at given prices in a given period of time
Total Revenue
the money a firm receives from selling its output, calculated by multiplying the price by quantity sold
Increase in Supply
a rightward shift of the supply curve
Decrease in Supply
a leftward shift of the supply curve
Price Elasticity of Supply
measures the extent to which the supply of a good changes in response to a change in the price of that good
Market Equilibrium
a market is in equilibrium when planned demand equals planned supply and the demand curve crosses the supply curve. In this situation there is no excess demand or excess supply in the market. Unless some event disturbs the equilibrium, there is no reason for the price to change
Market Disequilibrium
exists at any other price other than the equilibrium price. When the market in in disequilibrium, either excess demand or excess supply exists in this market. Excess demand causes the price to rise until a new equilibrium is established. Conversely, excess supply causes the market price to fall until equilibrium is achieved
Excess Supply
when firms wish to sell more than consumers wish to buy, with the price above the equilibrium price
Excess Demand
when consumers wish to buy more than firms wish to sell, with the price below the equilibrium price
Complementary Good
a good in joint demand, or a good which is demanded at the same time as the other good
Substitute Good
a good in competing demand, namely a good which can be used in place of another good
Composite Demand
demand for a good which has more than one use
Derived Demand
demand for a good which is an input into the production of another good
Merit Good
a good which when consumed leads to benefits which other people enjoy, or a good for which the long-term benefit of consumption exceeds the short-term benefit enjoyed by the person consuming the good
Short-run production
occurs when a firm adds variable factors of production to fixed factors of production
Long-run production
occurs when a firm changes the scale of all the factors of production
Productivity
output per worker per period of time
Labour productivity
output per worker
Capital productivity
output per unit of capital
Specialisation
a worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services
Division of labour
different workers perform different tasks in the course of producing a good or service
Trade
the buying and selling of goods and services
Exchange
to give something in return for something else received. Money is a medium of exchange
The short run
the time period in which at least one factor of production is fixed and cannot be varied
The long run
the time period in which no factors of production are fixed and in which all the factors of production can be varied
Fixed cost
cost of production which, in the short run, does not change with output
Variable cost
cost of production which changes with the amount that is produced, even in the short run
Total cost
the whole cost (fixed + variable) of producing a particular level of output
Average cost
total cost of production divided by output
Long-run average cost
long-run total cost divided by output
Economies of scale
falling long run average costs of production that result from an increase in the size or scale of the firm
Technical economy of scale
a cost saving generated through changed to the 'productive process' as the scale of production and the level of output increase
Internal economy of scale
cost saving resulting from the growth of the firm itself
External economy of scale
cost saving resulting from the growth of the industry or market of which the firm is a part
Total revenue
all the money received by a firm from selling its total output
Average revenue
total revenue divided by output; in a single-product firm, average revenue equals the price of the product
Profit
the difference between total sales revenue and total cost of production
Diseconomies of scale
occurs when an increase in output leads to rising long run average costs production
Loss of control
dedelegation and bad decisions increasing costs
Loss of cooperation
employees may feel alienated as the company grows
Loss of co-ordination
too many layers within the organisation meaning difficult to communicate from top to bottom causing loss of productivity and efficiency
Market Structure
the organisation of a market in terms of the number of firms in the market and the ways in which they behave
Price taker
a firm which passively accepts the ruling market price set by market conditions outside its control
Price maker
a firm possessing the power to set the price within the market, usually they have a monopoly
Perfect competition
a market which displays the 6 conditions of: a large number of buyers and seller so no one has market power; perfect market information all act rationally; the ability to buy or sell for as much as is desired at the ruling market price; a uniform or homogenous product; and no barriers to entry or exit in the long run this is unrealistic but govts try to promote this so more firms can be productively and allocatively efficient by encouraging enterprise, deregulating the market firms are profit maximisers so operate at MC=MR
Competitive market
one in which firms strive to outdo their rivals, but it does not necessarily meet all the conditions of perfect competition
Concentrated market
a market containing very few firms, in the extreme, only one firm
Pure monopoly
when there is only one firm in the market so they are the price maker, there is product differentiation, high barriers to entry, SNP are made in the long and short run, strong brand loyalty they are not allocatively or productively efficient and so therefore are not dynamically efficient but can choose to be if they reinvest their SNP also might not have economies of scale as they restrict supply they can benefit society as they may be more efficient in providing a good than lots of small firms who can't achieve economies of scale and those benefits from increased efficiency can be passed onto the consumer and also help with international competitiveness a nationalised monopoly is not interested in making a profit like the NHS so there will be high inefficiency and costs of production so a natural monopoly (privatised) may be more efficient as they are profit concerned as explained above wanting to reduce costs of production
Monopoly power
the power of a firm to act as a price maker rather than as a price taker
Imperfect competition
any market structure lying between the extremes of perfect competition and pure monopoly
Profit maximisation
occurs when a firm's total sales revenue is furthest above total cost of production
Sales maximisation
occurs when sales revenue is maximised
Market share maximisation
occurs when a firm maximises its percentage share of the market in which it sells its product
Barriers to entry/exit
makes it difficult or impossible for new firms to enter a market and the same to exit
Consumer sovereignty
through exercising their spending power, consumers collectively determine what is produced in a market. Consumer sovereignty is strongest in a perfectly competitive market
Producer sovereignty
producers or firms in a market determine what is produced and what prices are charged
Natural monopoly
the term has two meanings, first when a country or firm has complete control over a natural resource, and second when there is only room in a market for one firm benefitting from economies of scale to the full
Patent
a strategic or manmade barrier to market entry caused by government legislation protecting the right of a firm to be the sole producer of a patented good, unless the firm grants royalties for other firms to produce the good
Natural barrier to entry
a barrier to market entry which is not manmade
Artificial barrier to entry
a barrier to market entry which is manmade these can be intellectual barriers like patents which can occur in a monopoly which can benefit consumers with new and innovative products
Informative advertising
provides consumers and producers with useful information about goods or services
Product differentiation
making a product different from other products through product design, the method of producing the product, or through its functionality in monopolistic the smaller the differences the more elastic the demand for the product is as it can be easily substituted
Note 
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