AQA A-level Economics (Microeconomics)

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148 Terms

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Positive Statement
a statement that is objective and can be tested by referring to the evidence available and so can be scientifically proven
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Normative Statement
a statement that is subjective as it includes a value judgement, therefore not possible to test as it is based on opinion
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Need
something that is necessary for human survival, such as food, clothing, warmth or shelter
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Want
something that is desirable such as fashionable clothing, but is not necessary for human survival
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The basic economic problem
There are a limited amount of resources to fulfil our infinite number of wants
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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
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Production
a process, or set of processes, that converts inputs into outputs of goods
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Capital Good
a good which is used in the production of other goods or services. Also known as a producer good
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Consumer Good
a good which is consumed by individuals or households to satisfy their needs or wants
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Factors of Production
inputs into the production process, such as land, labour, capital and enterprise
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Finite Resource
a resource, such as oil, which is scarce and runs out as it is used. Also known as a non-renewable resource
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Renewable Resource
a resource, such as timber, that with careful management can be renewed as it is used
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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
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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
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Opportunity Cost
is the cost be the next best alternative foregone when a decision is made
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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
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Economic Growth
the increase in the potential level of real output the economy can produce over a period of time
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Full Employment
when all who are able and willing to work are employed at the current wage rate
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Unemployment
when not all those who are able and willing to work are employed
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Resource Allocation
the process through which the available factors of production are assigned to produce different goods and services
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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
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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
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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
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Equilibrium Price
the price at which planned demand for a good or service exactly equals planned supply
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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
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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
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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
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Increase in Demand
a rightward shift of the demand curve
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Decrease in Demand
a leftward shift of the demand curve
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Normal Good
has a positive elasticity of demand as demand increases as income rises and demand decreases as income falls
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Normal necessities
have an income elasticity of demand between 0 and 1 so demand is rising less proportionately to income
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Luxury good
have an income elasticity of demand above 1 as demand rises more than proportionate to a change in income
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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
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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
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Elasticity
the proportionate responsiveness of a second variable to an initial change in the first variable
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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
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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
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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
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Market Supply
the quantity of a good or service that all firms plan to sell at given prices in a given period of time
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Total Revenue
the money a firm receives from selling its output, calculated by multiplying the price by quantity sold
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Increase in Supply
a rightward shift of the supply curve
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Decrease in Supply
a leftward shift of the supply curve
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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
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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
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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
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Excess Supply
when firms wish to sell more than consumers wish to buy, with the price above the equilibrium price
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Excess Demand
when consumers wish to buy more than firms wish to sell, with the price below the equilibrium price
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Complementary Good
a good in joint demand, or a good which is demanded at the same time as the other good
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Substitute Good
a good in competing demand, namely a good which can be used in place of another good
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Composite Demand
demand for a good which has more than one use
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Derived Demand
demand for a good which is an input into the production of another good
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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
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Short-run production
occurs when a firm adds variable factors of production to fixed factors of production
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Long-run production
occurs when a firm changes the scale of all the factors of production
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Productivity
output per worker per period of time
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Labour productivity
output per worker
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Capital productivity
output per unit of capital
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Specialisation
a worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services
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Division of labour
different workers perform different tasks in the course of producing a good or service
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Trade
the buying and selling of goods and services
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Exchange
to give something in return for something else received. Money is a medium of exchange
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The short run
the time period in which at least one factor of production is fixed and cannot be varied
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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
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Fixed cost
cost of production which, in the short run, does not change with output
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Variable cost
cost of production which changes with the amount that is produced, even in the short run
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Total cost
the whole cost (fixed + variable) of producing a particular level of output
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Average cost
total cost of production divided by output
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Long-run average cost
long-run total cost divided by output
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Economies of scale
falling long run average costs of production that result from an increase in the size or scale of the firm
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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
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Internal economy of scale
cost saving resulting from the growth of the firm itself
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External economy of scale
cost saving resulting from the growth of the industry or market of which the firm is a part
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Total revenue
all the money received by a firm from selling its total output
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Average revenue
total revenue divided by output; in a single-product firm, average revenue equals the price of the product
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Profit
the difference between total sales revenue and total cost of production
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Diseconomies of scale
occurs when an increase in output leads to rising long run average costs production
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Loss of control
dedelegation and bad decisions increasing costs
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Loss of cooperation
employees may feel alienated as the company grows
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Loss of co-ordination
too many layers within the organisation meaning difficult to communicate from top to bottom causing loss of productivity and efficiency
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Market Structure
the organisation of a market in terms of the number of firms in the market and the ways in which they behave
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Price taker
a firm which passively accepts the ruling market price set by market conditions outside its control
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Price maker
a firm possessing the power to set the price within the market, usually they have a monopoly
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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
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Competitive market
one in which firms strive to outdo their rivals, but it does not necessarily meet all the conditions of perfect competition
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Concentrated market
a market containing very few firms, in the extreme, only one firm
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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
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Monopoly power
the power of a firm to act as a price maker rather than as a price taker
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Imperfect competition
any market structure lying between the extremes of perfect competition and pure monopoly
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Profit maximisation
occurs when a firm's total sales revenue is furthest above total cost of production
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Sales maximisation
occurs when sales revenue is maximised
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Market share maximisation
occurs when a firm maximises its percentage share of the market in which it sells its product
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Barriers to entry/exit
makes it difficult or impossible for new firms to enter a market and the same to exit
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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
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Producer sovereignty
producers or firms in a market determine what is produced and what prices are charged
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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
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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
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Natural barrier to entry
a barrier to market entry which is not manmade
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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
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Informative advertising
provides consumers and producers with useful information about goods or services
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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