Edexcel IGCSE Economics - Paper 1: Microeconomics and Business Economics

Goods

Things that are produced in order to be sold

Finite

Having an end or limit

Infinite

Without limits

What are the four factors of production?

Land, Labour, Capital, Enterprise

Why do economists say that resources are scarce?

There is only a limited or finite quantity of resources

Needs

The basic requirements for human survival

What are examples of needs?

Water, food, warmth, shelter, clothing

Wants

People's desires for goods and services

What are examples of wants?

Holidays abroad, better houses, bigger cars, improved healthcare, better education

Basic economic problem

Allocation of a nation's scarce resources between competing uses that represent infinite wants

Scarce resources

Amount of resources available when supply is limited

What three decisions have to be made when addressing the basic economic problem?

What to produce, How to produce, For whom to produce

Opportunity cost

Cost of the next best alternative that is given up when someone makes a choice

What is the opportunity cost of a firm spending $100,000 on advertising?

Training its workforce, buying new machinery

Expenditure

Spending by a government

Capital goods

Purchased by firms and used to produce other goods

What are examples of capital goods?

Factories machinery, tools, equipment

Consumer goods

Purchased by households

What are examples of consumer goods?

Food, confectionery, cars, tablets, furniture

Production Possibility Curve

Line that shows the different combinations of two goods an economy can produce if all resources are used up

What happens when an economy moves from one point on the PPC to another?

An opportunity cost is incurred

Economic growth

Increase in the level of output by a nation

What happens to the PPC if a country can produce more?

It shifts outwards

What are some reasons for economic growth/an outward shift in the PPC?

New technology, Improved efficiency, Education and training, New resources

Why might negative economic growth/an inward shift in the PPC occur?

Resource depletion, Adverse weather, Increased outward migration, Wars

Variables

Something that affects a situation in a way that you cannot be sure what will happen

Maximise

To increase something such as profit, satisfaction or income as much as possible

Revenue

Money that a business receives over a period of time, especially from selling goods or services

What are the two underlying assumptions in economics?

Consumers aim to maximise benefit, Businesses aim to maximise profit

Why may consumers not always maximise benefit?

They have difficulty in calculating the benefits, They develop buying habits, They are influenced by the behaviours of others

Enterprises

Companies, organisations or businesses

Why might producers not always maximise their profits?

Performance may be influenced by other people in the organisation, Alternative business objectives, Operate as charities, Social enterprises

Administration

Activities involved with managing and organising the work of a company or organisation

Demand curve

Line drawn on a graph that shows how much of a good will be bought at different prices

Demand schedule

Table of the quantity demanded of a good at different price levels - can be used to calculate the expected quantity demanded

Effective demand

Amount of a good people are willing to buy at given prices over a given period of time supported by the ability to pay

Inverse relationship between price and quantity demanded

When price goes up, the quantity demanded falls and when price goes down the quantity demanded rises

Demand

The amount of a good that consumers are willing to and able to buy at a given price

Shift in the demand curve

Movement to the left or right of the entire demand curve when there is a change in any factor affecting demand except the price

Disposable income

Income that is available to someone over a period of time to spend - including state benefits and excluding direct taxes

Inferior goods

Goods for which demand will fall if income rises or rise if income falls

Normal goods

Goods for which demand will increase if income increases or will fall if income falls

What are the factors that may shift the demand curve?

Fashion and tastes, Price of substitutes, Price of complements, Income, Advertising, Demographic changes

Will an increase in advertising shift the demand curve to the left or to the right?

To the right

If disposable income rises, will the demand for a normal good rise or fall?

Rise

If disposable income rises, will the demand for an inferior good rise or fall?

Fall

If fashion tastes change to favour a certain clothing item, will demand for that item rise or fall?

Rise

Substitute goods

Goods bought as an alternative to another but perform the same function

Complementary goods

Goods purchased together because they are consumed together

If the price of car insurance rises, will demand for cars rise or fall?

Fall

If the price of Pepsi rises, will demand for Coke rise or fall?

Rise

Infrastructure

Basic systems and structures that a country needs to make economic activity possible

Will demand for schools and hospitals be higher in rural areas or urban areas?

Urban areas

If a certain ethnic group moves into a country, will the demand curve for cultural products of that group shift to the left or to the right?

To the right

Supply

The amount of a good that producers are willing to and able to offer for sale at different prices

Supply curve

Line drawn on a graph which shows how much of a good sellers are willing to supply at given prices

per annum (p.a.)

For or in each year

Proportionate relationship between price and the quantity supplied

When the price goes up, the quantity supplied also goes up and when the price goes down the quantity supplied goes down

Shift in the supply curve

Movement to the left or the right of the entire supply curve when there is any change in the conditions of supply except the price

Fixed supply

It is impossible for sellers to increase supply even when prices rise

What will fixed supply look like on a supply curve?

A vertical line

What is a scenario where there may be fixed supply?

Supply at venues where sports matches or concerts are held

Indirect taxes

Taxes levied on spending

What is an example of an indirect tax?

VAT

Productivity

The rate at which goods are produced, and the amount produced in relation to the work, time and money needed to produce them

What are factors that may shift the supply curve?

Production costs, Natural Factors, Subsidies, Indirect Taxes, New Technology

Will a rise in production costs shift the supply curve to the right or to the left?

To the left

Why will a rise in indirect taxes cause the supply curve to shift to the left?

Indirect taxes represent a cost to the firm

Consumption

Amount of goods, services, energy or natural materials used in a particular period of time

Subsidy

Money that is paid by a government or organisation to make prices lower, reduce the cost of producing goods or providing a service, usually to encourage production of a certain good

Why may governments use indirect taxes?

To raise revenue for government expenditure and discourage the consumption of harmful products

What is the effect of a government granting a subsidy on a good?

An increase in its supply

Will an increase in new technology shift the supply curve to the left or to the right?

To the right

Will adverse weather shift the supply curve to the left or to the right?

To the left

Equilibrium price

Price at which supply and demand are equal

Market clearing price

Price at which the amount supplied in a market matches exactly the amount demanded

Total revenue

Amount of money generated from the sale of goods calculated by multiplying price by quantity

Formula for calculating total revenue

TR = P * Q

Why is the equilibrium price known as the market clearing price?

The amount supplied in the market is completely bought up by consumers, so there are no buyers left without goods and there are no sellers left with unsold stock

If demand shifts to the right, will the equilibrium price rise or fall?

Rise

If supply shifts to the right, will the equilibrium price rise or fall?

Fall

Excess demand

Where demand is greater than supply and there are shortages in the market

Excess supply

Where supply is greater than demand and there are unsold goods in the market

How can producers restore equilibrium when there is disequilibrium in the market?

Change the price, Adjust supply

Price elasticity of demand

The responsiveness of demand to a change in price

Inelastic demand / Price inelastic

Change in price results in a proportionately smaller change in the quantity demanded

Elastic demand / Price elastic

Change in price results in a greater change in the quantity demanded

How do you calculate price elasticity of demand?

Price Elasticity of Demand = (% Change in Quantity Demanded / % Change in Price)

Perfectly elastic demand

Demand where PED = ∞ - an increase in price will result in zero demand

Perfectly inelastic demand

Demand where PED = 0 - a change in price will result in no change in the quantity demanded

Unitary elasticity with regard to demand

Where PED = -1 - the responsiveness of demand is proportionately equal to the change in price

What values would mean demand is price inelastic?

PED is less than 1

What values would mean demand is price elastic?

PED is greater than 1

What are the factors affecting Price Elasticity of Demand?

Availability of Substitutes, Proportion of Income, Luxury or Necessity, Addictiveness, Time

What acronym can be used to remember the factors affecting Price Elasticity of Demand?

SPLAT

Will goods that have lots of close substitutes have elastic or inelastic demand?

Elastic demand

Will goods that are considered 'essential' by consumers have elastic or inelastic demand?

Inelastic demand

If consumers have to spend a large proportion of their income on a good, will demand be price elastic or inelastic?

Price elastic

Is price more elastic in the short term or in the long term?

In the long term

Why is price more elastic in the long term?

Consumers can search for alternatives and are more prepared to switch