Edexcel AS/A Level Economics - Introduction to markets and market failure

All key terms for unit 1 of the Edexcel AS/A Level Economics qualification

Ceteris paribus

All things being equal: the assumption that, whilst the effects of a change in one variable are being investigated, all other variables are kept constant

Law

A theory or model which has been verified by empirical evidence

Normative economics

The study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated

Normative statement

A statement which cannot be supported or refuted because it is a value judgement

Positive economics

The scientific or objective study of the allocation of resources

Positive statement

A statement which can be supported or refuted by evidence

Scientific method

A method which subjects theories or hypotheses to falsification by empirical evidence

Social science

The study of societies and human behaviour using a variety of methods, including the scientific method

Theory or model

A hypothesis which is capable of refutation by empirical evidence

Base period

The period, such as a year or a month, with which all other values in a series are compared

Index number

An indicator showing the relative value of one number to another from a base of 100. It is often used to present an average of a number of statistics

Nominal values

Values unadjusted for the effects of inflation (i.e. values at current prices)

Real values

Values adjusted for inflation (i.e. values at constant prices)

Basic economic problem

Resources have to be allocated between competing uses because wants are infinite whilst resources are scarce

Capital

As a factor of production is the stock of manufactured resources used in the production of goods and services

Choice

Economic choices involve the alternative uses of scarce resources

Economic goods

Goods that are scarce because their use has an opportunity cost

Entrepeneurs

Individuals who seek out profitable opportunities for production and take risks in attempting to exploit these

Enterprise or entrepreneurship

As a factor of production is the seeking out of profitable opportunities for production and taking risks in attempting to exploit these

Factors of production

The inputs to the production process: land, labour, capital and enterprise or entrepreneurship

Fixed capital

Economic resources such as factories and hospitals which are used to transform working capital into goods and services

Free goods

Goods that are unlimited in supply and which therefore have no opportunity cost

Human capital

The value of the productive potential of an individual or group of workers; it is made up of the skills, talents, education and training of an individual or group and represents the value pf future earnings and production

Labour

As a factor of production is the workforce

Land

As a factor of production is all natural resources

Needs

The minimum that is necessary for a person to survive as a human being

Non-renewable resources

Resources, such as coal or oil, which once exploited cannot be replaced

Non-sustainable resource

A resource which can be economically exploited in such as a way that its stock is being reduced over time

Opportunity cost

The benefits forgone of the next best alternative

Renewable resources

Resources, such as fish stocks or forests, that can be exploited over and over again because they have the potential to renew themselves

Scarce resources

Resources that are limited in supply so that choices have to be made about their use

Sustainable resource

Renewable resource that is being economically exploited in such a way that it will not diminish or run out

Wants

Desires for the consumption of goods and services

Working or circulating capital

Resources that are in the production system waiting to be transformed into goods or other materials before being finally sold to the consumer

Capital goods

Goods that are used in the production of other goods such as factories, offices, roads, machines and equipment

Consumer goods

Goods and services that are used by people to satisfy their needs and wants

Margin

A point of possible change

Production possibility frontier (PPF)

A curve which shows the maximum potential level of output of one good given a level of output for all other goods in the economy

Barter

Swapping one good for another without the use of money

Capital productivity

Output per unit of capital employed

Division of labour

Specialisation by workers, who perform different tasks at different stages of production to make a good or service, in co-operation with other workers

Labour productivity

Output per worker

Market

Any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services

Money

Any item, such as a coin or bank balance, which fulfils four functions: a medium of exchange, a measure of value, a store of value and a method of deferred payment

Money substitutes

Anything which can be used as a medium of exchange but which are not stores of value. Examples are change cards or credit cards

Primary sector

Extractive and agriculture industries

Private sector

The part of the economy owned by individuals, companies and charities

Productivity

Output per unit of input employed

Public sector

The part of the economy where production is organised by the state or the government

Secondary/manufacturing sector

Industries involved in the production of goods, mainly manufactured goods

Specialisation

A system of organisation where economic units such as households or nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others

Sub-market

A market which is a distinct and identifiable part of a larger market

Tertiary/service sector

Industries involved in the production of services

Command/planned economy

An economic system where government, through a planning process, allocates resources in a society

Economic system

A complex network of individuals, organisations and institutions and their social and legal interrelationships which allocates resources

Free market economy

An economic system that resolves the basic economic problems mainly through the market mechanism

Mixed economy

An economy where both the free market mechanism and the government planning process allocate significant proportions of total resources

Economic welfare

The level of well-being or prosperity or living standards of an individual or group of individuals such as a country

Macroeconomics

The study of the economy as a whole

Microeconomics

The study of the behaviour of individuals or groups within a market context

Neo-classical theory

A theory of economics which typically starts with the assumption that economic agents will maximise their benefits and act rationally, and which develops how resources will be allocated in markets and at what price through the forces of demand and supply; the margin is a key concept in neo-classical theory

Utility/economic welfare

The satisfaction or benefit derived from consuming a good or set of goods

Conditions of demand

Factors other than price which lead to changes in demand and are associated with shifts in the demand curve

Consumer surplus

The difference between how much buyers are prepared to pay for a good and what they actually pay

Contraction of demand

When quantity demanded for a good falls because its price rises; it is shown by a movement up the demand curve

Demand curve

The line on a price/quantity diagram which shows the level of effective demand at ant given price

Demand/effective demand

The quantity purchased of a good at any given price, given that other determinants of demand remain unchanged

Extension of demand

When quantity demanded of a good increases because its price falls; it is shown by a movement down the demand curve

Law of diminishing marginal utility

The value or utility that individual consumers gain from the last product consumed falls the greater the number consumed

Shift in the demand curve

a movement of the whole demand curve to the right or left of the original caused by a change in any variable affecting demand except price