AQA Economics A Level Year 1 - Microeconomics

Allocative Efficiency

Occurs when the available economic resources are used to produce the combination of goods and services that best matches people's tastes and preferences

Positive Statements

A statement of fact that can be tested to see if it is incorrect or correct

Normative Statements

A statement that includes a value judgement and cannot be disproved just by looking at evidence

Need

Something that is essential for human survival e.g. food and water

Want

Something that is desirable e.g. fashionable accessories

Economic Welfare

The economic well-being of an individual, a group within society, or an economy

Production

A process, or a set of processes that converts inputs into output of goods

Capital Goods

Goods used in the production of other goods or services (also known as a producer good)

Consumer Goods

A good which is consumed by individuals or households to satisfy their needs or wants

Factors of Production

Inputs into the production process

CELL - the four factors of production

Capital

Enterprise

Land

Labour

Capital

Equipment used in producing goods and services

Enterprise

Refers to the decision makers and the risk takers in the firm

Labour

The human input into the production process

Land

The actual land and the natural resources in and on it

Interest

The reward for capital

Rent

The reward for land

Wages

The reward for labour

Profit

The reward for enterprise

Finite Resources

Resources which are scarce and run out as they are used, such as oil (also known as a non-renewable resource)

Renewable Resources

Resources which with careful management can be renewed as they are used, such as timber

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

Fundamental Questions

What to produce?

How to produce it?

Who to produce it for?

Scarcity

Results from the fact that wants are unlimited but resources to meet these wants are limited

Opportunity Cost

The next best alternative forgone when making a decision

Good

A physical and tangible product

Service

Intangible things

Economic Good

A good that has an opportunity costs in consumption because it uses up scarce resources

Free Good

A good that doesn't have an opportunity cost in consumption because it doesn't use up scarce resources

Production Possibility Frontier

A curve that depicts the various combinations of two products 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 that the economy can produce over a period of time

Causes of shifts in the PPF

Technological improvements - leads to increased productivity

Discovery of new resources /run out of existing resources

Changes in the working population that increase/decrease it

Economic shocks

Economic Growth

Trade-off

Where you have to choose between conflicting objectives because you can't achieve them all at the same time. It involves compromising and aiming to achieve each of your objectives a bit.

Full Employment

When all who are able and willing to work are employed

Unemployment

When not all of those who are able and willing to work are employed

Productive Efficiency - for an economy

Occurs when it is impossible to produce more of one good without producing less of another

Productive Efficiency - for a firm

Occurs when the average total cost of production is minimised

Economic Agents

Producers

Consumers

Governments

Aim of Producers

To maximise profits

Aim of Consumers

To maximise utility

Aim of Governments

To maximise welfare

Planned Economy

Scarce resources are owned and allocated by the government

Market Economy

Scarce resources are allocated through the price mechanism, with limited government intervention.

Mixed Economy

Some scarce resources are allocated by the government and others are allocated by the price mechanism

Competitive Market

A market in which there are a large number of buyers and sellers. They all ask possess good market information and can easily enter or leave the market.

Market

Where buyers and sellers meet to exchange goods and services

Equilibrium Price

The price at which planned demand for a good or service equals planned supply

Supply

The quantity of a good or service that producers are willing and able to sell at a given price in a given period of time

Demand

The quantity of a good or service that consumers are willing and able to buy at a given period of time. For economists, demand is always effective demand

Effective Demand

The desire for a good or service to be backed up with the ability to pay

Market Demand

The quantity of a good or service that all the consumers in a market are able and willing to buy at different market prices

Market Supply

The quantity of a good or service that all firms plan to sell at given process in a given period

Increase in Demand

A shift to the right of the demand curve

Decrease in Demand

A shift to the left of the demand curve

Conditions of Demand

A determinant of demand, other than the good's own price, that fixes the position of the demand curve

Conditions of Demand

Price of Substitute Goods

Price of Complementary Goods

Income

Tastes and Preferences

Population Size

Normal Goods

Goods for which demand increases as income rises and demand decreases as income falls

Inferior Goods

Goods for which demand decreases as income rises and demand increases as income falls

Exceptions to the law of demand

Speculative demand

Veblen Goods

Giffen Goods

Veblen Good

Goods of exclusive consumption. Some are signals of wealth e.g. Ferrari

People buy the more expensive one because it is perceived to be of higher quality

Giffen Good

Where an increase in price causes an increase in demand. This is because of the income effect of the higher price outweighing the substitution effect

Speculative Demand

If the price of something such as housing, shares ir a foreign currency starts to rise, people may speculate that in the near future the price may rise even further. In this situation, demand is likely to increase

Elasticity

The proportionate responsiveness of a second variable to an initial change in the first variable

Price Elasticity of Demand (PED)

Measures the extent to which the demand for a good changes in response to a change in the price of that good

PED Formula

%change in Quantity Demanded / %change in Price

Factors determining PED

Substitutability of the good

Percentage of income spent on the good

Necessity or Luxury?

The width of the market definition

Time

Income Elasticity of Demand (YED)

Measures the extent to which the demand for a good changes in response to a change in income

YED Formula

%change in Quantity Demanded / %change in Income

Normal Good

YED>0

Inferior Good

YED<0

Cross-elasticity of Demand (XED)

Measures the extent to which the demand for a good changes in response to a change in the price of another good

XED Formula

%change in Quantity Demanded of Good A / %change in Price of Good B

Goods are substitutes

XED>0

Goods are complements

XED<0

Profit

The difference between total sales revenue and total costs of production

Profit

Total revenue - Total costs of production

Total Revenue

price of good x quantity sold

Total Revenue

The money a firm receives from selling its output

Conditions of supply

determinants of supply other than the good's own price that fix the position of the supply curve

Conditions of supply

Costs of Production

Technical Progress

Taxes imposed on firms

Subsidies

Price Elasticity of Supply (PES)

Measures the extent to which the supply of a good changes in response to a change in the price of that good

PES Formula

Percentage change in quantity supplied / percentage change in price

Factors determining PES

The length of production period

The availability of spare capacity

The ease of accumulating stocks

The ease of switching between alternative production methods

The number of firms in the market

The ease of entering the market

Time

Market Equilibrium

Occurs when planned demand = planned supply and the demand curve crosses the supply curve

Market Disequilibrium

Exists at any other price that the equilibrium price. Here there is either excess demand or excess supply in the market

Excess Supply

When firms wish to sell more than consumers wish to buy, with the price above the equilibrium

Excess Demand

When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price

Joint Supply

When one good is produced, another good is also produced from the same raw materials

Competing Supply

When raw materials are used to produce one good, they cannot be used to produce another good

Complementary Goods

Goods which are in joint demand, or a good which is demanded at the same time as another good

Substitute Goods

Goods which are in competing demand, or 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

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 unit of input

Labour Productivity

Output per worker

Capital Productivity

Output per unit of capital

Productivity Gap

The difference between labour productivity in the UK and other developed economies

Specialisation

Occurs when a worker only performs one task or a narrow range of tasks.

Different firms may also only produce certain types or ranges of goods and services