A-Level Economics: Core Microeconomic Principles and Elasticities

Comprehensive vocabulary flashcards covering the economic problem, production possibility curves, specialisation, market systems, supply and demand mechanics, and elasticities (PED, PES, YED, XED).

Scarcity

A condition where unlimited or infinite wants and needs exist alongside limited or finite resources available.

Free Good

A good that can be used without having to sacrifice something else, requiring no factors of production (such as rainwater, seawater, wind, and sunlight).

Economic Good

A good that comes with choices over what to produce based on the limited factors of production available (such as bread, houses, and smartphones).

Needs

Fundamentals required for the basic function of society and individual survival (such as food, water, shelter, and basic healthcare).

Wants

Goods and services that are desirable but not essential for survival, serving to improve comfort, enjoyment, and quality of life.

Satisficing

A business objective where a firm aims for a decent level of profit so managers can concentrate on other goals.

Factors of Production

The inputs used to produce goods and services, consisting of land, labour, capital, and entrepreneurship.

Land

Natural resources used in production (including raw materials, farmland, minerals, water, and oil), which earns the reward of rent.

Labour

The human physical and mental effort applied to produce goods and services, which receives the reward of wages.

Capital

Money and man-made resources used to produce other goods (such as machinery, tools, factories, and computers), which earns the reward of interest.

Entrepreneurship

The individuals who organise the other factors of production, bear risks, and create business ideas, who receive the reward of profit.

Positive Statement

An objective, fact-based, and measurable statement that can be tested against tangible evidence or data to prove whether it is true or false.

Normative Statement

A subjective and value-based statement reflecting personal opinions on what could or ought to happen, which cannot be tested with data.

Opportunity Cost

The cost of the next best alternative foregone when making a decision between competing options.

Production Possibility Curve (PPC)

A diagram mapping the maximum combinations of two products that an economy or firm can produce using all available factors of production.

Law of Increasing Opportunity Cost

The principle that causes the PPC to be bowed outwards because resources are not equally suited to producing both outputs, requiring ever-larger sacrifices of one good to produce more of another.

Capital Goods

Goods that aid the economy in producing more output in the future (such as machinery, lorries, and factories), spending on which constitutes investment.

Consumer Goods

Goods that individuals use or enjoy in the present (such as food, televisions, and cars), spending on which constitutes consumption.

Specialisation

The process where individuals, firms, or nations concentrate on producing a specific good, service, or task to become experts and improve resource allocation.

Division of Labour

The organisation of production into separate individual stages where workers specialise in specific tasks to raise productivity and output.

Double Coincidence of Wants

A problem inherent in a barter system where an exchange can only take place if both trading parties desire the exact product the other is offering.

Medium of Exchange

A function of money that overcomes the limitations of barter by providing an agreed store of value enabling goods and services to be traded freely.

Incentive

Something that motivates an economic agent (such as households, firms, or governments) to act in a particular way.

Market Economy

An economic system in which resources are owned by private individuals, resource allocation is determined by the price mechanism, and firms produce for profit based on consumer demand.

Planned Economy

An economic system in which resources are owned by the state and central government planning determines what, how, and for whom to produce.

Mixed Economy

An economic system combining private and state ownership, in which market forces determine the provision of most goods while the government provides public and merit goods and regulates markets.

Allocative Efficiency

A condition achieved when the goods and services most wanted by society are produced to maximise social welfare, occurring where price equals marginal cost ($P = \text{MC}$).

Productive Efficiency

Producing goods at the lowest possible average cost without wasting resources, represented at the point where marginal cost equals average cost ($\text{MC} = \text{AC}$) or on the PPC frontier.

Price Mechanism

The system in which prices, determined through the interaction of supply and demand, act as signals to dictate how scarce resources are distributed.

Demand

The quantity of a good or service that consumers are willing and able to purchase across a range of prices, holding incomes, preferences, and related goods constant.

Law of Demand

The economic principle stating that there is an inverse relationship between price and quantity demanded, ceteris paribus.

Joint Demand

Demand for interdependent goods that are typically consumed together (such as printers and ink cartridges).

Composite Demand

Demand for a good or service that has multiple distinct uses (such as water).

Competitive Demand

Demand for goods that serve as direct substitutes for one another, where consumers can choose between alternative products (such as Coke and Pepsi).

Derived Demand

Demand for a good, service, or factor of production that results directly from the demand for a related final product (such as bricks for building houses).

Ceteris Paribus

A Latin term meaning 'all other things being equal', used to isolate the relationship between two specific economic variables.

Real Income Effect

An explanation for the downward-sloping demand curve: when the price of a good falls, consumers' real purchasing power increases, making the good more affordable.

Substitution Effect

An explanation for the downward-sloping demand curve: as a good becomes cheaper relative to its alternatives, consumers switch toward purchasing that good.

PACIFIC

A mnemonic for non-price determinants that cause a shift in the demand curve: Population, Advertising, Substitutes, Income, Fashion/trends, Interest rates, and Complimentary goods.

Supply

The total quantity of a good or service that firms are willing and able to make available for sale across a range of prices over a given period.

Law of Supply

The economic principle stating that as the price of a product increases, the quantity supplied increases, because higher prices offer greater profit potential.

PINTSWC

A mnemonic for non-price factors that shift the supply curve: Productivity, Indirect tax, Number of firms, Technology, Subsidy, Weather, and Cost of materials.

Consumer Surplus

The difference between the maximum price a consumer is willing to pay and the price they actually pay, shown graphically as the area below the demand curve and above the market price.

Producer Surplus

The difference between the price producers receive and the minimum price they would be willing to accept to supply a good, shown graphically as the area above the supply curve and below the market price.

Market Equilibrium

A state where quantity demanded equals quantity supplied at the prevailing market clearing price, resulting in no excess demand or excess supply.

Excess Supply

A market condition where the price is set above the equilibrium level, causing the quantity supplied to exceed the quantity demanded and driving price downward.

Excess Demand

A market shortage where the price is set below equilibrium, causing quantity demanded to exceed quantity supplied and driving price upward.

Price Elasticity of Demand (PED)

A measure of the responsiveness of the quantity demanded of a good to a change in its price, defined as $\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$.

SPLAT

A mnemonic representing the determinants of price elasticity of demand: Substitutes, Percentage of income, Luxury or necessity, Addiction or habit, and Time.

Unit Elastic Demand

A condition where the percentage change in quantity demanded equals the percentage change in price ($|\text{PED}| = 1$), representing the midpoint of a linear demand curve where total revenue is maximised.

Price Elasticity of Supply (PES)

A measure of how responsive the quantity supplied of a good is to a change in its price, calculated as $\text{PES} = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$.

PSSST

A mnemonic for the determinants of price elasticity of supply: Production lag, Stocks, Spare capacity, Substitutability of factors of production, and Time.

Income Elasticity of Demand (YED)

A measure of the responsiveness of the quantity demanded of a good to a change in consumer income, calculated as $\text{YED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in consumer income}}$.

Normal Good

A good with a positive income elasticity of demand ($\text{YED} > 0$), where an increase in consumer income leads to an increase in quantity demanded.

Inferior Good

A counter-cyclical good with a negative income elasticity of demand ($\text{YED} < 0$), meaning that demand increases during economic downturns or recessions and decreases when consumer income rises.

Cross Price Elasticity of Demand (XED)

A measure of the responsiveness of the quantity demanded of Good X to a change in the price of Good Y, calculated as $\text{XED} = \frac{\% \text{ change in quantity demanded of good X}}{\% \text{ change in price of good Y}}$.

Substitute Goods (in XED)

Goods with a positive cross price elasticity of demand ($\text{XED} > 0$), where an increase in the price of one good leads to an increase in demand for the other.

Complementary Goods (in XED)

Goods with a negative cross price elasticity of demand ($\text{XED} < 0$), where an increase in the price of one good leads to a decrease in demand for the other.

Scarcity

The basic economic problem where unlimited or infinite wants and needs exceed the limited or finite resources available.

Free Good

A good that can be used without sacrificing something else, requiring zero factor inputs to consume (such as rainwater, seawater, wind, or sunlight).

Economic Good

A good that carries an opportunity cost and requires decisions on resource allocation because it is made from scarce factors of production (such as bread, clothing, or cars).

Needs

Fundamentals required for the basic functioning and survival of an individual in society (such as food, water, shelter, sanitation, and healthcare).

Wants

Goods or services that are desirable but not essential for survival, serving to improve comfort, enjoyment, and quality of life.

Factors of Production

The productive inputs used to make goods and services: land, labour, capital, and entrepreneurship.

Land

Natural resources used in the production process, such as minerals, oil, farmland, and water; its reward is rent.

Labour

The mental and physical human effort applied in the production of goods and services; its reward is wages.

Capital

Man-made goods used to produce other goods and services, such as tools, machinery, and factory buildings; its reward is interest.

Entrepreneurship

The human skill of organising other factors of production, taking business risks, and innovating; its reward is profit.

Positive Statement

An objective, descriptive statement that can be tested, measured, and verified against real-world evidence or data to be proven true or false.

Normative Statement

A subjective, value-based statement reflecting personal judgements or opinions about what ought to happen, which cannot be tested or verified with data.

Opportunity Cost

The cost of the next best alternative forgone when a choice is made between competing options.

Production Possibility Curve (PPC)

A diagram illustrating the maximum combinations of two goods or services that an economy or firm can produce using all available resources and technology efficiently.

Law of Increasing Opportunity Cost

The principle explaining why the PPC is curved (concave to the origin): resources are not equally suited to producing both goods, meaning progressively larger amounts of one good must be sacrificed to produce each additional unit of the other.

Capital Goods

Goods purchased and used by firms to help the economy produce more consumer goods in the future (such as machinery, lorries, and factories); spending on them is called investment.

Consumer Goods

Goods that individuals buy to directly use, consume, or enjoy in the present (such as food, televisions, and cars); spending on them is called consumption.

Specialisation

The process by which individuals, firms, regions, or countries concentrate on producing a specific range of tasks, goods, or services in which they are most productive.

Division of Labour

The separation of a manufacturing or service process into distinct, sequential tasks, with individual workers specialising in a specific stage.

Double Coincidence of Wants

A major difficulty in a barter system where an exchange requires each party to simultaneously want the exact item the other person is willing to trade.

Financial Incentive

A monetary factor that encourages or discourages an economic agent to act in a specific way, such as profit motives for firms, wages for workers, or taxes and subsidies from the government.

Market Economy

An economic system in which resources are privately owned and the basic questions of what, how, and for whom to produce are determined by the price mechanism and market forces.

Planned Economy

An economic system where productive resources are owned by the state, and decisions regarding resource allocation are directed by central government planners.

Mixed Economy

An economic system that combines elements of both market forces and government intervention, allocating most resources via the price mechanism while the public sector provides merit and public goods.

Productive Efficiency

Occurs when goods are produced at the lowest possible average total cost ($MC = AC$), wasting no productive resources; represented by any point on the boundary of the PPC.

Allocative Efficiency

Occurs when resources are allocated to produce the specific combination of goods and services most desired by society, maximising social welfare ($P = MC$); shown where market supply equals market demand.

Price Mechanism

The system in a free market through which the forces of demand and supply determine prices, which act as signals to allocate resources.

Demand

The quantity of a good or service that consumers are willing and able to buy at various prices over a given period of time, holding other factors constant.

Law of Demand

The economic principle stating that there is an inverse relationship between price and quantity demanded, ceteris paribus: as price rises, quantity demanded falls, and vice versa.

Joint Demand

Demand for two or more goods that are interdependent and consumed together (complements), such as printers and ink cartridges.

Composite Demand

Demand for a good that has multiple distinct uses, such that allocating more of it to one use reduces the supply available for others (such as water).

Competitive Demand

Demand for alternative goods that serve as substitutes for one another, where consumers choose between them (such as Coca-Cola and Pepsi).

Derived Demand

Demand for a good, factor of production, or service that arises solely as a consequence of the demand for another final product (such as bricks for building houses).

Ceteris Paribus

A Latin phrase meaning 'all other things being equal,' used to isolate the relationship between two specific economic variables while holding all other influences constant.

Real Income Effect

An explanation for the downward slope of the demand curve: when the price of a good falls, consumers experience an increase in real purchasing power, enabling them to buy more of the product.

Substitution Effect

An explanation for the downward slope of the demand curve: when a good's price falls, it becomes relatively cheaper compared to alternative products, prompting consumers to switch their purchases toward it.

PACIFIC

A mnemonic for non-price factors that shift the demand curve: Population, Advertising, Substitutes, Income, Fashion/trends, Interest rates, and Complementary goods.

Consumer Surplus

The difference between the maximum price a consumer is willing to pay for a unit of a good and the price they actually pay; depicted on a graph as the area below the demand curve and above the market price up to the quantity traded.

Producer Surplus

The difference between the market price a producer receives for a good and the minimum price they would be willing to accept; depicted as the area above the supply curve and below the market price up to the quantity traded.

Supply

The total quantity of a good or service that firms are willing and able to offer for sale at a given price or across a range of prices over a specific period.

Law of Supply

The principle stating that, ceteris paribus, as the price of a good increases, the quantity supplied increases because higher prices offer greater profit-maximising potential.

PINTSWC

A mnemonic for non-price factors that shift the supply curve: Productivity, Indirect tax, Number of firms, Technology, Subsidy, Weather, and Cost of materials.