OCR A Level Economics

normative statement

an opinion that cannot be confirmed by referencing facts

positive statement

a statement that can be proved by referencing facts

why are economic models used?

theories cannot be tested in a controlled environment

the basic economic problem

scarcity - consumer wants are always greater than available resources

opportunity cost

the next best alternative foregone

factors of production

resources used by a firm in production

list and define the factors of production

labour - the human element, both mental and physical

capital - man made aids to production eg technology

land - any natural resource used in production

enterprise - combining above factors to make a profit, risk taking

how can a PPC be used?

shows the efficiency of a firm and its maximum potential efficiency

shows possible manufacturing combinations between two products and the opportunity cost of sacrificing each product

demand

amount of a product demanded by consumers who are willing and able to buy it at a certain price over a certain period of time

define determinants of demand

give examples

factors that determine the demand for a product.

consumer income, price of a substitute, quality, advertising, seasonal preference

complementary good

a good commonly purchased alongside another good

competitive demand

demand for alternative increases with price of original

joint demand

demand for complementary good decreases as price of original increases

derived demand

demand for a factor of production is influenced by demand for the product itself

composite demand

demand for a product comes from multiple groups of consumers

substitution effect

customers from a substitute product are attracted by a lower price

real income effect

customers can afford to buy more items alongside a lower priced item

diminishing marginal utility

extra utility gained from consumption decreases as more is consumed

a movement up the demand cure means

contraction of demand, a decrease

a movement down the demand curve means

extension of demand, an increase

a shift left of the demand curve means

a decrease in demand

a shift right of the demand curve means

an increase in demand

supply

the amount of a product a producer is willing and able to sell at a certain price over a certain period of time

list some determinants of supply

price, availability of factors of production

natural events

revenue generated by other products

consumer confidence

production technology

tax levels

equilibrium price

the intersection of the demand and supply curves

why do prices settle at equilibrium?

either firms must reduce prices to sell enough or firms increase price due to excess demand

time lags

a delay in an economy's response to changes in variables

boom

fast economic growth, low unemployment

downturn

economic growth slower than in a boom

recession

contraction of the economy for at least two consecutive quarters

recovery

economic growth after a recession, increased activity

price elasticity of demand

the responsiveness of demand to a change in price

ped =

%change in qd/%change in price

ped > 1

elastic - demand for an item will change more than proportionately to a change in price

ped = 1

unitary - demand for an item will change proportionately to a change in price

ped < 1

inelastic - demand for an item will change less than proportionately to a change in price

income elasticity of demand

responsiveness of demand to a change in consumer income

yed =

%change in qd/%change in income

consumer surplus

difference between what a consumer expects to pay and what they actually pay

producer surplus

difference between how a producer expects to price their product and how they can actually afford to price it

invisible hand

consumers dictate the price of goods and services through their purchases

free market economy

no public sector, no government sector, production dictated by invisible hand

command economy

no private sector, government dictates production

mixed economy

there is both a private and public sector

three functions of money

store of value, unit of account, medium of exchange

double coincidence of wants

two parties are willing to swap items because they have inferred an equal value on the items

specialisation

in a production process, each worker has only one job to do

advantages of specialisation

more efficient, less training, lower wages, standardised product, automation

disadvantages of specialisation

less transferable skills, absent worker stops production, lower motivation due to boredom

determinants of pes

how much surplus the producer has, availability of factors of production, time period

cross elasticity of demand

responsiveness of demand for one product to a change in price of another

xed formula

%change in qd of good A/%change in price of good B

xed value of a substitute

>1

xed value of a complementary good

<1

large divergence of xed from 0

strong relationship between two products

indirect tax

a tax passed onto consumers by producers

incidence of a tax if ped>pes

less incidence on consumers

incidence of a tax if pes>ped

less incidence on producers

monetary policy

policy which influences the supply of money in an economy

fiscal policy

policy that controls spending and taxation in an economy

expansionary fiscal policy

increasing ad/as and expanding real output through government spending and/or a decrease in net taxes

expansionary monetary policy

increasing ad, output and employment by reducing interest rates

contractionary monetary policy

reducing ad, output by increasing interest rates

contractionary fiscal policy

decreasing ad/as by decreasing government spending and/or increasing net taxes

foreign direct investment

a foreign company spends money in a country for a return, influenced by confidence

confidence

the degree of optimism that a consumer has in an economy and its future

allocative efficiency

every good or service is produced to the point where the last unit provides an msb=msc of production

productive efficiency

production at the lowest possible cost

dynamic efficiency

productive efficiency over a long period of time

social efficiency

occurs where msc=msb, production has a net benefit on society

corporate social responsibility

a business's concern for society's welfare

marginal social cost

the extra cost to society of producing one additional unit

marginal social benefit

the extra benefit to society of consuming one additional unit

crowding out

government spends more on public firms, private firms have lower confidence and lower output

resource crowding out

private sector firms lend to the government so have less to spend on themselves

crowding in

government spending boosts ad so private firms can make money by producing the goods

joint supply

two or more goods derived from a single product, eg milk produces both yoghurt and cheese

monopsonist

the only buyer in a market

barriers to entry

what prevents firms from entering a market

barriers to entry examples

start up costs, production technology, advertising campaigns

supernormal profits

profits above the level required to keep a firm in an industry

normal profits

profits required to satisfy investors and keep the firm in the market

hot money

short term speculative investment

monopsony

a market with only one buyer

oligopoly

a market with a few large firms selling a similar product, high barriers to entry

perfect competition

a large number of firms produce homogenous products for the same price with no barriers to entry

monopolistic competition

a large number of firms produce similar products at similar prices with low barriers to entry

monopoly

a single firm sells at set prices with total barriers to entry

law of diminishing returns

short run - when variable factors of production are added to fixed factors of production total/margnial product will rise and then fall

short run

at least one fixed factor of production

long run

all factors of production are variable

explicit costs

what a business has to spend to function

implicit cost

a businesses opportunity cost

fixed costs

do not vary with output - must always be paid

variable costs

business costs that vary with output

TFC =

AFC x Q

AFC =

TFC / Q

economic growth on a ppf

outward shift

pros of free market

-incentive to produce the best products possible

-innovation, risk taking rewarded

-increased choice for consumers

cons of free market

-those who cannot work receive no income

-unprofitable goods such as drugs would not be made

-monopolies