A-Level Microeconomics Comprehensive Review

Vocabulary practice flashcards covering fundamental A-Level Microeconomics principles including scarcity, market structures, elasticities, price mechanisms, welfare economics, and market failure diagrams.

Microeconomics

The study of economics at the level of the individual firm, industry, or consumer/household.

Ceteris Paribus

A Latin phrase meaning 'all other things remain equal', used in economic models to isolate the impact of a single factor while assuming all other variables remain constant.

Positive Statement

An objective statement that can be tested against factual evidence to be declared either true or false.

Normative Statement

A value judgement that reflects opinion and cannot be declared true or false through empirical testing.

The Economic Problem

The fundamental dilemma that there are infinite human wants and needs but scarce finite resources, necessitating choices about resource allocation.

Factors of Production

The four economic inputs used in the production process: Land (natural resources), Labour (human input), Enterprise (entrepreneurs organising factors and taking risks), and Capital (man-made goods used to produce other products).

Renewable Resources

Natural resources that are replenished naturally at a rate comparable to or faster than their rate of consumption.

Non-Renewable Resources

Finite resources that are depleted through use and cannot be replaced once consumed.

Capital Goods

Producer goods used in the supply of other products rather than being wanted for their own sake.

Consumer Goods

Goods that directly provide utility or satisfaction to consumers and tend to be finite.

Specialisation

The process by which individuals, firms, or regions concentrate their efforts on producing a narrow range of goods or services in which they hold a comparative advantage.

Division of Labour

The separation of a production process into distinct sequential tasks, allowing individual workers to specialise in specific operations.

Productivity

A measure of economic efficiency expressed as the quantity of output produced per worker.

Homo Economicus

A theoretical economic portrayal of humans as perfectly rational, narrowly self-interested agents who possess complete information and always make optimal decisions to maximise utility or profit.

Utility

The satisfaction or economic well-being derived by an individual from the consumption of a good or service.

Marginal Utility

The additional satisfaction gained from consuming one extra unit of a good or service.

Rational Choice Theory

The assumption that consumers behave rationally by allocating their limited budgets across goods and services to maximise total utility.

Bounded Rationality

The concept that individuals are unable to make fully optimal rational decisions due to cognitive biases, information gaps, and limited time.

Asymmetric Information

A market situation where one party to an economic transaction possesses greater or superior information than the other party.

Behavioural Economics

A branch of economic analysis that integrates psychological insights into human behaviour to explain why individuals often make irrational choices.

Opportunity Cost

The value of the next best alternative forgone when a choice is made.

Production Possibility Frontier (PPF)

A graphical curve showing the maximum combinations of two goods or services that an economy can produce when all resources are fully and efficiently employed.

Productive Efficiency

A state achieved when production occurs at the lowest possible unit cost, represented by any point situated along the boundary of the PPF.

Allocative Efficiency

A state achieved when the distribution of resources matches the exact preferences of society, represented by a single unique point on the PPF.

Law of Diminishing Returns (PPF)

The economic tendency where the opportunity cost of producing additional units of one good rises because factor inputs are not equally suited to producing both goods, resulting in a bowed-out PPF.

Functions of Money

The four essential economic purposes served by money: a medium of exchange, a measure of value, a store of value, and a standard of deferred payment.

Free Market Economy

An economic system in which resource allocation is determined by price signals and competitive market forces with minimal government intervention.

Command Economy

An economic system in which the central state or government owns the means of production and determines what, how, and for whom goods are produced.

Mixed Economy

An economic system in which resources are allocated through a combination of private market forces and public government intervention.

The Invisible Hand Theory

Adam Smith's concept that individuals pursuing their own self-interest in a free market unintentionally promote the broader welfare of society via competition and market prices.

Demand Curve

A graphical representation showing the inverse relationship between the price of a good and the quantity demanded per period of time, holding ceteris paribus constant.

Veblen Goods

Prestige or luxury goods (such as rare artwork or vintage cars) for which demand increases as their price increases due to conspicuous consumption.

Law of Diminishing Marginal Utility

The economic principle stating that as a consumer consumes successive units of a good, the additional satisfaction derived from each additional unit decreases.

Income Effect

The change in consumption resulting from a change in a good's price altering the consumer's real purchasing power.

Substitution Effect

The economic incentive for consumers to switch towards a good whose relative price has fallen and away from relatively more expensive alternatives.

Derived Demand

Demand for a good or factor of production that is directly linked to the demand for the final product it helps produce.

Composite Demand

Demand for a commodity that has multiple competing uses, meaning an increase in demand for one application reduces supply for the others.

Joint Demand

Demand for goods that are consumed together as complementary items.

Competitive Demand

Demand for goods that are direct substitutes, where purchasing one product diminishes the demand for an alternative product.

Shifts in the Demand Curve

A change in the quantity demanded at every market price caused by non-price factors such as income, tastes, population, or prices of related goods, causing the curve to move from $D_1$ outwards to $D_2$ or inwards to $D_3$.

Movement along the Supply Curve vs Shift of the Supply Curve

A change in price causes a movement along a stationary supply curve ($A$ to $B$), whereas non-price determinants (e.g. indirect taxes, technology, costs of production) cause the entire supply curve to shift outwards or inwards.

Joint Supply

A situation where the production of one good automatically results in the increased production of a byproduct or secondary good.

Competitive Supply

A situation where two goods compete for the same factors of production, such that expanding output of one good forces a reduction in the supply of the other.

Price Elasticity of Demand (PED)

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

Price Elastic Demand and Total Revenue

When demand is price elastic ($\text{PED} > 1$), a price reduction generates a proportionally larger increase in quantity demanded, leading to an overall increase in total revenue.

Price Inelastic Demand and Total Revenue

When demand is price inelastic ($\text{PED} < 1$), a price increase leads to a proportionally smaller decline in quantity demanded, leading to an overall increase in total revenue.

Excess Supply (Disequilibrium)

A market disequilibrium condition occurring when price is set above equilibrium ($P_2 > P^*$), causing quantity supplied ($Q_s$) to exceed quantity demanded ($Q_d$), putting downward pressure on prices.

Excess Demand (Disequilibrium)

A market disequilibrium condition occurring when price is set below equilibrium ($P_1 < P^*$), causing quantity demanded ($Q_d$) to exceed quantity supplied ($Q_s$), putting upward pressure on prices.

Price Mechanism

The system in a free market through which the interaction of supply and demand allocates scarce resources via signalling, rationing, and incentive functions.

Consumer and Producer Surplus

The total economic welfare in a market: consumer surplus is the area beneath the demand curve and above the market price line, whereas producer surplus is the area above the supply curve and beneath the market price line.

Income Elasticity of Demand (YED)

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

Normal Good

A product for which demand increases as real consumer income rises, characterised by a positive income elasticity of demand ($\text{YED} > 0$).

Inferior Good

A product for which demand decreases as real consumer income rises, characterised by a negative income elasticity of demand ($\text{YED} < 0$).

Cross Elasticity of Demand (XED)

A measure of the responsiveness of the quantity demanded of Good A following a change in the price of Good B, calculated as $\text{XED} = \frac{\%\,\Delta\,\text{Quantity Demanded of A}}{\%\,\Delta\,\text{Price of B}}$.

Substitute Goods (XED)

Goods that have a positive cross elasticity of demand ($\text{XED} > 0$); weak substitutes show a steep slope with low responsiveness, while close substitutes show a flatter slope with high responsiveness.

Complementary Goods (XED)

Goods that have a negative cross elasticity of demand ($\text{XED} < 0$); weak complements display an inelastic downward slope, whereas strong complements exhibit a flatter, highly elastic downward slope.

Price Elasticity of Supply (PES)

A measure of the responsiveness of the quantity supplied of a product to a change in its price, calculated as $\text{PES} = \frac{\%\,\Delta\,\text{Quantity Supplied}}{\%\,\Delta\,\text{Price}}$.

Market Failure

A scenario where the price mechanism fails to allocate resources efficiently, causing a net deadweight loss of economic and social welfare.

Public Good

A non-rivalrous and non-excludable good that leads to missing markets in the free enterprise system due to the free-rider problem.

Non-Excludability

A property of a good where it is impossible to exclude non-paying individuals from consuming its benefits once it has been provided.

Non-Rivalry

A property of a good where consumption by one individual does not reduce the quantity or benefits available for others.

Quasi-Public Good

A good that possesses some, but not all, the characteristics of a pure public good, being partially non-rivalrous or partially non-excludable.

Externality

A spillover effect on third parties arising from the production or consumption of a product for which no monetary compensation is paid or received.

Social Cost

The total cost incurred by society as a whole from an economic activity, defined as $\text{Social Cost} = \text{Private Cost} + \text{External Cost}$.

Social Benefit

The total benefit enjoyed by society as a whole from an economic activity, defined as $\text{Social Benefit} = \text{Private Benefit} + \text{External Benefit}$.

Negative Externality of Production

A market failure where production generates third-party costs, making Marginal Social Cost exceed Marginal Private Cost ($\text{MSC} > \text{MPC}$) and resulting in market overproduction ($Q_m > Q_{\text{opt}}$) and welfare loss.

Negative Externality of Consumption

A market failure where consumption creates external costs on third parties, causing Marginal Private Benefit to exceed Marginal Social Benefit ($\text{MPB} > \text{MSB}$) and resulting in market overconsumption ($Q_m > Q_{\text{opt}}$) and welfare loss.

Positive Externality of Consumption

A market failure where consumption confers external benefits onto third parties, meaning Marginal Social Benefit exceeds Marginal Private Benefit ($\text{MSB} > \text{MPB}$), leading to market underconsumption ($Q_m < Q_{\text{opt}}$) and welfare loss.

Positive Externality of Production

A market failure where production provides third-party benefits, causing Marginal Social Cost to be below Marginal Private Cost ($\text{MSC} < \text{MPC}$), resulting in market underproduction ($Q_m < Q_{\text{opt}}$) and welfare loss.