Theme 1

Edexcel Alevel Economics Theme 1

Ad valorem tax

An indirect tax imposed on a good where the value of the tax is dependent on the value of the good.

Asymmetric information

Where one party has more information than the other, leading to market failure.

Capital

One of the four factors of production; goods which can be used in the production process.

Capital goods

Goods produced in order to aid production of consumer goods in the future.

Ceteris paribus

All other things remaining the same.

Command economy

All factors of production are allocated by the state, so they decide what, how and for whom to produce goods.

Complementary goods

Negative XED; if good B becomes more expensive, demand for good A falls.

Consumer goods

Goods bought and demanded by households and individuals.

Consumer surplus

The difference between the price the consumer is willing to pay and the price they actually pay.

Cross elasticity of demand (XED)

The responsiveness of demand for one good (A) to a change in price of another good (B).

Demand

The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment of time.

Diminishing marginal utility

The extra benefit gained from consumption of a good generally declines as extra units are consumed.

Division of labour

When labour becomes specialised during the production process so do a specific task in cooperation with other workers.

Economic problem

The problem of scarcity; wants are unlimited but resources are finite so choices have to be made.

Efficiency

When resources are allocated optimally, so every consumer benefits and waste is minimised.

Enterprise

One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.

Equilibrium price/quantity

Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded.

Excess demand

When price is set too low so demand is greater than supply.

Excess supply

When price is set too high so supply is greater than demand.

Externalities

The cost or benefit a third party receives from an economic transaction outside of the market mechanism.

External cost/benefit

The cost/benefit to a third party not involved in the economic activity.

Free market

An economy where the market mechanism allocates resources so consumers and producers make decisions about what is produced.

Free rider principle

People who do not pay for a public good still receive benefits from it.

Government failure

When government intervention leads to a net welfare loss in society.

Habitual behaviour

A cause of irrational behaviour; when consumers are in the habit of making certain decisions.

Incidence of tax

The tax burden on the taxpayer.

Income elasticity of demand (YED)

The responsiveness of demand to a change in income.

Indirect tax

Taxes on expenditure which increase production costs and lead to a fall in supply.

Inferior goods

Goods which see a fall in demand as income increases.

Information gap

When an economic agent lacks the information needed to make a rational, informed decision.

Information provision

When the government intervenes to provide information to correct market failure.

Labour

One of the four factors of production; human capital.

Land

One of the four factors of production; natural resources such as oil, coal, wheat.

Luxury goods

YED>1; an increase in incomes causes an even bigger increase in demand.

Market failure

When the free market fails to allocate resources to the best interest of society.

Market forces

Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand.

Maximum price

A ceiling price which a firm cannot charge above.

Minimum price

A floor price which a firm cannot charge below.

Mixed economy

Both the free market mechanism and the government allocate resources.

Model

A hypothesis which can be proven or tested by evidence.

Negative externalities of production

Where the social costs of producing a good are greater than the private costs.

Non-excludable

A characteristic of public goods; cannot be prevented from using the good.

Non-renewable resources

Resources which cannot be readily replenished or replaced.

Non-rivalry

A characteristic of public goods; one person’s use of the good does not prevent someone else from using it.

Normal goods

YED>0; demand increases as income increases.

Normative statement

Subjective statements based on value judgements which cannot be proven.

Opportunity cost

The value of the next best alternative forgone.

Perfectly price elastic good

PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes.

Perfectly price inelastic good

PED/PES=0; quantity demanded/supplied does not change when price changes.

Positive externalities of consumption

Where the social benefits of consuming a good are larger than the private benefits.

Positive statement

Objective statements which can be tested with factual evidence.

Possibility production frontier (PPF)

Depicts the maximum productive potential of an economy.

Price elasticity of demand (PED)

The responsiveness of demand to a change in price.

Price elasticity of supply (PES)

The response of supply to a change in price.

Price mechanism

The system of resource allocation based on the free market movement of prices.

Private cost/benefit

The cost/benefit to the individual participating in the economic activity.

Private goods

Goods that are rivalry and excludable.

Producer surplus

The difference between the price the producer is willing to charge and the price they actually charge.

Public goods

Goods that are non-excludable and non-rivalry.

Rationality

Decision-making that leads to economic agents maximising their utility.

Regulation

Laws to address market failure and promote competition between firms.

Relatively price elastic good

When PED/PES>1; demand/supply is relatively responsive to a change in price.

Relatively price inelastic good

When PED/PES<1; demand/supply is relatively unresponsive to a change in price.

Renewable resources

Resources which can be replenished.

Scarcity

The shortage of resources in relation to the quantity of human wants.

Social cost/benefit

The cost/benefit to society as a whole due to the economic activity.

Social optimum position

Where social costs equals social benefits.

Social science

The study of societies and human behaviour.

Specialisation

The production of a limited range of goods by a company/country.

Specific tax

A tax imposed on a good where the value of the tax is dependent on the quantity bought.

State provision of goods

Through taxation, the government provides public goods or merit goods.

Subsidy

Government payments to a producer to lower their costs of production.

Substitutes

Positive XED; if good B becomes more expensive, demand for good A rises.

Supply

The ability and willingness to provide a particular good/service at a given price.

Symmetric information

Where buyers and sellers both have access to the same information.

Trade pollution permits

Licenses which allow businesses to pollute up to a certain amount.

Unitary price elastic good

When PED/PES=1; a change in price leads to a change in output by the same proportion.

Utility

The satisfaction derived from consuming a good.

Weakness at computation

A cause of irrational behaviour; when consumers are bad at making calculations.