IGCSE ECONOMICS PAPER 1 DEFINITIONS

Scarcity

A situation of unlimited wants and limited resources.

Opportunity cost

The second-best alternative given up when an economic decision is made.

Economic growth

An increase in the real GDP of an economy over time.

Productive capacity

The total quantity of goods an economy is capable of producing with all available resources in one year.

Profit

Total revenue earned over a period of time minus total costs.

Total revenue

Selling price per unit multiplied by units sold.

Total costs

Total fixed costs plus total variable costs.

Fixed cost

A cost which does not change with output, e.g., rent or managerial salaries.

Variable cost

A cost of production which rises with output, e.g., raw materials.

Average cost

Total cost divided by number of units produced.

Rational behaviour

A situation where a consumer or producer takes into account every possible piece of relevant information before making an economic decision.

Demand

The range of quantities demanded of a good at different prices.

Supply

The range of quantities supplied at different prices.

Market equilibrium

A situation where the market sets a price such that the quantity demanded equals the quantity supplied.

Substitute good

A good which can be used instead of another, e.g., Coke as a substitute for Pepsi.

Complementary good

A good which is used together with another good, e.g., bicycle tyres and a bicycle pump.

Excess supply

A situation in which the quantity supplied exceeds the quantity demanded.

Excess demand

A situation in which the quantity demanded exceeds the quantity supplied.

Price elasticity of demand

The ratio of the percentage change in quantity demanded to the percentage change in the price of a good.

Price elasticity of supply

The ratio of the percentage change in quantity supplied to the percentage change in the price of a good.

Price elastic

Where the percentage change in quantity demanded or supplied is greater than the percentage change in price (the ratio is > 1).

Price inelastic

Where the percentage change in quantity demanded or supplied is less than the percentage change in price (the ratio is < 1).

Unitary price elastic

Where the price elasticity of supply or demand is equal to 1.

Perfect price elasticity of supply

Where the price elasticity of supply is infinity (a horizontal supply curve).

Perfect price inelasticity of demand

Where the price elasticity of demand is zero (a vertical demand curve).

Factors of production

Elements required for production, e.g., land, labour, capital, enterprise.

Spare capacity

A situation in which the economy is not using all its available resources.

Income elasticity of demand

The ratio of the percentage change in quantity demanded to the percentage change in income.

Luxury good

A good with a positive income elasticity of demand greater than 1.

Inferior good

A good with a negative income elasticity of demand.

Normal good

A good with a positive income elasticity of demand.

Tax

A charge on the income of households or the profits of firms made by a government.

Subsidy

A payment to a business by the government to reduce its cost of production and encourage production.

Mixed economy

An economy where some economic decisions are made by the state and some by individuals.

Public sector

The part of the economy consisting of government-owned businesses.

Private sector

The part of the economy consisting of businesses owned by shareholders and run by managers to maximize profit.

Privatization

The transfer of a business operation from state ownership to the private sector.

Market failure

Any situation in which a market allocates too many or too few resources to the production of a good.

External costs

Costs borne by those who are not consumers or producers of a good, e.g., passive smoking.

External benefits

Benefits borne by those who are not consumers or producers of a good, e.g., protection from a virus.

Social costs

Private costs plus external costs.

Social benefits

Private benefits plus external benefits.

Land

All natural resources, e.g., oil.

Labour

All human resources.

Capital

Man-made resources, e.g., machines and buildings.

Enterprise

The human skill of bringing together other resources to produce goods.

Public good

A good which cannot be provided by the market.

Non-excludability

A situation where non-paying consumers cannot easily be prevented from benefiting from the use of a good.

Indivisibility

A situation in which a good is only useful to consumers if it is provided at a certain minimum quantity.

Non-rivalry

A situation in which two or more consumers of a good may both benefit from its consumption simultaneously without restricting others’ enjoyment.

Primary activity

Extraction of natural commodities and agriculture.

Secondary activity

All manufacturing activity.

Tertiary activity

All businesses involved in the provision of services.

Quaternary activity

Information-based services, e.g., Google.

Productivity

The value of output produced by one unit of a resource in one hour.

Human capital

The quality of human resources influenced by education, training, and management.

Division of labour

The allocation of workers to specific parts of a task.

Economies of scale

A situation in which the average cost per unit falls as a firm increases all resources for production simultaneously.

Internal economies of scale

Economies of scale caused by decisions made by the business itself.

External economies of scale

Economies of scale caused by factors connected to the expansion of an industry.

Infrastructure

Roads, railways, internet connections, and public buildings.

Monopoly

A market which is dominated by one firm.

Price maker

A business with some control over the price it charges for its differentiated products.

Patent

A document recognizing the ownership of an idea or product and allowing the holder to prosecute copying efforts.

Innovation

The process of generating new ideas for products or processes.

Oligopoly

A market consisting of a few firms competing with roughly equal size.

Barriers to entry

Factors preventing new firms from entering an industry, such as high start-up costs.

Collusion

Secret and illegal cooperation between competitors.

Non-price competition

Competition between firms based on factors other than price.

Cartel

An organization of firms designed to fix prices and quantities to consumers' detriment.

Participation

The fraction of a certain section of the population which is in the workforce.

Trade union

An organization representing workers' rights to management.

Merger

A voluntary combination of two businesses to form a larger business.