Edexcel A Level Economics - How Markets Work Flashcards

Vocabulary practice flashcards covering fundamental terms and definitions from the Edexcel A Level Economics topic on How Markets Work.

Rational Decision Making

An economic assumption that economic agents consider the outcome of their choices, recognize net benefits, and select the choice that presents the highest benefits.

Demand

The amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period.

Effective Demand

Demand where a consumer is willing to purchase a good or service and also has the ability to afford it.

Law of Demand

Captures the inverse relationship between price and quantity demanded; when price rises, quantity demanded falls, and when price falls, quantity demanded rises.

Conditions of Demand

Factors other than price level that change the demand for a good/service and shift the entire demand curve.

Marginal Utility

The extra utility (satisfaction) gained from the consumption of an additional unit of a product.

Law of Diminishing Marginal Utility

States that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit.

Price Elasticity of Demand (PED)

Reveals how responsive the change in quantity demanded is to a change in price, calculated as $\text{PED} = \frac{\text{\%} \triangle \text{ in QD}}{\text{\%} \triangle \text{ in P}}$.

Income Elasticity of Demand (YED)

Reveals how responsive the change in quantity demanded is to a change in income, calculated as $\text{YED} = \frac{\text{\%} \triangle \text{ in QD}}{\text{\%} \triangle \text{ in Y}}$.

Cross Price Elasticity of Demand (XED)

Reveals how responsive the change in quantity demanded for good A is to a change in price of good B, calculated as $\text{XED} = \frac{\text{\%} \triangle \text{ in QD}_A}{\text{\%} \triangle \text{ in P}_B}$.

Inferior Good

A good for which demand decreases when income increases, resulting in a negative YED ($\text{YED} < 0$).

Normal Necessity

A good where demand increases proportionately less when income increases, having an income elasticity between 0 and 1 ($0 \rightarrow 1$).

Normal Luxury

A good where demand increases proportionately more when income increases, having an income elasticity greater than 1 ($\text{YED} > 1$).

Supply

The amount of a good/service that a producer is willing and able to supply at a given price in a given time period.

Conditions of Supply

Factors that change the supply of a good/service irrespective of the price level, shifting the entire supply curve.

Price Elasticity of Supply (PES)

Reveals how responsive the change in quantity supplied is to a change in price, calculated as $\text{PES} = \frac{\text{\%} \triangle \text{ in QS}}{\text{\%} \triangle \text{ in P}}$.

Short-run (Production)

Any period of time in which at least one factor of production is fixed and serves as a limiting factor.

Long-run (Production)

Any period of time in which all factors of production are variable; also known as the planning stage.

Market Clearing Price

The equilibrium price at which demand equals supply and sellers are clearing their stock at an acceptable rate.

Excess Demand

A market state of disequilibrium occurring when quantity demanded is greater than quantity supplied because prices are below equilibrium.

Excess Supply

A market state of disequilibrium occurring when quantity supplied is greater than quantity demanded because prices are above equilibrium.

Price Mechanism

The interaction of demand and supply in a free market that determines prices, which allocate scarce resources between competing wants/needs.

Rationing Function

A function of the price mechanism where prices allocate scarce resources so that when resources become scarcer, rising prices limit distribution to those who can afford them.

Signalling Function

A function of the price mechanism where price changes provide information to producers and consumers about where resources are required or not.

Incentive Function

A function of the price mechanism where price changes incentivize producers to reallocate factors of production to more profitable markets.

Consumer Surplus

The difference between the amount the consumer is willing to pay for a product and the price they actually paid.

Producer Surplus

The difference between the amount that the producer is willing to sell a product for and the price they actually receive.

Indirect Tax

A tax levied by the government on producers upon the consumption of goods and services.

Specific Tax

A fixed indirect tax charged per unit of output.

Ad Valorem Tax

An indirect tax calculated as a percentage of the purchase price.

Producer Subsidy

A per unit amount of money given to a firm by the government to increase production or increase provision of a merit good.

Rule of Thumb

A heuristic or shortcut used by consumers to quickly estimate benefits without gathering comprehensive information.