Edexcel A-Level Economics Theme 1

Asymmetric information

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

Capital good

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

Complementary goods

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

Consumer goods

Goods 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

The responsiveness of demand for one good to a change in the price of another good

Demand

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

Diminishing marginal utility

The extra benefit gained from consumption of a good generally declines as extra units are consumed (explains why demand curve is downward sloping)

Division of labour

When the production process is divided into many separate tasks, each assigned to individual workers

Economic problem

Infinite wants but resources are scarce so choices have to be made

Enterprise

The willingness and ability to take risks and combine the three other factors of production

Equilibrium

Where demand equals supply in a market and there is no tendency for price or quantity to change

Excess demand

When quantity demanded exceeds quantity supplied because the price is set too low

Excess supply

When quantity supplied exceeds quantity demanded because the price is set too high

Externality

A third party spill-over effect, arising from the production or consumption of a good or service, for which no appropriate compensation is paid

Microeconomics

Study of economics at the level of the individual firm, industry or household/consumer

Normative statement

A subjective statement that carries a value judgment

Positive statement

An objective statement that can be tested or rejected by referring to the available evidence

Barter

The practice of exchanging one good or service for another without using money

Economic agent

A participant in an economic system (e.g. consumer, firm, government)

Factor incomes

The rewards to owning factors of production (e.g. wages, rent, interest, profit)

Factors of production

CELL - capital, enterprise, land, labour. The inputs required in order to supply goods and services

Free goods

Goods unlimited in supply therefore having zero-opportunity cost to supply

Land

Natural resources available for production

Labour

Physical and mental effort by humans

Non-renewable resources

Resources which are finite and cannot be replaced, so their stock falls over time

Renewable resources

Resources which can be naturally replenished, so their stock can be maintained over time

Scarcity

There is a limited quantity of resources available to produce unlimited goods and services we desire

Allocative efficiency

When the value that consumers place on a good or service equals the cost of production

PPF

A boundary that shows the potential output combinations of two or more goods and services using all available resources

Adam Smith

One of the founding fathers of modern economics. Wrote the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest.

Functions of money

method of deferred payment, medium of exchange, store of value, unit of account

Specialisation

A method of production where a firm/country focuses on the production of a limited range of goods/services to increase productivity

Invisible hand

How the pursuit of self-interest in a competitive market can allocate resources in society's best interests

Utility

A measure of the satisfaction derived from consuming a good or service

Law of demand

There is an inverse relationship between the price of a good and the quantity demanded.

Derived demand

Demand that arises from the demand for something else.

PED

The responsiveness of quantity demanded to a change in price

Inferior good

When demand for a product falls as real income increases (YED negative)

Necessity

A good/service for which demand rises less than proportionally to a change in income (YED positive, inelastic)

Luxury good

A good/service for which demand rises more than proportionally to a change in income (YED positive, elastic)

Normal good

Good/service with a positive YED

Substitutes

Goods/services in competitive demand that act as replacements for each other

Complements

Goods/services in joint demand

YED

The responsiveness of quantity demanded to a change in income

Revenue

Price x Quantity sold

Supply

Quantity of a good or service that a producer is willing and able to sell at a given price

PES

The responsiveness of quantity supplied to a change in price

Price mechanism

The means by which market forces interact to determine the allocation of resources (through signalling, incentives and rationing)

Consumer surplus

The difference between the price consumers are willing and able to pay for a good/service and the price they actually pay

Producer surplus

The difference between the price producers are willing and able to supply a good for and the price they actually receive

Ad valorem tax

An indirect tax based on a percentage of the selling price of a good/service

Excise duty

Indirect tax levied on the spending on goods/services such as cigarettes, fuel and alcohol

Indirect tax

A tax imposed on producers, where the burden of the tax is often passed onto consumers

Direct tax

A tax on income and wealth, where the burden of the tax cannot be passed onto someone else

Subsidy

Government grants given to producers to reduce their production costs

Unit tax

A specific tax per unit sold

Market failure

The inefficient allocation of goods/services in a free market - usually because the benefits for individuals/firms diverge from the benefits to society as a whole

Public good

A good which is non-rivalrous and non-excludable

Maximum price

A legally imposed price ceiling that suppliers cannot exceed

Minimum price

A legally imposed price floor below which the market price cannot fall

State provision

Government-provided goods/services funded through tax revenue, often to provide goods with positive externalities or which are public goods

Privatisation

The transfer of state-owned assets to the private sector

Nationalisation

The transfer of privately-owned assets to state ownership

Opportunity cost

The benefits of the next best alternative forgone

Productive efficiency

Producing output at the lowest possible average total cost of production

Economic goods

Goods that are scarce because their use has an opportunity cost

Technical efficiency

Using the minimum quantity of inputs possible in order to produce a given output

Dynamic efficiency

an economy or firm's ability to adapt and improve its productivity over time, often through re-invested profits

Ceteris paribus

a Latin phrase that means "all other things held constant"

Composite demand

Demand for a good which has more than one use e.g. land for housing or a factory.

Joint demand

demand for two or more goods that are used together to create a product

Joint supply

two or more goods that are derived from a single product (e.g. Butter and semi-skimmed milk are both produced from whole milk)

Free market economy

an economic system where the prices of goods and services are set freely by the forces of supply and demand

Private cost

the cost borne by the producer of a good or service

External cost

a cost paid by a third-party outside the transaction

Unexpected consequences

Outcomes that are not foreseen or intended when an action is taken (such as introducing a policy)