AQA A-Level Economics : Microeconomics

Short-Termism

the tendency for government to focus excessively on short-term performance objectives at the expense of longer-term strategic objectives e.g. lowering income tax

Scarcity

a situation in which unlimited wants exceed the finite resources available to fulfill those wants

Ceteris Paribus

'all other things being equal'

Positive Statement

objective statements that can be proved e.g. homelessness is currently at 5% in Cambridge

Normative Statements

opinions that contain value judgments

Value Judgments

judgments about society that cannot be quantified and tested e.g. homelessness is too high in Cambridge

Main Purpose of Economic Activity

to produce goods and services to satisfy consumers' wants and needs

The Economic Problem

involves working out how to allocate limited resources as effectively as possible to satisfy people's unlimited wants and needs

Factors of Production - Land

all natural resources that are used to produce goods and services e.g. materials, water

Factors of Production - Labour

a combination of human capital (the value of workers' labour) and the labour force (the working population)

Factors of Production - Enterprise

entrepreneurial actions (e.g. establishing businesses and taking risks) that individuals take to try and make a profit

Factors of Production - Capital

equipment used to generate goods and services within the production process e.g. machinery

Three Main Economic Agents

- individuals : people/firms that produce goods or supply services

- consumers : people/firms who purchase the goods/services

- governments : establishes rules for economies

Opportunity Cost (Tradeoffs)

the benefit lost by not choosing next best alternative to a decision

Issues with Opportunity Cost (2)

- imperfect information may prevent consumers from picking the alternative

- barriers between switching to alternative

Production Possibility Frontier

illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other

Why is the PPF Curved?

as the costs of production are not constant, and therefore the tradeoffs between producing product A and product B differ at different quantities

Efficiency

using resources in such a way as to maximize the production of goods and services

Static Efficiency

when productive and allocative efficiency are both achieved at a particular point in time

Productive Efficiency

when it is impossible to produce more of one product without decreasing the quantity produced of another product

Allocative Efficiency

a state of the economy in which production is able to meet consumer demand entirely (marginal benefit = marginal cost)

Factors which Shift the PPF Outwards (3)

- reallocation of fixed resources

- improvements in technology

- increase in the supply of labour

Command Economy

an economic system in which the government controls a country's economy

Marginal Product

the amount of extra output produced by an extra unit of input

Marginal Product of Labour

the amount of extra output produced by one more worker

Marginal Product of Capital

the amount of extra output produced by an extra unit of capital

Marginal Revenue

the change in total revenue from selling an extra good or service

Marginal revenue is positive / negative depending on...

the price elasticity of demand

Marginal Cost

the extra cost of production that a firm incurs when producing one more good or service e.g. materials, labour

Marginal Utility

the extra benefit to an individual of consuming a good or service

(Law of) Diminishing Marginal Returns

the concept that the more of something you add, the lower the impact of each additional unit, ceteris paribus

Diminishing Marginal Product

the marginal product of an input declines as the quantity of the input increases e.g. farmers use the most fertile land to produce crops initially

(Law of) Diminishing Marginal Utility

decreasing satisfaction or usefulness as additional units of a product are used by consumers

Budget Constraints

constraints that consumers face as a result of limited incomes

Total Utility

the total amount of satisfaction obtained from consumption of a product

Utility Maximization Formula

P1 / P2 = MŪ / MÚ

(these should be equal)

Rational Agents

agents (people, governments or producers) who use utility theory to guide their decision-making

Producers acting rationally will...

maximize their profit and attempt to increase their market share

Governments acting rationally will...

act in ways that maximise the welfare of their population e.g. reducing inflation

Consumers acting rationally will...

maximise their utility within the limits of their income and attempt to improve their work-life balance

Behavioral Economists

believe individuals will act irrationally as they lack perfect information and their decision making is restricted by time limits

Traditional Economists

assume that economic agents act rationally and want to maximise utility

Asymmetric Information

a situation in which one party to an economic transaction has less information than the other party

Anchoring

when an individual uses a reference point from a previous decision (which is usually irrelevant) to form the basis of a new decision

Availability Bias

the tendency for people to base their judgments on information that is readily available to them

Habitual Behaviour

where someone repeats their decision-making actions many times

Social Norms

generally accepted modes of behaviour

Nudging

a system of guiding people into making more rational decisions

Choice Architecture

presenting a decision in such a way as to influence an individuals decision

Default Bias

we are more likely to comply with a requirement than to make the effort not to comply

Mandated Choice

choices made in advance e.g. organ donor

Restricted Choice

offering people a limited number of options so that they are not overwhelmed by the complexity of the situation

Thin Market

a market with few buyers and few sellers

Thick Market

a market with many buyers and sellers

Price Signalling (Imperfect Information)

Buyers with imperfect information often believe a product's price represents its quality

Free Market

an economic system in which prices and wages are determined by unrestricted competition between businesses, without government regulation

Benefits of the Free Market (2)

- efficient as firms incentivised to produce more high demand goods

- rewards entrepreneurship

Drawbacks of the Free Market (2)

- missing markets for low demand products

- risk of monopolies

Benefits of Command Economy (2)

- corrects inequalities which exist in the free market

- prevent monopoly exploitation

Negatives of Command Economies (2)

- reduces incentive for entrepreneurship

- restricts consumer choice

Mixed Economy

an economy in which private enterprise exists in combination with the government controlled public sector

Bounded Rationality

a set of boundaries or constraints that tend to complicate the rational decision-making process

Price

the amount of money exchanged for a good or service

Quantity Demanded

the total number of units purchased at that price

Law of Demand

price and quantity demanded are inversely related as increased price will decrease demand, ceteris paribus

Willingness to Pay

the desire to pay based on individual preferences

Ability to Pay

whether an individual can afford product based on their income

Substitute Goods

an increase in the price of one good will increase the quantity demanded of the other e.g. Coca Cola and Pepsi

Complement Goods

an increase in the price of good will decrease the quantity demanded of the other e.g. flights to Spain and suncream

Income Effect

when prices fall, the consumer's purchasing power increases (assuming income is fixed), resulting in increased quantity demanded for the goods

Substitution Effect

when theorise of one good falls, the consumer will purchase the cheapest substitute, resulting in its quantity demanded increasing and demand for more expensive alternatives decreasing

Movements along the demand curve occur when...

price increases (demand contracts) or price decreases (demand extends)

Price Elasticity of Demand

measures the responsiveness of quantity demanded to a change in price

Price Elasticity of Demand Formula

PED = % change in quantity demanded / % change in price

Evaluating Price Elasticity of Demand

PED > 1 : Elastic Demand

PED < 1 : Elastic Demand

PED = 1 : Unitary Elasticity

Income Elasticity of Demand (YED)

measures the responsiveness of quantity demanded to a change in income

Income Elasticity of Demand Formula

YED = % change in quantity demanded / % change in income

Evaluating Income Elasticity of Demand

YED > 0 : Normal Goods

YED < 0 : Inferior Goods

YED > 1 : Luxury Goods

Cross Elasticity of Demand (XED)

measures the responsiveness of quantity demanded for product A in response to a change in price for product B

Cross Elasticity of Demand Formula

XED = % change in quantity demanded of product A / % change in price of product B

Evaluating Cross Elasticity of Demand

Positive XED : Substitute Goods

Negative XED : Complement Goods

XED Close to 0 : Unrelated Goods

Perfectly Elastic Demand

when quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity

Perfectly Inelastic Demand

when quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero

If demand is elastic, the firm should...

decrease prices as this will result in a proportionally larger increase in quantity demand

If demand is inelastic, the firm should...

increase prices as this will result in a proportionally lower decrease in quantity demand

Determinants of Price Elasticity (3)

- availability of substitutes

- proportion of income spent

- addictive goods

Total Revenue Formula

price per unit x quantity

Straight-line Demand Curve

Demand becomes less elastic as we move down along the demand curve

Factors Which Increase Supply

- increase in price

- improved technology

- subsidies

Price Elasticity of Supply (PES)

measures the responsiveness of quantity supplied to a change in price

Price Elasticity of Supply Formula

PES = % change in quantity supplied / % change in price

Evaluating Price Elasticity of Supply

PES > 1 : Elastic Supply

PES < 1 : Elastic Supply

PES = 1 : Unitary Elasticity of Supply

In the short run, supply is...

inelastic as capacity is fixed and one or more factors of production (usually capital) are fixed

In the long run, supply is...

elastic as all factors of production are variable and capacity can be increased

Equilibrium Price

the price at which the quantity demanded equals the quantity supplied

Disequilibrium

when the market is not at a stable price or quantity, resulting in excess demand / supply

Excess supply will signal producers to...

cut prices as its better to sell at a lower price than not at all

Excess demand will signal producers to...

produce more to capitalize on higher sales revenue

Joint Demand

the demand for two or more complementary goods e.g. Iphone and Airpods

Composite Demand

demand for a good which has more than one use in the production process e.g. steel