AQA AS Microeconomics Glossary

Positive Statement

A statement that does not include a value judgement and can be tested against the facts or evidence

Normative Statement

A statement that includes a value judgement and cannot be refuted just by looking at data or evidence

Value judgement

A view about what is right or wrong, good or bad in a moral sense. Statements that include these often contain the words ‘should’ or ‘ought’

Economic activity

The production, consumption, exchange and distribution of goods and services

Economic resources (factors of production)

The inputs into the production process that are needed to produce the goods and services that satisfy people’s wants. They are usually classified as land, labour, capital and enterprise.

Land

The factor of production that includes all the natural resources that are available on the earth.

Capital

The human-made factor of production. Examples include machines, tools, lorries and buildings.

Labour

The human resource - the contribution made by people to the production of goods and services

Entrepreneur

The person or group of people who organise the other economic resources to allow goods and services to be produced.

Enterprise

Involves making decisions and taking risks

Scarce resource

A factor of production that is limited in supply. There are not enough available to satify people’s wants and needs.

Scarcity

The fundamental economic problem that results from limited resources and unlimited wants. It means that choices have to be made which have an opportunity cost.

Opportunity cost

The next best alternative foregone when a choice is made.

Production possibility diagram

Shows the quantities of two goods or services that can be produced with the available resources, given the current state of technology

Production possibility frontier (PPF)

Shows the various quantities of two goods or services that can be produced, with the current state of technology, when all the available resources are fully employed

Resource allocation

How the available factors of production are used to produce different goods and services

Demand curve

The relationship between the price and quantity demanded of a good or service, in a given period of time, when other things that affect demand are held constant

Price elasticity of demand (PED)

A measure of the extent to which the quantity demanded of a product changes in response to a change in its price

Income elasticity of demand (YED)

A measure of the extent to which the quantity demanded of a product changes in response to a change in income

Cross elasticity of demand (XED)

A measure of the extent to which the quantity demanded of a product changes in response to a change in the price of a different product

Normal good

A product where there is a positive relationship between income and the quantity demanded of the product

Inferior good

A product where there is an inverse relationship between income and the quantity demanded of the product

Supply curve

The relationship between the price and quantity supplied of a good or service, in a given period of time, when other things that affect supply are held constant

Price elasticity of supply (PES)

A measure of the extent to which the quantity supplied of a product changes in response to a change in its price

Equilibrium market price

The price at which the quantity demanded equals the quantity supplied and there is no tendency for the price to change

Disequilibrium price

A price at which there is either excess demand, and a tendency for the price to rise, or there is excess supply, and a tendency for the price to fall

Excess demand

The amount by which the quantity demanded exceeds the quantity supplied at the current price

Excess supply

The amount by which the quantity supplied exceeds the quantity demanded at the current price

Joint demand

When two products are demanded together so that the demand for one product is directly related to the demand for the other product. Complementary goods are in joint demand.

Competitive demand

When the demand for one product increases the demand for another product decreases. Substitute goods are in competitive demand.

Composite demand

When a product has more than one use so that an increase in the demand for one use leads to a fall in the supply of the product that is available to use elsewhere.

Derived demand

When the demand for a product, or factor of production, is determined by the demand for a different product

Joint supply

When the output of one product also results in the output of a different product

Production

The process of using factors of production to create goods and services

Productivity

A measure of how much a factor of production can produce in a given period of time

Labour productivity

A measure of how much a worker can produce in a given period of time

Specialisation

Where firms, regions, countries or factors of production concentrate on producing a particular good or service, or carrying out a particular task

Division of labour

When the production of a good is broken down into many separate tasks and each worker performs one task, or a narrow range of tasks, as part of the production process

Short run

The time period when there is at least one fixed factor of production

Long run

The time period when all factors of production are variable

Returns

The amount produced, i.e. the output of a good or service

Average returns

Calculated by dividing total output by the number of units of the variable factor that are employed

Fixed costs

Costs that do not change when output changes

Variable costs

Costs that change when output changes

Internal economies of scale

When the growth of a firm results in its long-run average cost falling

External economies of scale

When the growth of an industry leads to lower average cost for firms in that industry

Diseconomies of scale

When the growth of a firm results in the firm’s long-run average cost increasing

Long-run average cost curve (LRAC)

Shows the minimum average costs of producing any given level of output when all factors of production are variable but technology has not changed

Total revenue

The total amount of money a firm receives from selling its output. It is usually calculated by multiplying the price of the product by the quantity sold.

Profit

The difference between a firm’s total revenue and total cost. It is the reward for the factor of production enterprise.

Technological change

The discovery and use of new and improved methods of producing goods and services. The introduction of new, more efficient technologies shifts the LRAC downwards.

Perfect competition

A market structure that comprises of a large number of small firms selling a homogeneous product to a large number of buyers, none of whom are able to influence the market price. There is perfect knowledge and freedom of entry into the market.

Homogeneous products

Identical products - they are perfect substitutes.

Price taker

A firm that is unable to influence the price of the product it sells. The price is usually determined by market forces.

Price maker

A firm that is able to set the price of the product it sells

Concentration ratio

A measure of the combined market share of the largest firms in an industry, usually expressed as a percentage

Barriers to entry

Factors that make it difficult for new firms to join a market

Monopoly

Where a single firm supplies 100% of a market

Monopoly power

The ability of a firm to affect the price of a product. Firms with monopoly power are price makers.

Creative destruction

The replacement of existing products, markets and firms with new ones as an inevitable consequence of technological change

Productive efficiency

Where it is not possible to produce more of one good or service without producing less of another. An individual firm achieves this when producing at the lowest point on its average total cost curve.

Allocative efficiency

When an economy is producing the combination of goods and services that best satisfies people’s preferences

Income

The flow of money received by an economic agent over a period of time.

Wealth

The value of the stock of assets owned by an economic agent at a point in time.

Equity

A normative concept related to fairness and justice.

Rationing function of price mechanism

When there is excess demand for products and/or factor services, prices rise to reduce demand. The opposite happens when there is excess supply.

Incentive function of price mechanism

When an increase in price encourages producers, and those providing factor services, to produce more. The opposite happens for a fall in price.

Signalling function of price mechanism

A change in price conveys information to economic agents about changing market conditios in a simple, convenient manner, helping producers and consumers make informed decisions.

Market failure

When markets operating without government intervention result in a misallocation of resources

Complete market failure

When the market mechanism does not supply a product even though it would satisfy people’s wants and needs. There is a missing market.

Partial market failrue

When a market exists and the product is supplied, but not at the socially optimum level.

Public good

A product that is non-rival and non-excludable

Private good

A product that is both rival and excludable

Quasi-public good

A product that has some but not all of the features of a public good

Non-excludable

When no one can be prevented from consuming the product

Non-rival

When the consumption of the product by one or more individuals does not reduce the amount available for others to consume

Free rider

When an individual is able to consume a product without paying for it

Tragedy of the commons

Where individuals, acting in their self-interest, overuse a shared resource with the result that it is depleted and degraded

Externality

The effects that producing and/or consuming a product have on third parties

Negative externality

When the social cost is greater than the private cost of production, or when the private benefit is greater than the social benefit of consumption

Positive externality

When the social cost of production is less than the private cost, or when the social benefit of consumption is greater than the private benefit

Social cost

Sum of private cost and external cost

Social benefit

Sum of private benefit and external benefit

Merit good

A product that society judges to be especially worthwhile and is likely to be underconsumed because the benefits are not always fully appreciated

Demerit good

A product that society judges to be undesirable and is likely to be overconsumed because the costs are not always fully recognised

Immobility of factors of production

When there are barriers that restrict the ability of factors of production to move to a different location (geographical) or change the type of employment (occupational)

Public ownership

When a firm or industry is owned and controlled by the government. Nationalisation results in the public ownership of firms that were previously in the private sector.

Privatisation

The transfer/sale of state-owned enterprises and other assets from the public sector to the private sector

Regulation

Laws and government-imposed rules that limit and control the behaviour of firms and individuals

Deregulation

The removal of rules that restrict the behaviour of firms and individuals, particularly those that limit competition

Subsidy

A payment to producers to reduce costs and increase supply

Price control

A government regulation that sets a maximum or minimum price that can be charged for a product

Government failure

When government intervention, with the intention of reducing market failure, leads to a worse allocation of resources than if the government had not intervened and reduces economic welfare

Unintended consequences

The unexpected outcomes that result from the decisions, policies and actions of the government or other economic agents