AS Economics

Positive statement

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

Normative statement

A value judgement which is a subjective statement of opinion rather than a fact that can be tested by looking at the available evidence

Basic Economic Problem

how best to make decisions about the allocation of scarce resources among competing uses so as to maximise human happiness and welfare

Factors of Production

the inputs available to supply goods and services. They are classified as land, labour, enterprise and capital

Opportunity Costs

a benefit that a person could have received, but gave up, to take another course of action. An alternative given up when a decision is made

Ceteris Paribus

a Latin phrase, roughly means "all other things being equal."

Microeconomics

a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources.

Macroeconomics

a branch of economics that studies how the aggregate economy behaves. A variety of economy-wide phenomena is thoroughly examined such as, inflation, price levels, rate of growth, national income, gross domestic product and changes in unemployment.

hypothesis

a supposition or proposed explanation made on the basis of limited evidence as a starting point for further investigation.

capital goods

goods that are used in producing other goods, rather than being bought by consumers.

composite demand

Demand for a good that has multiple different uses. e.g. People may demand oil because it can be used to create either petrol or plastics. People may demand wheat for producing bread, biofuels or feeding livestock.

margin

the difference between a product or service's selling price and its cost of production

Production Possibility Frontier

the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed.

consumption

the use of goods and services by households.

investment

the purchase of goods that used in the future to create wealth, rather than be consumed today

quantity demanded

the quantity purchased of a good at any given price

demand

a consumer's desire and willingness to pay a price for a specific good or service

extension of demand

when quantity demanded for a good increases because of a fall in the price

contraction of demand

when quantity demanded for a good falls because of a rise in the price

Demand curve

the line on a price/quantity diagram which shows the quantity demanded at any given price

Shift of the demand curve

a movement of the whole demand curve to the right or left of the original caused by a change in any variable affecting demand except price

determinants/conditions of demand

factors other than price which lead to changes in demand and to shifts of the demand curve

derived demand

a demand for a commodity, service, etc. which is a consequence of the demand for something else.

elastic demand

where the price elasticity of demand is greater than -1 (further away from 0)

inelastic demand

where the price elasticity of demand is less than -1 (nearer to 0)

price elasticity of demand

the % change in quantity demanded/% change in price

unitary elasticity

% change in quantity = % change in price i.e = 1

total revenue

quantity sold * average price

normal goods

any goods for which demand increases when income increases, and falls when income decreases but price remains constant,

inferior goods

any good that decreases in demand when consumer income rises

substitute goods

goods that could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise.

complementary goods

any good for which demand is increased when the price of another good is decreased

income elasticity of demand

% change in Quantity Demanded/% change in income

cross elasticity of demand

% change in Quantity Demanded of product X/% change in price of Product Y

market supply

the quantity of a good or service that all firms plan to sell at in a given period of time

determinants/conditions of supply

the conditions of supply, other than the product's price, that fix the position of the supply curve

supply curve

graphical representation of the relationship between the price of a good or service and the quantity supplied for a given period of time

excess supply

when firms wish to sell more than consumers wish to buy. The price will be above the equilibrium price

excess demand

when consumers wish to buy more than firms wish to sell. The rice will be below the equilibrium price

production

the conversion of inputs or factor services into outputs of goods and services

productivity

output per unit of input

short run production

occurs when a firm adds variable factors of production to fixed factors of production

long run production

occurs when a firm changes the scale of all factors of production

labour productivity

output per worker

capital productivity

output per unit of capital

productivity gap

the difference between labour productivity in the UK and other developed economies

short run

the time period in which at least one factor of production cannot be changed

long run

the time period in which all factors of production can be varied

fixed cost

a cost of production which in the short run does not change with output

variable cost

a cost of production which changes with the amount produced, even in the short run

average cost

total cost of production divided by output

total cost

the whole cost of producing a particular level of output

average revenue

total revenue divided by output

internal economy of scale

reduction in long run average costs resulting from the growth of the firm itself

external economy of scale

reduction in average cost saving resulting from the growth of the industry or market

natural monopoly

when a country or firm has complete control of a resource OR where there is only room in a market for one form benefitting from full economies of scale

natural barriers to entry

barriers to entry that result from inherent features of the industry

monopoly (pure)

a market with only one firm

oligopoly

a market or industry containing a few firms

artificial barriers to entry

deliberate barriers to entry erected by firms themselves or governments making it difficult for others to enter a market

monopoly power

where firms in non monopoly market structures still have considerable power to set prices, and differentiate products

concentration ratio

the total market share of a number of leading firms int he market, or the output of those firms as a % of total market output

collusion

co-operation between firms, usually to fix prices

productive efficiency

the lowest-average cost level of output/production

market failure

a situation in which the allocation of goods and services is not efficient.

missing market

a type of market failure where there is some obstruction to an efficient free market which would enable an efficient distribution of resources but for various reasons this market doesn't exist.

allocative function of prices

channels resources away from markets with excess supply to markets with excess demand

Private cost

The costs or harm born by the parties involved in an economic transaction. They are internal costs of production or consumption

Private benefit

The benefit received by the parties involved in an economic transaction. They are internal benefits of production or consumption.

External cost

The difference between social and private costs; i.e. those incurred by third parties.

External benefit

The difference between social and private benefits; i.e. those received by third parties.

Social Cost

All the costs accrued by society (private cost + external cost) of an economic activity

Social benefit

All the benefits received by society (private benefit + external benefit)of an economic activity

Social welfare

The cost or benefit of an activity to society as a whole.

Externality

The difference between social costs and benefits and private costs and benefits.

Negative externality

Social Cost > Private cost. They occur outside of the market i.e. they affect economic agents not directly involved in the production and/or consumption of a good or service.

Positive Externality

Social benefit > Private benefit. They occur outside of the market i.e. they affect economic agents not directly involved in the production and/or consumption of a good or service.

Social optimum

Can be found where social cost is equal to social benefit and produces an allocatively efficient output.

merit good

a good for which the social benefits of consumption exceed the private benefits (e.g healthcare)

demerit good

a good for which the social costs of consumption exceed the private costs

public good

a good which is both non excludable and non rival

quasi public good

a good which is not fully Non-rival and where it is possible to exclude people form consuming the product

private good

a good that is excludable and rival

immobility of labour

the inability of workers to move from one job to another

geographical immobility

when workers find it difficult to move to another part of the country to find work

occupational immobility

when workers find it difficult to switch jobs because they lack or cannot develop the required skills

equity

fairness or justness

equality

everybody being treated in exactly the same way

income

the flow of money a person or household receives in a time period

wealth

the stock of everything which has value owned by a person or hosuehold

black market

a clandestine or indercover market or transaction which has some aspect of illegality

buffer stock

a reserve of a commodity that can be used to offset price fluctuations.

government failure

where government intervention reduces economic welfare

subsidy

a payment made by government usually to producers, for each unit of the good they produce. Consumers can also receive this payment to reduce the costs of purchasing the good (e.g to enable them to travel on buses at a lower price)

Economy of Scale

a proportionate saving in costs gained by an increased level of production.

Diseconomy of Scale

a situation in which economies of scale no longer functions for a firm. With this principle, rather than experiencing continued decreasing costs and increasing output, a firm sees an increase in average costs when output is increased.

Technical economies of scale

These are economies of scale where Large-scale businesses can afford to invest in expensive and specialist capital machinery.

scarcity

results from the fact that people have unlimited wants but resources to meet them are limited

land

comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, forests, fish stocks and agricultural produce

labour

all human physical and mental effort used in creation of goods and services