EDEXCEL Economics (A) Key Term Glossary: Theme 1

Flashcards covering key vocabulary from EDEXCEL Economics (A) Theme 1.

Behavioural economics

Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Ceteris paribus

To simplify analysis, economists isolate the relationship between two variables by assuming all other influencing factors are held constant.

Economic model

A simplified representation of economic processes used to gain a better understanding of economic theory.

Microeconomics

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

Unintended consequences

Outcomes that are not foreseen and intended by a purposeful action, often occurring in government intervention in markets.

Normative statements

Statements that express an opinion about what ought to be; they are subjective and carry value judgments.

Positive statement

Objective statements that can be tested or rejected by referring to available evidence.

Value judgement

A view of the rightness or wrongness of something, based on a personal view.

Barter

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

Basic economic problem

There are infinite wants but finite factor resources with which to satisfy them.

Capital goods

Producer goods useful for the goods and services they can help produce in the future.

Constraints

Limits to what we can afford to consume, operating within a budget and making choices from feasible sets.

Economic agent

A participant in an economic system – be it a consumer, business or the government.

Entrepreneur

An individual who seeks to supply products to a market for a rate of return (i.e. a profit), often investing their own financial capital and taking on business risks.

Factor incomes

Rewards to factors of production: wages for labour, rent for land, interest for capital, and profit for enterprise.

Factors of production

Inputs available to supply goods and services: Land, Labour, Capital, and Enterprise.

Finite resources

Workers, machines, land acres, and oil reserves on the earth are examples of these limited resources.

Free goods

Goods that do not use up any factor inputs when supplied and have a zero-opportunity cost.

Inputs

Labour, capital and other resources used in the production of goods and services.

Interest

The reward to the ownership of capital.

Land

Natural resources available for production.

Labour

Physical and mental effort by humans.

Manufacturing

The use of machines, tools and labour to make things for use or sale, commonly applied to industrial production on a large scale.

Needs

Essential for survival; food satisfies hungry people.

Non-renewable resources

Resources which are finite and cannot be replaced, such as minerals and fossil fuels.

Opportunity cost

The cost of any choice in terms of the next best alternative foregone.

Rationing

A way of allocating scarce goods and services when market demand exceeds available supply.

Renewable resources

Resources that (in theory) are replaceable if the rate of extraction is less than the natural rate at which the resource renews.

Rent

Income typically associated with the ownership of land, but can also include rental income from leasing out other assets.

Scarcity

Limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.

Allocative efficiency

Occurs when the value that consumers place on a good or service equals the cost of the resources used up in production.

Concave production possibility frontier

A PPF that is bowed outwards, indicating a rising marginal opportunity cost as you produce more of one good due to imperfect factor mobility.

Consumer goods

Goods bought and used by consumers and households.

Economic efficiency

Making best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time.

Economic growth

An increase in the productive potential of a country – shown by an outward shift of the production possibility frontier.

Pareto efficiency

An action done in an economy that harms no one and helps at least one person.

Production possibility frontier

A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently.

Productive potential

The amount of output an economy could produce if all of its resources were fully and efficiently employed.

Trade-off

Choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.

Division of labour

The specialization of labour in specific tasks, intended to increase productivity.

Measure of value

A function of money where it can be used to judge the value of a good or service.

Medium of exchange

Money is any asset that is widely acceptable as a medium of exchange when buying goods and services in markets.

Method of deferred payment

A function of money that allows a system of making payments at a later date.

Specialisation

A method of production where a business or area focuses on the production of a limited scope of products or services to gain greater productive efficiency.

Standard of deferred payment

A function of money - the accepted way, in a given market, to settle a debt.

Store of value

A function of money in that it can be used to save and be exchanged at a later time.

Unit of account

A function of money, a nominal unit of measure or currency used to value products, assets, debts, incomes and spending.

Capitalist economy

An economic system organised along capitalist lines uses market-determined prices to guide our choices about the production and distribution of goods.

Command economy

An economic system where most factor resources are allocated by the government, with few officially sanctioned private markets.

Consumer sovereignty

Exists when an economic system allows scarce resources to be allocated to producing goods and services that reflect the wishes of consumers.

Economic planning

Government policies aimed at influencing trends in the economy.

Economic system

A network of organisations used to resolve the problem of what, how much, how and for whom to produce.

Free market

System of buying and selling that is not under the control of the government, and where people can buy and sell freely

Mixed economy

Where resources are partly allocated by the market and partly by the government.

Planned economy

In a planned economy, decisions about what to produce, how much to produce and for whom are decided by central planners working for the government rather than allocated using the price mechanism.

Transition economies

Economies involved in a process of moving from a centrally planned economy to a mixed or free market economy.

Market incentives

Signals that motivate economic actors to change their behaviour perhaps in the direction of greater economic efficiency.

Rational choice

The weighing up of costs and benefits and trying to maximise the surplus of benefits over costs.

Utility

A measure of the satisfaction that we get from purchasing and consuming a good or service.

Utility maximisation

Belief that consumers behave rationally in allocating their limited budget between different products so as to maximise total satisfaction from their purchases.

Demand

Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

Demand curve

Shows the relationship between the price of an item and the quantity demanded over a period of time.

Diminishing marginal utility

The change in satisfaction from consuming an extra unit of a good or service.

Effective demand

When consumers' desire to buy a product is backed up by an ability to pay for it.

Excess demand

The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price.

Law of demand

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

Perverse demand curve

One which slopes upwards from left to right. Therefore an increase in price leads to an increase in demand.

Willingness to pay

The maximum price a consumer is prepared pay to obtain a product.

Complements

Two complements are said to be in joint demand. Examples include: fish and chips, iron ore and steel, hardware and software for digital products.

Income elasticity of demand

The relationship between a change in quantity demanded and a change in real income.

Inelastic demand

When the coefficient of price elasticity of demand is less than 1. (Ped<1)

Inferior good

When demand for a product falls as real incomes increases. Income elasticity is negative.

Luxury good

Goods and services have an income elasticity of demand with a coefficient of more than +1

Necessities

Typically have a low own-price elasticity of demand (consumers are not sensitive to a change in price) and a low but positive income elasticity of demand (YED >0 but <+1).

Normal goods

Goods that have a positive income elasticity of demand.

Price elasticity of demand

Measures the responsiveness or sensitivity of demand for a product following a change in its own price.

Real income

The money earned from employment after the distorting effects of inflation have been removed.

Substitutes

Goods in competitive demand and act as replacements for another product.

Total revenue

The amount of money earned by a firm from selling its output. TR = P X Q

Unit elasticity of demand

A demand curve with unitary price elasticity has a coefficient of PED equal to 1 (unity) throughout. Total spending on the product will be the same at each price level.

Unrelated goods

Goods or services that have no relationship between them in which case the cross-price elasticity of demand will be zero.

Competitive supply

Goods in competitive supply are alternative products a firm could make with its resources.

Excess supply

When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price.

Law of supply

There is a positive relationship between the price of a good and supply.

Market supply

The total amount of an item producers are willing and able to sell at different prices, over a given period of time e.g. one month.

Supply

Quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.

Supply chain

Different stages of making, distributing and selling a good or service from the production of parts, through to distribution and sale of the product.

Supply curve

The relationship between market price and quantity supplied onto the market.

Elastic supply

Where the coefficient of price elasticity of supply is greater than +1.

Elasticity of supply

Price elasticity of supply measures the relationship between change in quantity supplied and a change in market price.

Inelastic supply

When the coefficient of price elasticity of supply is less than +1. (Pes<1)

Disequilibrium

Prices where demand and supply are out of balance are points of disequilibrium. There is either excess demand (market prices too low) or excess supply (market prices too high).

Equilibrium

Means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change.

Excess demand

A situation where quantity demanded is greater that quantity supplied.

Excess supply

A situation where quantity supplied is greater than quantity demanded.

Health rationing

occurs when the demand for health care services outstrips the available resources leading to waiting lists and delays for health treatment.

Shortage

A situation in which quantity demanded is greater than quantity supplied.

Price mechanism

The means by which decisions of consumers and businesses interact to determine the allocation of resources.

Price signals

Changes in price act as a signal about how resources should be allocated.

Rationing

A rising price can reduce the quantity demanded of a good or service.