A Level Economics Theme 1 Edexcel

Positive statement

An objective statement which can be assessed in its authenticity and accuracy, can be incorrect as long as it can be assessed.

Normative statement

A statement which cannot be assessed in its accuracy and authenticity, value based and often displays an opinion or contains the phrase “ought to” or “should” or any similar phrases.

Economic problem

There is an infinite amount of wants as opposed to a finite amount of resources.

Product possibility frontiers

Graphs depicting the amount of two products that can be made and the various combinations, as well as displaying the opportunity cost of the chosen option. A point within the curve is an inefficient use of resources and a point outside the curve signals economic growth.

Opportunity cost

The unachievable option forgone due to another choice being made which limits the ability to perform the option. Eg

An increase in product A being produced will lead to a decrease in product Bs production by 2000 units, the Opportunity cost is 2000 units if product B.

Specialisation

When workers develop a few skills in particular rather than seeing the production process through its entirety.

Division of labour

A method of splitting production into various stages in order to increase efficency and production output, as opposed to workers producing one product in its entirety and repeating.

Free market economy

An economy where the free market forces, throughthe price mechanism, allocate resources to production. Can fail to allocate resources efficiently.

Mixed economy

An economy that uses the free market system to allocate resources, however in some areas government intervention and state provision intervenes to correct market failure.

Command economy

An economy where all allocation of resources is dictated by the state, however often fails in many ways due to lack of understanding and government knowledge.

Profit maximisers

Assumes all firms are aiming to maximise profit by acting as rationally as possible.

Utility maximisers

Assumes all consumers aim to maximise utility, however in reality many consumers act irrationally quite frequently.

Demand

A downward curve indicating that as price increases the quantity demanded will decrease. The amount of a product that is desired at any given time that consumers are both eilling and able to pay for (effective demand)

Price elasticity of demand

The % change in demand ÷ by the % change in price. Values >1 are considered elastic, infinity is perfectly elastic, 0 is perfectly inelastic, 1 is unit elastic and <1 is considered inelastic. Negatives/positive signs are negligible.

Income elasticity of demand

% change in demand ÷ % change in income. Negative values signify an inferior good, and a positive value indicates a normal good. Generic products have a value of <1 and luxuries have a value of >1

Cross elasticity of demand

% change in demand for A ÷ % change in demand for B. A positive cross elasticity indicates the goods are complimentary, while a negative cross elasticity indicates substitute goods. Goods with a value of 0 are unrelated, however as goods can fluctuate in demand not all unrelated goods would have a value of 0, use common sense if markets are clearly unrelated.

Supply

The quantity of goods a firm is willing to produce at a given price point. Upwards sloping as due to the economics of scale and profit maximisation as price increases more firms enter the market and increase supply.

Price elasticity of supply

% change in supply ÷ percentage change in price. Values >1 are price elastic and values <1 are price inelastic.

Price determination

Market price for products is set at the equilibrium, where supply = demand, leading to no surplus, and is changed by a decrease/increase in either supply or demand.

Signalling function

Signals to firms/consumers that there should be a shift in the supply/demand curves.

Incentivising function

A function that highlights the incentive to increase/decrease output or demand in response to a change in price

Rationing function

Limits the distribution of goods to consumers who are willing to pay the price neccessary, and those who value the good the most or are most in need of the good. Indicates to firms to take resources from markets with excess supply and distribute it to markets with excess demand.

Consumer surplus

The difference between the price a consumer is willing and able to pay for a good and the price a consumer pays in the end. On a graph it is displayed through the area below the demand curve and above the price equilibrium line.

Producer surplus

The difference between the price a producer is willing to sell their product at and the price the product is sold for. On a graph it is displayed through the area above the supply curve and below the price equilibrium line.

Subsidies

A government given grant to reduce the cost of production for firms in a market the government aims to incentivise production in.

Indirect tax

A tax that is not directly paid to the government (eg income tax) but rather paid for through other means (eg VAT on goods and services)

Ad valorem tax

A tax that changes in quantity through being reflected in a percentage of the previous cost, as opposed to a set added amount. Creates a S+tax curve that is non-parallel to S1.

Behavioural economics

The belief that as opposed to traditional economics assumptions that consumers act rationally, that many act irrationally.

Herding behaviour

When consumers act irrationally due to a sense of fear or anxiety around missing out, often leading people to make purchases out of wanting to follow trends and be like the masses rather than maximising utility.

Habitual behaviour

Continuing a purchase out of habit or because it's easier to continue paying higher than to change routine even if the product is not the most rational option.

Information gaps / difficulty to comprehend information

People aren't informed entirely due to the amount of information out there/complexity of understanding that information and may make irrational purchasing decisions as a consequence.

T*

The point on the laffer curve that dictates when taxation revenue will start to decrease if it rises any higher as people seek out ways to avoid the tax. It is the optimum tax fkr a product and is unknown.

Market failure

When the free market fails to efficiently allocate resources.

Externalities

Effects as a result of production/consumption, can be positive or negative and it's when social benefit/cost outweighs private benefit/cost.

Public goods

Goods that are non-rivalrous and non-excludable, creating the free rider problem and meaning they will likely not be supplied by the free market. Goods with only one factor are called “quasi-public goods”

Information gaps

Either through the withholding of information or through a lack of general knowledge the market can fail to allocate resources efficiently.

Government intervention

When the government intervenes in a market to correct market failure. Often in the form of minimum/maximum prices, taxes/subsidies, or through state provision of goods. Other ways include ad programmes to decrease information gaps, policies around production/consumption and tradable permits.

Government failure

When the government intervenes in order to correct market failure however as a result creates an overall welfare loss. Often due to information gaps, unintended consequences or ineffective policies.