IGCSE Economics (Edexcel) - Paper 1 (copy)

Economic Problem

what to produce, how to produce and for whom to produce

Scarcity

exists when there are unlimited wants and finite resources

Want

the desire for goods and services

Resources

factors of production: land, labour, capital, entrepreneurship

Opportunity cost

the value of the next best alternative foregone

Production possibility curve

shows all the possible combinations of goods that can be produced when all the known resources are used efficiently

Positive economic growth

an increase in the maximum productive potential of an economy

Revenue

the amount of money a firm receives from selling its output

Profit

where total revenue is greater than total costs

Demand

the quantity of goods/services consumers are willing and able to buy at a given price

Fashion and tastes

current trends in consumers' preferences for a certain type of good

Substitute goods

goods in competitive demand

Complementary goods

goods in joint demand, i.e. used together

Demographic changes

changes in population size or structure

Supply

the quantity of goods/services producers are willing and able to sell at a given price

Indirect tax

tax on expenditure

Subsidy

money given by the government to producers to encourage production (by reducing their costs)

Market equilibrium

a situation in which quantity demanded equals quantity supplied

Equilibrium price

the price where supply equals demand

Excess demand (shortage)

exists at prices below the equilibrium price where quantity demanded exceeds quantity supplied

Excess supply (surplus)

exists at prices above the equilibrium price where quantity supplied exceeds quantity demanded

Price elasticity of demand

measures the responsiveness of demand to a change in price

Price elasticity of supply

measures the responsiveness of supply to a change in price

Spare capacity

a situation where a firm or economy can produce more with existing resources than they are currently producing

Income elasticity of demand

measures the responsiveness of demand to a change in consumers' incomes

Luxury goods

goods that have income elasticities much greater than 1

Normal goods

goods that have positive income elasticities OR goods that consumers demand more of when their incomes rise

Inferior goods

goods that consumers demand less of when their incomes rise

Public sector

the part of the economy which is owned by the government and operates in the public interest

Private sector

organisations that are owned by individuals or groups of individuals, not the state

Market failure

a situation in which a market left on its own fails to allocate resources efficiently

Public goods

goods that are unlikely to be provided through the market due to their non-excludability and non-rivalry features

Free rider problem

consumers will conceal their true preferences for public goods, hoping to benefit as free riders

Privatisation

government selling off an industry or asset in the public sector to the private sector

External cost

a negative effect imposed on a third party

External benefit

a positive effect to a third party

Social costs

private costs + external costs

Social benefits

private benefits + external benefits

Factors of production

resources used to produce goods and services, and include land, labour, capital and enterprise

Land

all the natural resources used in production

Labour

the human efforts, physical and mental, used in production

Capital

all the man-made things used in production

Enterprise (entrepreneurship)

the organising factor in production

Primary sector

includes all those industries that involve extracting raw materials from the earth, e.g. agriculture, fishing, forestry, mining and quarrying

Secondary sector

includes all those industries that convert raw materials into finished or semi-finished goods, e.g. manufacturing, processing, construction

Tertiary sector

all kinds of services

Productivity

output per unit of input

Labour productivity

output per unit of labour

Human capital

the attributes of workers such as their skills, experience, intelligence, and character traits

Migration

movement of people from one country to another

Division of labour

a firm breaks up a production process and each worker specialises in one task

Fixed cost

cost that does not change with the level of output e.g. rent

Variable cost

cost that changes with the level of output e.g. raw materials

Total revenue

unit price times quantity sold (P x Q)

Total costs

the sum of all fixed and variable costs

Average costs

total costs divided by number of units produced

Economies of scale

a decrease in average costs caused by increasing the scale of production

Internal economies of scale

the fall in average costs that an individual firm can enjoy when it expands

External economies of scale

the cost savings that all firms in an industry enjoy when the industry expands

Infrastructure

systems/structures such as the transport network needed for the operation of an economy

Diseconomies of scale

average costs rise as the scale of production increases

Competition

the rivalry between firms selling similar goods in the same market

Efficiency

the ratio of useful output to total input

Innovation

the development and application of ideas and technologies that improve goods and services or make their production more efficient

Risk

the chance that an outcome or investment's actual gain will differ from an expected outcome or return

Niche market

a focused, targetable portion of a broader market in which specialised products or services are sold

Monopoly

the situation where there is one dominant seller in a market

Price-maker (price-setter)

(of a firm) having the power to influence the price it charges

Barriers to entry

business practices or conditions that make it difficult for new firms to enter the market

Patent

a licence that grants permission to operate as a sole producer of a newly designed product

Oligopoly

a market dominated by a few very large producers

Collusion

a few firms act together to avoid competition by agreeing to fix prices or output

Cartel

a formal organisation of producers that agree to coordinate prices and production

Price war

occurs when two or more firms compete primarily by lowering their prices

Demand for labour

a derived demand as it arises from the demand for the goods that they produce

Supply of labour

the quantity of labour willing and able to work at any given wage

Trade union

an organisation of workers to improve their pay and working conditions

Fine

a financial penalty for breaking a law

Pollution permits

involve giving firms the legal right to pollute up to a certain limit

Merger

when two or more companies join to form a single firm

Takeover

one firm buys control of another firm

Minimum wage

the legal lowest amount which labour must be paid at or above