OCR Economics A Level - Microeconomics 1 (Introduction to Microeconomics)

Economic goods

Goods that are scarce (no unlimited supply of these goods)

Free goods

Resources that are usually not seen as limited (sunlight/air)

The Economic Problem

The problem of how to make the best use of limited or scarce resources

Scarcity

When there is a limited amount of something

Normative statement

Opinion-based statement that one might agree or disagree with

Positive statement

Factual statement that can be tested

Economic agents

Key groups involved in the economic problem, including governments, firms and households

Households

Consumers of goods and services, suppliers of labour

Firms

Producers of goods and services, demanders of labour

Government

Solving/minimising market failure.

Factors of Production

Land, Labour, Capital, Enterprise

Rewards for the Factors of Production

Rent, Wages, Interest, Profit

Rationality

Assumption that each economic agent acts in their own best interests

Land

Rent

Labour

Wages

Capital

Interest

Enterprise

Profit

Incentives

Something that motivates an action. Usually relates to the objectives of economic agents

Market economy

Allocation of resources is decided by the interaction of supply and demand (market forces). Multiple businesses competing likely leads to lower average costs, greater efficiency and innovation. People also have an incentive to work in order to earn money to purchase goods and services.

Planned economy

The government controls the factors of production and decides on the allocation of resources. The Government can focus resources on where they are most needed in the economy. Prices can be controlled so that those most in need can access goods and services. Fewer resources are wasted on duplicating goods and services. Less inequality of income and wealth.

Mixed economy

Combination of market forces and government policies that controls the allocation of resources. The government can decide which resources to control. Market forces can be used for goods and services that are considered less important.

Productive efficiency

Situation where all of the resources in society are being used to produce as much as possible. It is when no more could be produced

Allocative efficiency

Situation where production matches consumer preferences. It is when supply equals demand

Effectiveness of Incentives

Depends on the size of incentive, type of good/service, timescale involved, objectives of the economic agents

Opportunity Cost

Cost of the next best alternative foregone when a decision is made

Trade-Off

A sacrifice that is made in order to gain something

Production Possibility Curve (PPC)

Shows the range of possibilities that exist for an economy or a firm

A,B,C

Productively efficient, all resources are being used to produce the maximum possible output

D

Possible, productively inefficient, there may be unused resources

E

Impossible, beyond the boundaries of the PPC

Shift of PPC

Caused by an increase in quality or quantity of factors of production

Opportunity Cost's usefulness as a concept

Aids decision making