Edexcel Economics A-level Theme 1: Introduction to Markets and Market Failure 1.1 Nature of Economics

Vocabulary flashcards covering key terms and definitions from 1.1 Nature of Economics in Edexcel A-level Theme 1.

Model (in economics)

A simplified representation economists use to explain how the economy works (e.g., supply and demand, circular flow); developed by proposing a model, gathering evidence, and testing or changing it.

Theory

A general explanation of economic phenomena that can be expressed in words and sometimes turned into a model or mathematical form; aims to explain why something is the way it is.

Ceteris paribus

Latin for 'all other things remaining equal'; assumptions used to simplify analysis, e.g., holding other factors constant when income changes to see demand shifts.

Hypothesis

A testable statement that can be proven true or false through evidence or experimentation.

Law (in science/economics)

A principle that gains universal acceptance based on evidence; in economics, not all theories become universal laws due to changing human behavior.

Positive statement

An objective statement that can be tested or proven/disproven; free of value judgments.

Normative statement

A subjective statement based on opinions or values; cannot be proven true or false.

Scarcity

The fundamental economic problem of finite resources and infinite wants; resources are limited relative to demands.

Renewable resource

A resource that can be replenished or replaced over time at a rate at least equal to its consumption (e.g., oxygen, solar power, fish).

Non-renewable resource

A resource that cannot be readily replaced by natural means at the rate of consumption (e.g., coal, oil, gas).

Opportunity cost

The cost of the next best alternative forgone when a choice is made.

Production possibility frontier (PPF)

The curve showing the maximum possible combinations of two goods an economy can produce with its current resources and technology.

Capital goods

Goods produced to aid the production of other goods in the future (e.g., machinery, factories).

Consumer goods

Goods purchased by households for immediate consumption.

Economic efficiency

Allocating resources for their best use; on the PPF, all points represent efficient production.

Movement along the PPF

A change in the mix of goods produced along the curve, with the same resources.

Shift of the PPF

A change in the economy’s productive potential due to a change in resources or technology.

Economic growth

An outward shift of the PPF; the economy can produce more of both goods due to more or better resources or technology.

Economic decline

An inward shift of the PPF; reduced productive potential.

Specialisation

Production of a limited range of goods by a country/firm/individual, making trade essential.

Division of labour

Breaking production into specialized tasks to increase productivity and efficiency.

Adam Smith

19th-century economist who argued for free markets and division of labour; 'invisible hand' guides resources to society’s benefit.

Comparative advantage

Countries should specialise in producing goods with the lowest opportunity cost to maximise global output.

Public goods

Goods provided by the government that are non-excludable and non-rivalrous; markets may underprovide without intervention.

Merit goods

Goods considered intrinsically good that the government may provide due to positive externalities.

Demerit goods

Goods considered intrinsically bad that may be restricted due to negative externalities.

Externalities

Costs or benefits of a transaction to third parties not directly involved; can be positive or negative.

Free market economy

An economy where resources are allocated by the price mechanism with minimal government interference; consumer sovereignty guides production.

Laissez-faire

Policy of minimal government intervention in markets; belief in limited state role.

Invisible hand

Metaphor for how individuals pursuing self-interest can lead to socially beneficial outcomes through market competition.

Mixed economy

An economy combining free market mechanisms with government planning or intervention.

Command economy

An economy where the government owns most resources and makes most production decisions.

Karl Marx

Critic of capitalism who argued that capitalism exploits workers and would lead to communism; described a two-class system.

Communism

A system where the state owns the means of production and aims for a classless society; planning replaces markets.

Fiscal policy

Government use of taxation and spending to influence aggregate demand and the economy.

Monetary policy

Central bank actions on money supply and interest rates to influence the economy.

Consumer sovereignty

In a free market, consumers’ preferences determine what is produced.

Monopoly power

When a single firm dominates a market, enabling it to influence prices and output.