2. The Role of Markets: Paper 1: OCR A-level Economics Revision and Macroeconomics

Specialisation

The production of a limited range of goods by a company country/individual so they aren’t self-sufficient and have to trade with others.

Division of Labour

When labour becomes specialised during the production process so do a specific task in cooperation with other workers.

Demand

The quantity of a good/service that consumers are able and willing to buy at a given price during a given period of time.

Individual Demand

Demand of an individual or firm, measured by the quantity bought at a certain price at one point in time.

Market Demand

Sum of all individual demands in a market.

Joint Demand

When goods are bought together.

Competitive Demand

When goods are substitutes, so buying one means you don’t buy the other.

Composite Demand

When the good demanded has more than one use.

Supply

The ability and willingness to provide a particular good/service at a given price at a given moment in time.

Individual Supply

Supply of a single firm.

Market Supply

Sum of all individual supplies in the market.

Competitive Supply

When a business could make more than one good with its resources, and producing one means they can’t produce the other.

Composite Supply

When a good or service can be obtained from different sources.

Consumer Surplus

The difference between the price the consumer is willing to pay and the price they actually pay.

Producer Surplus

The difference between the price the producer is willing to charge and the price they actually charge.

Market

Where demand and supply interact; the collection of many sub-markets.

Excess Demand

When price is set too low so demand is greater than supply.

Excess Supply

When price is set too high so supply is greater than demand.

Derived Demand

The demand for one good is linked to the demand for a related good.

Joint Supply

Increasing supply of one good causes an increase in the supply of a by-product.

Elasticity

How responsive demand or supply is to a change in price.

Price Elasticity of Demand

The responsiveness of demand to a change in price.

Cross Elasticity of Demand (XED)

The responsiveness of demand to one good to a change in price of another good.

Income Elasticity of Demand

The responsiveness of demand to a change in income.

Price Elasticity of Supply

The responsive of supply to a change in price.

Perfectly Price elastic Good

PED/PES = Infinity; quantity demanded/supplies falls to 0 when price changes.

Perfectly Price Inelastic Good

PED/PES = 0; quantity demanded/supplied does not change when price changes.

Price Elastic Good

When PED/PES>1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied.

Price Inelastic Good

When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied.

Luxury Goods

YED>1; an increase in income causes an even bigger increase in demand.

Normal Goods

YED>0; demand increases as income increases.

Inferior Good

YED<0; goods which see a fall in demand as income increases.

Complementary Goods

Negative XED; if good B becomes more expensive, demand for good A falls.

Substitutes

Positive XED; if good B becomes more expensive, demand for good A rise.

Unrelated Goods

XED=0; if the price of good B changes, it has no impact on the demand for good A.

Margin

The effect of an additional action.

Diminishing Marginal Utility

The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping.

Market Failure

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources.

Marginal External Benefit

The extra benefit to a third party not involved in the economic activity, per unit consumed.

Marginal Private Benefit

The extra benefit to the individual per unit consumed.

Marginal External Cost

The extra cost to a third party not involved in the economic activity, per unit consumed.

Marginal Social Cost

The extra cost to society per unit consumed.

Marginal Private Cost

The extra cost to the individual per unit consumed.

Marginal Social Benefit

The extra benefit to society per unit consumed.

Externalities

The cost or benefit a third party receives from an economic transaction outside of the market mechanism.

Positive Externalities of Consumption

Where the social benefits of consuming a good are larger than the private benefits of consuming that good.

Positive Externalities of Production

Where the social benefits of producing a good are larger than the private benefits of producing that good.

Negative Externalities of Consumption

Where the social costs of consuming a good are greater than the private costs of producing the good.

Negative Externalities of Production

Where the social costs of producing a good are greater than the private costs of producing the good.

Information Failure

When an economic agent lacks the information needed to make a rational, informed decision.

Asymmetric Information

Where one party has more information than the other, leading to market failure.

Moral Hazard

Where individuals make decisions in their own best interests knowing there are potential risks for others.

Merit Goods

Goods with positive externalities.

Demerit Goods

Goods with negative externalities.

Public Good

Goods that are non-excludable, non-rivalry, non-rejectable and have zero marginal cost.

Private Good

Goods that are rival and excludable.

Quasi-public Good

Goods which aren’t perfectly non-rivalry/non-excludable but aren’t perfectly rivalry/excludable.

Non-diminishability/Non-rivalry

A characteristic of public goods; one person’s use of the good does not prevent someone else from using it.

Non-excludability

A characteristic of public goods; someone cannot be prevent from using the good.

Non-rejectability

A characteristic of public goods; people cannot choose not to consume the good.

Free Rider Problem

People who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit.

State Provision

When the government provides public goods or merit goods which are underprovided in the free market.

Indirect Tax

Taxes on expenditure which increase production costs and lead to a fall in supply.

Subsidy

Government payments to a producer to lower their costs of production and encourage them to produce more.

Minimum Price

A floor price which a firm cannot charge below.

Maximum Price

A ceiling price which a firm cannot charge above.

Buffer stock schemes

The introduction of both a maximum and minimum price in the market to prevent large fluctuations in prices.

Public/Private Partnerships

When the government and the private sector work together to build and operate projects.

Regulation

Laws to address market failure and promote competition between firms.

Tradable Pollution Permits

Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control the amount of pollution. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute.

Information Provision

When the government intervenes to provide information to correct market failure.

Competition Policy

Government action to increase competition in markets.

Government Failure

When government intervention leads to a net welfare loss in society.