Microeconomics Revision - A Levels

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175 Terms

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basic economic problem

the problem of scarcity; wants are unlimited but resources are finite so choices have to be made

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capital

one of the four factors of production; goods which can be used in the production process

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economic good

goods which have an opportunity cost and suffer from the problem of scarcity

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free good

goods with no opportunity cost, since there is no scarcity of the good; they are not traded

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labour

one of the four factors of production; human capital

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land

one of the four factors of production; natural resources such as oil, coal, wheat, physical space

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needs

requirements necessary for an individual to live and function, such as food and shelter

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normative statements

subjective statements based on value judgements and opinions; cannot be proven or disproven

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positive statements

objective statements which can be tested with factual evidence to be proven or disproven

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rationalisation

decision-making that leads to economic agents maximising their utility

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scarcity

the shortage of resources in relation to the quantity of human wants

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wants

something that people desire to have, but do not necessarily need to survive

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allocative efficiency

when resources are allocated to the best interests of society, when there is maximum social welfare and maximum utility; P=MC

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economic efficiency

when resources are allocated optimally, so every consumer benefits and waste is minimised

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incentive

something which motivates an individual to make a decision and behave a certain way

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market economy

an economy where the market mechanism allocates resources so consumers make decisions about what is produced

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maximisation

consumers aim to generate the greatest utility possible, firms aim to generate the highest profits possible

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mixed economy

both the free market mechanism and the government allocate resources

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planned economy

all factors of production are allocated by the state, so they decide what, how and for whom to produce goods

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productive efficiency

when resources are used to give the maximum possible output at the lowest possible cost; MC=AC

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resource allocation

how resources are distributed among producers and how goods and services are distributed among consumers

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opportunity cost

the value of the next best alternative forgone

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production possibility curve frontier

depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed

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trade off

when one thing is lost to gain something else

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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

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division of labour

when labour becomes specialised during the production process so workers carry out a specific task in co-operation with other workers

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competitive demand

when goods are substitutes, so buying one means you don't buy the other

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composite supply

when a good or service can be obtained from different sources

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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

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individual demand

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

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joint demand

when goods are bought together

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market demand

sum of all individual demands in a market

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competitive supply

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

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composite supply

when a good or service can be obtained from different sources

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individual supply

supply of a single firm

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joint supply

increasing supply of one good causes an increase in the supply of a byproduct

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market supply

sum of all individual supplies in the market

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supply

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

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consumer surplus

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

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producer surplus

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

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derived demand

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

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excess demand

when price is set too low so demand is greater than supply

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excess supply

when price is set too high so supply is greater than demand

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market

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

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complementary goods

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

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cross elasticity of demand

the responsiveness of demand of one good (A) to a change in price of another good (B), calculated by: % change in QD of A divided by % change in P of B

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elasticity

how responsive demand or supply is to a change in price

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income elasticity of demand

the responsiveness of demand to a change in income, calculated by: % change in QD divided by % change in income

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inferior goods

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

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luxury goods

YED > 1; an increase in incomes causes an even bigger increase in demand

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normal goods

YED > 0; demand increases as income increases

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perfectly price elastic good

PED/PES = infinity; quantity demanded/supplied falls to 0 when price changes

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perfectly price inelastic good

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

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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

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price elasticity of demand

the responsiveness of demand to a change in price, calculated by: % change in QD divided by % change in P

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price elasticity of supply

the responsive of supply to a change in price, calculated by: % change in QS divided by % change in P

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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

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substitutes

positive XED; if good B becomes more expensive, demand for good A rises

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unrelated goods

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

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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

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margin

the effect of an additional action

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externalities

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

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marginal external benefit

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

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marginal external cost

the extra cost to a third party not involved in the economic activity, per unit consumed, expressed by: marginal social cost - marginal private cost.

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marginal private benefit

the extra benefit to the individual per unit consumed

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marginal private cost

the extra cost to the individual per unit consumed

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marginal social benefit

the extra benefit to society per unit consumed, expressed by: marginal external benefit + marginal private benefit

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marginal social cost

the extra cost to society per unit consumed, expressed by: marginal external cost + marginal private cost

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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

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negative externalities of consumption

where the social costs of consuming a good are greater than the private costs of consuming the good

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negative externalities of production

where the social costs of producing a good are greater than the private costs of producing the good

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positive externalities of consumption

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

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positive externalities of production

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

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asymmetric information

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

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demerit goods

goods with negative externalities

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information failure

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

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merit goods

goods with positive externalities

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moral hazard

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

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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

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non diminishability/non-rivalry

a characteristic of public goods; one person's use of the good does not prevent someone else from using it

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non-excludability

a characteristic of public goods; someone cannot be prevented from using the good

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non-rejectability

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

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private goods

goods that are rivalrous and excludable

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public goods

goods that are non-excludable, non-rivalrous, non-rejectable and have zero marginal cost

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quasi-public goods

goods which aren't perfectly non-rivalrous/non-excludable but aren't perfectly rivalrous/excludable

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state provision

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

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buffer stock schemes

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

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competition policy

government action to increase competition in markets

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government failure

when government intervention leads to a net welfare loss in society

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indirect tax

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

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information provision

when the government intervenes to provide information to correct market failure

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maximum price

a ceiling price which a firm cannot charge above

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minimum price

a floor price which a firm cannot charge below

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public/private partnerships

when the government and the private sector work together to build and operate projects

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regulation

laws to address market failure and promote competition between firms

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subsidy

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

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tradable pollution limits

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

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conglomerate integration

the merger of firms with no common connection

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corporate social responsibility (CSR)

when firms take responsibility for consequences on the environment and behave more ethically

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diversification

when firms grow by expanding their production through increasing output, widening their customer base, developing a new product or diversifying their range