Microeconomics Revision - A Levels

basic economic problem

basic economic problem

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

capital

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

economic good

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

free good

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

labour

one of the four factors of production; human capital

land

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

needs

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

normative statements

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

positive statements

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

rationalisation

decision-making that leads to economic agents maximising their utility

scarcity

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

wants

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

allocative efficiency

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

economic efficiency

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

incentive

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

market economy

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

maximisation

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

mixed economy

both the free market mechanism and the government allocate resources

planned economy

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

productive efficiency

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

resource allocation

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

opportunity cost

the value of the next best alternative forgone

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

trade off

when one thing is lost to gain something else

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 workers carry out a specific task in co-operation with other workers

competitive demand

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

composite supply

when a good or service can be obtained from different sources

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

joint demand

when goods are bought together

market demand

sum of all individual demands in a 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

individual supply

supply of a single firm

joint supply

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

market supply

sum of all individual supplies in the market

supply

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

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

derived demand

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

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

market

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

complementary goods

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

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

elasticity

how responsive demand or supply is to a change in price

income elasticity of demand

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

inferior goods

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

luxury goods

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

normal goods

YED > 0; demand increases as income increases

perfectly price elastic good

PED/PES = infinity; quantity demanded/supplied 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 elasticity of demand

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

price elasticity of supply

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

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

substitutes

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

unrelated goods

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

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

margin

the effect of an additional action

externalities

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

marginal external benefit

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

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.

marginal private benefit

the extra benefit to the individual 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, expressed by: marginal external benefit + marginal private benefit

marginal social cost

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

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

negative externalities of consumption

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

negative externalities of production

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

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

asymmetric information

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

demerit goods

goods with negative externalities

information failure

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

merit goods

goods with positive externalities

moral hazard

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

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

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 prevented from using the good

non-rejectability

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

private goods

goods that are rivalrous and excludable

public goods

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

quasi-public goods

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

state provision

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

buffer stock schemes

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

competition policy

government action to increase competition in markets

government failure

when government intervention leads to a net welfare loss in society

indirect tax

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

information provision

when the government intervenes to provide information to correct market failure

maximum price

a ceiling price which a firm cannot charge above

minimum price

a floor price which a firm cannot charge below

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

subsidy

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

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

conglomerate integration

the merger of firms with no common connection

corporate social responsibility (CSR)

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

diversification

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