Edexcel A Level Microeconomics

Positive statement (def.)

Evidence based statement which can be proven true or false

Normative statement (def.)

Value judgment which cannot be tested

Scarcity (def.)

Lack of resources to fulfil everyone's wants and needs

Renewable resources (def.)

Resources which can be replenished over time

Non-renewable resources (def.)

Resources which cannot be replenished once they are used

PPF (def.)

Max potential output for two goods that an economy can produce, at a point time time, it it uses all of its factors of production to their full capacity.

Capital goods (def.)

Useful not in themselves but for goods and services they can help produce in future

Opportunity cost (def.)

next best alternative forgone

Pareto efficiency (def.)

State of allocation of resources in which it is impossible to make any one party better off without making at least one party worse off

Allocative efficiency (def.)

When value consumers place on good or service (reflected in price) = cost of resources used up in production

Specialisation (def.)

When individual/firm concentrates on performing specific task or narrow range of tasks in production process

Division of labour (def.)

Separation of production process into individual tasks

Advantages of specialisation (micro)

Workers skilled in narrow range of tasks/ cost efficient/ workers specialise in tasks they are good at/ not constantly changing tasks

Disadvantages of specialisation (micro)

Boredom/ Lack of diversification/ Less transferable skills/ Workers replaceable with machinery

Functions of money

Medium of exchange/ Store of value/ Unit of account/ Method of deferred payment

Free market economy (def.)

Economic system where resources are privately owned and allocated by price mechanism

Mixed economy (def.)

Where resources are partly allocated by market forces and partly by government

Conditions of demand

income/ willingness/ taste/ population/ substitute goods/ complementary goods

Veblen good (def.)

Good for which quantity demanded increases as price increases

PED > 0

Giffen good (def.)

Good for which higher price causes an increase in demand

Income effect > substitution effect

Law of diminishing marginal returns

After optimal level of capacity is reached, adding an additional factor of production results in smaller increases in output

Types of demand

Latent/ Effective/ Competitive/ Joint/ Derived/ Composite

Latent demand (def.)

Demand for something that consumers do not buy because they do not have enough money or it is not yet available

Effective demand (def.)

Quantity of good or service that consumers are willing and this willingness is backed up by ability to buy at given price in given time period

Competitive demand (def.)

When demand for one good increases or decreases, demand for another good does opposite

Joint demand (def.)

When demand for one good increases or decreases, demand for another good follows

Derived demand (def.)

Product is demanded only because of demand for final product it contributes to

Composite demand (def.)

When good is demanded for different purposes. Change in demand for one purpose affects others

Conditions of supply (PINTSWC)

productivity/ indirect tax/ no. firms/ technology/ subsidy/ weather/ costs of production

Excess supply

Quantity supplied exceeds quantity demanded

Excess demand

Quantity demanded exceeds quantity supplied

Roles of price mechanism (R/I/S/A)

Rationing/ Incentivising/ Signalling/ Allocating

PED (eq.)

PED = percentage change QD / percentage change P

YED (eq.)

YED = percentage change QD / percentage change Y

XED (eq.)

XED = Percentage change QD A / percentage change P B

Unitary price elastic demand

PED = 1

Perfectly price elastic demand

PED = infinity

Relatively price elastic demand

PED > 1

Perfectly price inelastic demand

PED = 0

Relatively price inelastic demand

PED < 1

Inferior good

YED < 0

Normal good

YED > 0

Luxury good

YED > 1

Substitute goods

XED > 0

Complementary goods

XED < 0

Unrelated goods

XED = 0

Deterimants of PED (AS/ I / TP / BL / N / A)

Availability of substitutes/ % income spent/ Time period/ Brand loyalty/ Necessity/ Addictiveness

Relationship between P(elastic good) and TR

P(elastic good) ∝ TR

Relationship between P(inelastic good) and TR

P(inelastic good) ∝ TR

PES (eq.)

PES = Percentage change QS / percentage change P

Determinants of PES

Amount of spare capacity/ Factor mobility/ Time period/ Length of production process/ Availability of stocks/ Durability

Direct tax (def.)

Tax on income or wealth

Indirect tax (def.)

Tax on expenditure (only taken when good is purchased)

Specific tax (def.)

Tax per unit

Ad valorem tax (def.)

Tax based on percentage of price of g/s

Impact of PED on producer and consumer share of tax

Subsidy (def.)

Grant paid by government to producers to increase supply

Market failure (def.)

When free market fails to allocate resources efficiently

Public good (def.)

Goods that are non-rival and non-excludable

Non-rival (def.)

Consumption of good by one person does not reduce amount available for others

Non-excludable (def.)

It is not possible to provide good or service to one person without it thereby being available for others to enjoy

Free-rider problem

Individuals benefit from resource/good/service without paying for them, which leads to underprovision of goods in free market and market failure.

Quasi-public good (def.)

Good that only has one characteristic of public good - either non-rival or non-excludable

Private cost (def.)

Costs experienced by two parties involved in transaction

External cost (def.)

Costs experienced by third parties not involved in transaction

Social cost (def.)

Private costs + external costs

Private benefit (def.)

Benefits experienced by two parties involved in transaction

External benefit (def.)

Benefits experienced by third parties not involved in transaction

Social benefit (def.)

Private benefits + external benefits

Deadweight loss (def.)

Loss of eocnomic efficiency that occurs when socially optimal quantity of good/service isn’t produced or consumed

Negative externality diagram

Positive externality diagram

Benefits of monopoly

significant profits/ higher prices/ lower wages

Imperfect information (def.)

When at least one party has incomplete information

Asymmetric information (def.)

When one party in transaction has more information than other

Merit good (def.)

Good which is under-consumed by consumers if left to free market

MPB(perceived) < MPB(actual)

Demerit good (def.)

Good which is over-consumed by consumers if left to free market

MPB(perceived) > MPB(actual)

Market failures (TC/FR/II/AI/MG/DG/NE/PE/CM/LM)

Tragedy of the Commons/ Free rider problem/ Imperfect information/ Asymmetric information/ Merit good/ Demerit good/ Negative externality/ Positive externality/ Commodity markets/ Labour markets

Organic growth (def.)

Increase factors of production in its own industry

Behavioural biases (HE/HA/WC/LA)

Herd mentality/ Habitual behaviour/ Weakness at computation/ Loss aversion

Tragedy of the commons

Individuals have access to a shared resource and act in their own interest, at the expense of other indviduals

Allocative efficiency

When value consumers place on good or service = cost of resources used up in production

P = MC

Productive efficiency

When output is being produced with minimum of combination of factor inputs

MC = AC

Technical efficiency

When maximum output that can be obtained from given input

Dynamic efficiency

Productive efficiency of firm over extended period of time