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55 terms

Edexcel Economics Module 1

STUDY
PLAY
Scarce Resources
Resources that are limited or finite
Opportunity Cost
The loss of potential gain from other alternatives when one alternative is chosen
Basic economic Problem
Resources are scarce but wants are unlimited
Production possibility frontier
A diagram that shows all the combinations of two goods that can be produced when all factors of production are being used
Free good
A good that has no opportunity cost
Normative economic statement
An economic statement that is based on opinion and cannot be measured
Positive economic statement
An economic statement that can be tested in order to determine whether or not it is true
Land
Natural resources that are used for production
Labour
Human resources that are used for production
Capital
Manufactured goods that are used for production
Enterprise (Entrepreneurship)
Risk taking in the production process
Demand curve
A demand curve shows how much people are willing and able to buy at each price
Supply curve
A supply curve shows how much suppliers are willing and able to supply at each price
Complementary goods
Goods or services that are frequently consumed together
Substitute goods
Goods or services that can be used instead off each other
Price elasticity of demand
A measure of the responsiveness of demand to a change in price
Formula for price elasticity of demand
%Change in quantity demanded
___________________________ (Divided)
%Change in price
Price elasticity of supply
A measure of the responsiveness of supply to a change in price
Formula for price elasticity of Supply
%Change in quantity demanded
___________________________
%Change in price
Income elasticity of demand
A measure of the responsiveness of demand to a change in income
Formula for Income elasticity of demand
%Change in quantity demanded
__________________________
%Change in income
Cross elasticity of demand
A measure of the responsiveness of demand for one good to a change in the price of another good
Formula for cross elasticity of demand
% change in quantity demanded of good A
__________________________________
%Change in price of good B
Normal good
A good that has a positive income elasticity of demand because demand for it will increase as real income increases (and vice versa)
Inferior good
A good that has a negative income elasticity of demand because demand for it will decrease as incomes increase (and vice versa)
Command Economy
An economy in which what, how and for whom to produce are determined by a state planning process
Free market economy
An economy in which what, how and for whom to produce are determined through the forces of supply and demand without state intervention
Mixed economy
An economy in which what, how and for whom to produce are determined partly through planning and partly through market forces
Monopoly
A sole supplier of a good or service
Consumer surplus
The difference between the maximum amount of money consumers are willing to pay for a product and the actual market price
Producer surplus
The revenue received by producers above that which would have brought the product onto the market for sale
Efficiency
How close a firm is to producing at the lowest possible average cost
Productivity
Measures the efficiency with which resources are used. Often taken to mean output per person employed
Division of labour
The way in which tasks in the production process are allocated to different people. (Also used to refer to the way that people within an economy specialise in different types of job and the way in which countries specialise in the production of different goods and services.)
Inflation
A sustained rise in the average price level
Unemployment
A situation where people who are willing and able to work are without paid employment
Structural unemployment
Unemployment caused by a change in the structure of the economy e.g. the decline of a major industry such as coal
Recession
Two or more successive quarters of negative economic growth
Market failure
A situation where free market forces have resulted in a good or service being under or over provided i.e. free market forces do not result in the socially optimal level of output
Private costs
Costs incurred by individual producers and consumers when they engage in an economic activity. These are the costs that are taken into account by free market forces
Private benefits
Benefits directly received by individual producers and consumers when they engage in an economic activity. These are the benefits that are taken into account by free market forces
External costs
Costs experienced by third parties i.e. producers and consumers who are not directly involved in an economic activity. These costs are ignored by free market forces.
External benefits
Benefits received by third parties i.e. producers and consumers who are not directly involved in an economic activity. These benefits are ignored by free market forces.
Social costs
All of the costs of an activity to society i.e. Private costs + external costs
Social benefits
All of the benefits of an activity to society i.e. private benefits + external benefits
Negative externality
If social costs exceeds private cost, the difference is a negative externality i.e. it means the same as external cost
Positive externality
If social benefit exceeds private benefit, the difference is a positive externality i.e. it means the same as external benefit
Merit good
A good or service that would be under-provided by the free market because consumption of the good or service results in substantial external benefits e.g. health care, education
Demerit good
A good or service that would be under-provided by the free market because its consumption results in substantial external costs e.g. cigarettes, alcohol
Public good
A good or service that would not be provided by the free market because it is characterised by non-excludability (i.e. if it exists, it is impossible to stop someone from benefiting from it) and non-rivalry (i.e. its consumption by one person does not reduce its availability to others) e.g. national defence, lighthouses
Private good
A good that is not characterised by non-excludability and non-rivalry
Asymmetric information
A situation in which some participants in a market have access to the same information
National minimum wage
A sum of money that is legally the minimum amount that an employer can pay an employee. It is usually set an hourly rate
Government failure
Situation when government interference in a market to correct market failure results in a less efficient allocation of resources.
Buffer Stock
A reserve of a commodity held to stabilise commodity prices. The stocks are usually held by an organisation that is separate from the producers - often the government.