AS Economics

This is an overview of the AS economics part 1.

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Economics Revision.
What is an economy?
An economy is a system which tries to balance the available resources of a country (land,
labour, capital and enterprise) against the wants and needs of consumers.
Economic problem.
Scarcity is a situation that arises because people have unlimited wants in the face of
limited resources.
Opportunity cost in decision making is the value of the next best alternative forgone.
Coordination problem:
1. Market economy is one in which market forces are allowed to guide the allocation of
resources within a society.
2. Planned economy is one in which the government undertakes the coordination role,
planning and directing the allocation of resources.
3. Mixed economy is when market forces are complemented by some state intervention.
Factors of production:
The factors of production are:
1. Capital.
2. Enterprise.
3. Land .
4. Labour.
Specialisation, exchange and division of labour:
Division of labour a process whereby the production procedure is broken down into a
sequence of stages, and workers are assigned to particular stages.
Principle of opportunity cost: in decision making, the value of the nextbest alternative
Production Possibility Frontier/ Curves is a curve showing the maximum combinations of
goods or services that can be produced in a set period of time given available resources.
Economic growth is an expansion in the productivity capacity of the economy. This
can be shown o a production possibility curve by the curve shifting to the right.
The total output of an economy like the UK is measured by its gross domestic product,
Competitive market:
A market is a set of arrangements that allows transactions to take place.
Determinants of demand and supply.
The law of demand states that there is an inverse relationship between quantity demanded and
the price of a good or service.
Ceteris paribus is a Latin phrase meaning "other things being equal."
Factors which affect demand include:
Price of other goods (compliments and substitutes )

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Disposable Income.
Fashions, personal preferences.
Factors which affect supply are:
Production costs.
Economic climate.
Goods ­ Normal, inferior, substitutes and compliments.
1. Normal goods are goods which the demand for increases in response to an increase in
2. Inferior goods are goods which the demand for decreases in response to an increase
in income. Products such as Tesco own brand.
3. Substitute goods are goods that increase in demand as a result of an increase in price
for another good.…read more

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Consumption externalities are externalities that affect the consumption side of a
market, which may be positive or negative.
Production externality: an externality that affects the production side of a market,
which may be positive or negative.
Internalising an externality is an attempt to deal with an externality by bringing an external cost
or benefit into the price system.
Negative externalities are when the marginal social cost is greater than the marginal
private cost and examples include:
1. Smokers ignore effects of passive smoking.
2.…read more

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Government failure is a misallocation of resources arising from government intervention.
Market failure: is a situation in which the free market mechanism does not lead to an optimal
allocation of resources ­ for example, where there is a divergence between marginal social
benefit and marginal social cost.
Taxation ­ Direct and indirect taxation. ­ Taxation shifts the supply curve to the left as
increases cost per unit to produce.…read more


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