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Unit 1 Competitive Markets: How they work and how they
The Four Factors of Production: - the four factors of production are land, labour, capital
Scarcity: - Scarcity is caused by there being a limited amount of resources available yet an
unlimited amount of wants from consumers.
Opportunity Cost: - opportunity cost is the cost foregoing the next best alternative.
A production possibility frontier: - A possibility frontier shows the maximum output of an
economy using all its resources fully.
The Division of labour: - the division of labour is when a job is split into smaller tasks and
individual workers are assigned a certain task.
Positive statements: - a positive statement is based on a fact and can be proven.
Normative statements: - a normative statement is based on a judgement and cannot be
Price Elasticity of Demand: - price elasticity of demand measures the responsiveness of
demand to a change in income.
Income Elasticity of Demand: - income elasticity of demand measures the responsiveness
of demand to a change in income.
Cross Price Elasticity of Demand: -cross price elasticity of demand measures the
responsiveness of demand for one product to a change in price of another product.
Price Elasticity of Supply: - price elasticity of supply measures the responsiveness of supply
to a change in price.
The Price Mechanism: - The price mechanism acts as a signalling and rationing device.
A free market economy: - A free market economy is one which there is no government
A command economy: - A command economy is one in which there is no private sector.
Indirect tax: - an indirect tax is a tax on expenditure designed to increase the costs of
Asymmetric information: - Asymmetric information occurs when one party involved in an
economic transaction has more knowledge than the other.
The principal agent problem: - The principal agent problem occurs when the goals of the
agent are different to those of the principals (i.e. the buyer and seller) involved in the
Labour immobility: - Labour immobility occurs when workers are unable to move to fine
jobs because they live in the wrong area or lack the appropriate skills.
Minimum price: - a minimum price is floor price guaranteed by the government that the
price of a product cannot fall below.
Buffer Stock Scheme: - A buffer stock scheme is when the government introduces both a
minimum and maximum price that the price of a good cannot move outside.
Government Failure: - Government failure occurs when the government tries to fix market
failure but creates a further misallocation of resources.