ECON1 Definitions

Definitions for AQA Economics AS Level ECON1

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  • Created by: Klarissa
  • Created on: 06-12-11 18:40

Economic Problem

Purpose of economic activity - to produce goods and services to satisfy needs and wants and thereby improve economic welfare

Economic Problem - deciding what goods should be produced, how and for who.

Free goods - goods which have no cost e.g air

Economic goods - goods which because they are scarce have an opportunity cost and therefore must be paid for

Opportunity cost - the highest valued alternative which is sacrificed when a choice is made; exists because of scarse resources but infinite wants

Allocative efficiency - achieved in an economy where it isn't possible to make someone better off without making someone worse off.

PPB or PPF - Production Possibility Boundary or Frontier; indicates the maximum possible output that can be achieved when a fixed set of resources is given


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Economic Problem 2

Positive statements - statements that can be tested against real world data

Normative statements - statements that cannot be tested or proved; opinion or value judgements

Value judgements - statements that cannot be tested or proved; depend on the individual and their personal values and opinion

Factors of production - the resources available for production nearly all of which are scarce

Land - refers to goods like land and minerals; essentially all the resources taken from the world; payment comes as rent

Labour - refers to potential workforce but not just in numbers also includes their skills, abilities and intelligence; payment comes as wages

Capital - goods used to make other goods and services, e.g. machinery; payment comes as interest 

Enterprise - the risk takers who are willing to bring the other 3 factors of production together to create goods and services; payment comes as profit

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Economic Problem 3

Market - a mechanism for the allocation of resources; made up of the consumer, the firms and the owners of the factors of productions

Consumers - seek to maximise their welfare or satisfaction by choosing how they spend their money

Firms - aim to make as high a profit as they can; usually done by maximising the difference between revvenue and costs incurred

Owners of factors of production - aim to maximise their returns so give their resources to the use that offers the highest rate of return

Price - acts as a signalling, rationing and incentive mechanism

Signalling - price signals to buyers and sellers the conditions od the market

Rationing - price rations scarce resources by raising prices

Incentive - high prices give incentive to firms to move resources to producing the more expensive good

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Demand and Supply

Demand - the amount consumers are willing and able to pay at a given price

Effective demand - demand supported by the ability to pay for a good or service

Market demand - total demand in a market for a good; the sum of all the individuals' demand

Derived demand - demand for one good derives from another good; usually occurs between factor and good markets

Composite demand - a good that is demanded for more than one purpose so causes a decrease in supply for one purpose; leads to higher prices

Complementary goods - goods which are consumed together e.g. DVD and DVD players

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Demand and Supply 2

Substitutes goods - goods which have competing alternatives e.g. butter and margarine

Normal goods - when incomes increase, demand for normal goods increase also

Inferior goods - when incomes decrease, demand for inferior goods increase

Excess demand - where demand exceeds supply so prices should be raised; means there is a shortage

Supply - the amount offered for sale at any given price

Excess supply - where supply exceeds demand so prices should be lowered; means there is surplus

Equilibrium - the price where demand equals supply; there is neither shortage nor surplus of goods

Market-clearing price - equilibrium; demand equals supply

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Elastic - the product is responsive to a change in price; change in price causes a large change in quantity demanded; as price increases, total revenue decreases

Inelastic - the product isn't very responsive to a change in price; change in price causes a small change in quantity demanded; as price increases, total revenue increases

Unit price elasticity - percentage change in quantity demanded is equal to the percentage change in price

Perfectly elastic - any increase in price will see quantity demanded fall to zero

Perfectly inelastic - change in price will have no influence

Price elasticity of demand (PED) - the responsiveness of demand to a change in price

Price elasticity of supply (PES) - the responsiveness of supply to a change in price

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Elasticity 2

Income elasticity of demand (YED) - the responsiveness of quantity demanded to a change in income

Positive YED - means as income increases, demand for a product will do so to; normals goods

Negative YED - means as income increases, demand for a product will decrease; inferior goods

Cross elasticty of demand (XED) - responsiveness of change in price of one good compared to the quantity demand of another good

Positive XED - increase in price of one good means increase in quantity demanded for another good; substitutes

Negative XED - increase in price of one good means decrease in quantity demanded for another good; complementary goods

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Production and Efficiency

Productive efficiency - when a firm operates at minimum total cost but produces the maximum possible output

Specialisation - when concentration is focused on a particular task or product (can be in terms of a country or an individual)

Division of Labour - type of specialisation; production of a good is broken down so an individual or group of people focus on one particular task; assembly line

Production - the process that converts factor inputs into outputs of goods and services

Economies of scale - where an increase in the scale of production leads to reductions of average total cost for firms

Diseconomies of scale - where an increase in the scale of productions leads to increase in average total costs for firms

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Market Failure

Market failure - where the market, when left alone, fails to allocate an efficient allocation of resources

Economic efficiency - the use of resources to maximise the supply of goods and services

Monopoly - a market dominated by a single seller of a good or service; the firm must have more than 25% of the market share

Public goods - a good that possesses the characteristics non-excludability and non-rivalry in consumption

Quasi-public goods - a good that has the characteristics of a public and private good; a good that is in effect a public good but is owned privately, e.g. M6 Toll Road

Non-excludability - where it is not possible to provide a good or service to one person without it being available for other people

Non-rivalry - where the consumption of a good by one person doesn't prevent others from consuming it

Free-rider principle - not possible to charge an individual for a good that someone else can get for free

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Market Failure 2

Externalities - third party effects which occur as a result of consumption or production of a good or service

Negative externalities - social costs exceed private costs

Positive externalities - social benefits exceed private benefits

Marginal external benefit/cost - the spillover benefit or cost to third parties of an economic transaction

Marginal private benefit/cost - the benefit/cost to an individual or firm of an economic transaction

Marginal social benefit/cost - the  full benefit/cost to society of an economic transaction, includes private and external benefits/costs

Demerit goods - seen as goods which are 'bad for you'; create negative externalities; tend to be overconsumed if left to the market

Merit goods - seen as gods which are 'good for you'; create positive externalities; tend to be underconsumed if left to the market

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Market Failure 3

Inequality - wide difference between income and wealth between different groups in society cause a wide gap in living standards seen as unacceptable by society; value judgement

Information failure - when people have inaccurate or incomplete data so that they make wrong choices

Government intervention - when the government steps into the market to correct market failure by re-allocate resources more efficiently

Subsidies - payments by government to producers to encourage production of a good; means prices for consumers should typically become lower

Government failure - when government intervention results in misallocation of resources, causes the problem to worsen or creates another market failure; the costs of government intervention exceed the benefits  

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Buffer Stock, Minimum Prices and Maximum Prices

Buffer stock - an intervention system that aims to limit the fluctuations of price of a commodity; usually used in agriculture

Minimum prices - a price floor below which the price of a good or service is not allowed to decrease

Maximum prices - a price ceiling above which the price of a good or service is not allowed to increase

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thanks! have u got macro?


very good

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