ECON1 Definitions
Definitions for AQA Economics AS Level ECON1
- 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
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
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
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
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
Elasticity
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
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
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
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
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
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
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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