ECON1 Definitions

All the Key Terms from the AQA Economics textbook

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  • Created on: 07-05-14 18:38
Goods and services
Goods are considered as products that we can touch such as CD’s or a car- they are physical. These differ from services which are not touchable such as a trip to the cinema or a train journey.
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Economic welfare
This refers to the benefit or satisfaction an individual or society gets from the allocation of resources. We can attempt to measure the welfare of individuals but really we want to understand the overall effects on society as a whole.
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Opportunity cost
The opportunity cost of something is the next best alternative given up when an economic decision is made.
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Economic goods
Economic goods are goods that are scarce and therefore have an opportunity cost.
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Free goods
Free goods are goods that have no opportunity cost, e.g., air
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Factor market
A factor market, is the market for the factors of production, that make others goods and services such as labour or raw materials.
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Renewable resources
Renewable resources are resources that are able to be replenished over time, whereas non-renewables such as oil and gas are likely to run out.
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Profit
Profit is when the total income or revenue for a firm is greater than total costs
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Free market economy
A free market economy is one in which there is very limited government involvement in providing goods and services. Its main role is to ensure that the rules of the market are fair so that, for example people cannot steal each other’s property.
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Production possibility boundary
The PPB indicates the maximum possible output that can be achieved given a fixed set of resources and technology in a particular period of time.
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Productive efficiency
Productive efficiency is when a firm operates at minimum average total cost, producing the maximum possible output from inputs into the production process.
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Allocative efficiency
Allocative efficiency is achieved in an economy when it is not possible to make anyone better off without making someone worse off, or you cannot produce more of one good without making less of another.
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Productivity
Productivity is a measure of efficiency, measuring the ratio of inputs to outputs; the most common measure is labour productivity, which is the output per worker.
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Human capital
Human capital is the skills, abilities, motivation and knowledge of labour. Improvements in human capital raise productivity and can shift the PPB to the right.
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Division of labour
Division of labour is the breaking of the production process down into a sequence of tasks with workers assigned to particular tasks.
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Specialisation
Specialisation is the production of a limited range of goods by an individual factor of production or firm or country, in cooperation with others so that together a complete range of goods is produced.
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Value judgements
Value judgements are statements or opinions expressed that are not testable or cannot be verified and depend very much on the views of the individual and the values they hold.
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Normative statements
Normative statements are opinions that require value judgements to be made.
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Positive statements
Positive statements are statements that can be tested against real-world data.
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Demand
Demand is the amount that consumers are willing and able to buy at each given price level.
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Effective demand
Effective demand is the demand supported by the ability to pay for a good or service.
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Market demand
Market demand is the total demand in a market for a good, the sum of all individuals’ demand, at each given price.
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Contractions in demand
Contractions in demand are the falls in the quantity demanded caused by rises in prices.
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Extensions in demand
Extensions in demand are increases in demand caused by changes (falls) in price.
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Normal goods
Normal goods are goods or services that will see an increase in demand when incomes rise.
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Inferior goods
Inferior goods are goods or services that will see demand fall when income rises.
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Complementary products
Complementary products are goods that are consumed together, for example bread and butter, or DVDs and DVD players.
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Composite demand
Composite demand is a good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the available supply for the other purpose, typically leading to higher prices, e.g. milk used in butter and cheese.
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Derived demand
Derived demand is when the demand for one good or service comes from the demand for another good or service. The demand for cars stimulates the demand for steel; therefore the demand for steel is derived demand.
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Supply
Supply is the amount offered for sale at each given price level.
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Planned supply
Planned supply is the amount producers plan to produce at each given price.
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Actual supply
Actual supply is the amount that producers in fact produce. This may differ from planned supply for a variety of reasons such as breakdowns in production, staff absences, etc.
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Market supply
Market supply is the sum of all individual firms’ supply curves at each given price.
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Extension in supply
Extension is supply is when there is an increase in supply because the market price has risen.
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Contraction in supply
Contraction in supply is when the amount offered for sale is reduced because the price level has fallen.
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Joint supply
Joint supply is when the production of one good also results in the production of another.
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Equilibrium
Equilibrium is the price at which demand is equal to supply and there is no tendency for change.
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Disequilibrium
Disequilibrium is a situation within the market where the supply does not equal demand.
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Excess supply
Excess supply is when supply at a particular price is greater than demand; this should signal to producers to lower prices.
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Market-clearing price
Market supply is the price at which all goods that are supplied will be demanded.
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Excess demand
Excess demand, is when demand is greater than supply at a given price.
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Maximum price
Maximum price is a price ceiling above which the price of a good or service is not allowed to increase.
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Minimum price
Minimum price is a price floor below which the price of a good or service is not allowed to decrease.
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Price elasticity
Price elasticity is the responsiveness of demand to a change in the price level. The formula is: % change in quantity demanded/ % change in price
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Subsidies
Subsidies are payments by government to producers to encourage production of a good or services. Often subsidies are found in farming where farmers receive funds from government per tonne or unit of output. This means that prices can be lower.
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Incidence of tax
Incidence of tax is the proportion of a tax that is passed onto the consumer. If most of a tax rise added to the consumer then the incidence of tax is said to be “high”. When demand price is inelastic then the incidence of tax tends to be high.
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Income elasticity of demand
Income elasticity of demand is the proportion to which demand changes when there is a change in income.
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Substitutes
Substitutes are goods that can be used as alternatives to another good, e.g. bus & rail services or Mars Bars & Snickers. Close substitutes are good alternatives whereas weak substitutes are not very good alternatives: gas-fired power & hydroelectric
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Commodity
A commodity is a good that is traded, but usually refers to raw materials or semi-manufactured goods that are traded in bulk such as tea, iron ore, oil or wheat. Often they are unbranded goods (homogeneous) where all firms’ products are very similar
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Investment good
An investment good is a product that will increase in value over time.
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Sustainable
Sustainability is an activity carried today that does not stop future generations maximising their welfare.
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Market failure
Market failure is where the market fails to produce what consumers require at the lowest possible cost.
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Government failure
Government failure is when government intervention to correct market failure does not improve the allocation of resources or leads to a worsening of the situation. The costs of government intervention may therefore exceed the benefits.
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Buffer stocks
A buffer stock is an intervention system that aims to limit the fluctuations of the price of a commodity.
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Inflationary pressure
Inflationary pressure is occurrences that are likely to lead to increased prices.
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Negative externalities
Negative externalities are costs imposed on a third party not involved with the consumption or production of the good.
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Specialisation
Specialisation is the production of a limited range of goods by an individual factor of production or firm or country.
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Division of labour
Division of labour is breaking the production process down into a sequence of tasks, with workers assigned to particular tasks.
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Production
Production is the process that converts factor inputs into outputs of goods and services
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Fixed costs
Fixed costs are costs of production that do not very as output changes
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Variable costs
Variable costs are costs of production that vary with output
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Economies of scale
An economy of scale is where an increase in the scale of production leads to reductions in average total cost for firms.
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Diseconomies of scale
A diseconomy of scale is where an increase in the scale of production leads to increases in average total costs for firms.
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Competition
Competition is a market situation in which there are a large number of buyers and sellers.
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Monopoly
Monopoly is a market structure dominated by a single seller of a good.
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Externalities
Externalities are costs or benefits that spillover to third parties external to a market transaction
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Marginal private cost
Marginal private costs are the cost to an individual or firm of an economic transaction.
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Marginal external cost
Marginal external is the spillover cost to third parties of an economic transaction.
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Marginal social cost
Marginal social cost is the full cost to society of an economic transaction, including private and external costs.
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Marginal private benefit
Marginal private benefit is the benefit to an individual or firm of an economic transaction
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Marginal external benefit
Marginal external benefit is the spillover benefit to third parties of an economic transaction.
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Positive externality
Positive externality is a positive spillover effect to third parties of a market transaction.
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Marginal social cost
Marginal social cost is the full cost to society of an economic transaction, including private and external costs.
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Marginal private benefit
Marginal private benefit is the benefit to an individual or firm of an economic transaction
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Marginal external benefit
Marginal external benefit is the spillover benefit to third parties of an economic transaction.
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Positive externality
Positive externality is a positive spillover effect to third parties of a market transaction.
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Marginal social benefit
Marginal social benefit is the full benefit to society of an economic transaction, including private and external benefits.
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Ex ante
Ex ante is a term that refers to future events.
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Ex post
Ex post is a term that refers to after the event.
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Merit good
A merit good is a good that would be under-consumed in a free market, as individuals do not fully perceive the benefits obtained from consumption.
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Marginal social benefit
Marginal social benefit is the full benefit to society of an economic transaction, including private and external benefits.
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Ex ante
Ex ante is a term that refers to future events.
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Ex post
Ex post is a term that refers to after the event.
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Merit good
A merit good is a good that would be under-consumed in a free market, as individuals do not fully perceive the benefits obtained from consumption.
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Failure of information (or information failure)
Failure of information (or information failure) is where economic agents do not properly perceive the benefits or disadvantages of a transaction.
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Partial market failure
Partial market failure is where the free market provides a product but with a misallocation of resources.
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Demerit good
A demerit good is a good that would be over-consumed in a free market, as it brings less overall benefit to consumers than they realise.
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Public good
A public good is a good that possess the characteristics of non-excludability and non-rivalry in consumption.
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Free-rider problem
Free-rider problem is where some consumers benefit from other consumers purchasing a good, particularly in the case of public goods.
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Quasi- public good
A Quasi- public good is a good that has some of the qualities of a public good but does not fully possess the two required characteristics of non-rivalry and non-excludability.
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Private good
A private good is a good that is both excludable and rival in consumption.
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Complete market failure
Complete market failure is where the free market fails to provide a product at all, i.e. the case of public goods.
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Occupational immobility:
As patterns of demand and employment change, many workers may find it difficult to easily secure new jobs, since they may lack the necessary skills.
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Geographical immobility:
Geographical immobility is where workers find it difficult to move to where employment opportunities may be, due to family ties and differences in housing costs.
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Income
Income is a flow of earnings to a factor of production over a period of time, e.g. wages or salaries.
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Wealth
Wealth is a stock of owned assets, e.g. housing property or portfolio of shares.
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Indirect tax
Indirect tax is a tax on spending.
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Pollution permit
A pollution permit is a permit sold to firms by the government, allowing them to pollute up to a certain limit.
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Law of unintended consequences
The law of unintended consequences is when the actions of consumers, producers and governments have effects that are unanticipated.
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Inflation
Inflation is a persistent increase in the level of prices.
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Card 2

Front

This refers to the benefit or satisfaction an individual or society gets from the allocation of resources. We can attempt to measure the welfare of individuals but really we want to understand the overall effects on society as a whole.

Back

Economic welfare

Card 3

Front

The opportunity cost of something is the next best alternative given up when an economic decision is made.

Back

Preview of the back of card 3

Card 4

Front

Economic goods are goods that are scarce and therefore have an opportunity cost.

Back

Preview of the back of card 4

Card 5

Front

Free goods are goods that have no opportunity cost, e.g., air

Back

Preview of the back of card 5
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