1 AO1 Flashcards
What is name given to ‘all other things equal’?
Ceteris Paribus
Normative statement
- These are statements based on value judgement
- They are subjective and cannot be tested
Positive statement
These are statements that are objective and can be tested
The economic problem
There are a scarce amount of resources for an infinite amount of wants and needs
Opportunity cost
The value of the next best alternative forgone
What is division of labour and why is it used?
- Where a task is broken up into several component tasks
- Allows workers to specialise by focusing on a specific component thus, increasing productivity
Free-market economy
An economy that has no government intervention in the allocation of resources or the distribution of goods/services
Command economy
An economy in which all the resources are owned by the state and the government controls the distribution of goods/services
Mixed economy
- A mix of free-market and command economy
- Where some resources are owned and allocated by the private sector and some by the public sector
Specialisation
When an individual, firm, region or country concentrates in the production of a limited range of goods and services
Consumer good
A good that directly provides utility to the costumer
Capital good
A good that is used to produce consumer goods such as machinery
What does the production possibility frontier (PPF) represent?
The maximum potential output of a combination of goods an economy can achieve when all its resources are fully and efficiently employed, given the current level of technology
Diminishing marginal utility
The utility gained from each extra unit consumed will fall
Marginal utility
The utility gained from consuming one extra unit of a good or service
Price elasticity of demand
Percentage change in quantity demanded over the percentage change in price
Marginal revenue
Revenue gained by a firm from selling one extra unit of output
Income elasticity of demand
Percentage change in quantity demanded over the percentage change in income
Cross elasticity of demand
Percentage change in quantity demanded of good A over the percentage change in price of good B
What are the different YED values and there meanings?
- Negative value = Inferior good
- Positive value = Normal good
- Value above 1 = luxury good (a type of normal good)
- Value between 0 and 1= Relatively income inelastic
- Value above 1 = Relatively income elastic
What are the different XED values and there meanings?
- Positive value = substitute good
- Negative value = complementary good
- Value of zero = unrelated good
Price elasticity of supply
Percentage change in supply of good over the percentage change in price of a good
What are the different PED values and there meanings?
- Value greater than 1 = relatively elastic
- Value smaller than 1 = relatively inelastic
Consumer surplus
The extra amount of money consumers are willing to pay for a good or service above the amount they actually pay
Producer surplus
The extra amount of money paid to producers above what they are willing to accept for the supply of a good or service
Market failure
When the price mechanism causes an inefficient allocation of resources, leading to a net welfare loss
External costs
Negative third party effects outside of a market transaction
External benefit
Positive third party effects outside of a market transaction
Where is the social optimal point?
marginal social benefit = marginal social cost
Public goods
Those goods that are non-rivalry and non-excludable in their consumption
Government failure
When government intervention leads to an inefficient allocation of resources and a net welfare loss
Distortion of price signals
The actions of government which distort the operation of the price mechanism and so misallocate resources e.g. max and min prices
Equilibrium price
The price where the quantality demanded equals the quantity supplied for a good or service in a market
Price mechanisms
The use of market forces to allocate resources
What are the different PES values and there meanings?
Value between 0 and 1 = Relatively price inelastic
Value above 1 = Relatively price elastic
Law of demand
There is an inverse relationship between quantity demanded and price
Law of supply
As the price of a good rises, so will the quantity supplied
