Economics (paper 1) Flashcards
1
Q
GDP (Gross Domestic Product) definition
A
the total value of goods and services produced in a country annually
2
Q
How do we achieve a rising GDP?
A
Individuals are spending more, more employment opportunities are available, more tax is being paid and workers get paid more
3
Q
Interest rate definition
A
• The cost of borrowing money
• (Also the reward for saving)
4
Q
Opportunity cost definition
A
The cost of the next best alternative forgone
5
Q
wants definition
A
something we desire
6
Q
needs definition
A
something essential to survival
7
Q
What are the 3 factors of the basic economic problem?
A
• What to produce?
• How to produce it?
• Who to produce it for?
8
Q
Factors of production
A
• Land
• Labour
• Capital
• Enterprise
9
Q
What type of industry is the Uk?
A
• Tertiary sector
• Also has a lack of resources
10
Q
Scarcity definition
A
The shortage of a resource as a result of an unlimited want or need
11
Q
Basic Economic Problem defintion
A
Limited resources being unable to provide for the unlimited wants and needs of individuals
12
Q
Examples of each factor of production
A
Land: premises, agriculture, transport and cities
Labour: employees & employers
Capital: money & finance, equipment and machinery
Entrepreneurship: Governments and companies
13
Q
Market
A
Exchange of goods and services
14
Q
Primary sector
A
extraction of raw materials and natural resources
15
Q
Secondary sector
A
Manufacturing and construction activities
16
Q
Tertiary sector
A
Industries that provide a service
eg transport or finance
17
Q
What order does the supply chain go in?
A
Raw materials ➡️ Manufacturing ➡️ Distribution ➡️ Retailer ➡️ Consumer
18
Q
Economic sustainability
A
The best use of scarce resources to create growth in the economy
19
Q
As the economy grows, what happens to the state of individuals?
A
The wealthier we become
20
Q
Environmental sustainability
A
The impact of development on the environment now and in the future
21
Q
Social sustainability
A
How an economic choice affects a community’s quality of life
22
Q
Economy definition
A
Sustainable production and consumption of goods and services
23
Q
Factor market definition
A
where services of the factors of production are bought by firms and sold by households
24
Q
Product market
A
Final goods or services are offered to consumers and produced by firms
25
Expenditure definition
Money spent
26
How are households involved in product markets?
They consume the goods and services produced
27
How are households involved in factor markets?
They supply labour to firms for wages and salaries.
28
3 types of markets
Online, physical and auctions
29
Derived demand
When the demand for a product is linked to the demand for a related good
30
How are the product market and factor market interdependent?
• The skills of employees are bought by firms as labour and sold for wages
• Households then use the wages to buy goods and services from firms.
31
Economic agents
• Consumers
• Producers
• Businesses
• Governments
32
Free enterprise examples
• Sole traders
• Partnerships
• Private limited companies (LLC)
• Public limited companies (PLC)
33
Wage definition
Payment for labour calculated per hour
34
Debit card
Takes money directly from your bank account and won’t work if you don’t have enough
35
Gross pay
Amount of money earned by employee before any deductions
36
Efficiency
Being able to produce more output with the same or fewer resources
37
Specialisation
When individuals, firms or countries focus on producing a specific product to become more efficient
38
Division of labour definition
Specialisation by workers in production (can be by product or process)
39
Division of labour by product means…
When workers specialise in producing the final product or service
40
Division of labour by process means…
Workers specialise in one aspect of the production of a good or service
41
Price Mechanism
How changes in price reflect changes in supply and demand, allowing the market to correct itself
42
Monopoly
A large dominant firm in a market eg Openreach (bt)
43
Credit cards
allow you to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash.
44
advantages of using debit card
• Highly convenient (widely accepted)
• Interest isn’t charged
45
disadvantages of using credit card
Easy to overspend due to the high interest charges
46
Incentive
something that entices or motivates someone to do something
47
What is economy of scale?
When the cost of production reduces as the production rate increases
48
Goods are
tangible
49
Services are
intangible
50
Barter system meaning
The exchange of goods and services without the use of money
51
Exchange meaning
Giving up something you have in return for something you don’t have
52
Advantages of specialisation
• Firms achieve **economies of scale** as larger output would mean lower costs
• **Higher productivity** as workers become more skilled and efficient
• Workers get a **higher salary/ wage** which increases standard of living
• **GDP increases** as more jobs are created
• **Government revenue increases** to develop country
53
Disadvantages of specialisation
• Costs more to train workers
• Workers lose wider skills
• Mass unemployment occurs if demand drops for the product (structural)
• Workers may get bored and reduce quality
• May cause environmental damage if surplus output goes to waste
54
Law of demand
As the price increases, the demand decreases and as the price decreases the demand increases.
55
Demand definition
When consumers are willing and able to purchase a good or service
56
Consumers consume more as the prices _______
decrease
57
Extension in demand
When the market price falls
58
Contraction in demand
When the market price rises
59
Factors of production definition
The inputs used in the production of goods or services to make profit
60
Labour definition
The human input in producing a good or service
61
Capital definition
Goods used in the production process
62
3 Arguments for why the demand curve slopes downwards
• Substitution effect
• Income effect
• Diminishing marginal utility
63
Substitution effect
When consumers switch to a cheaper alternative as the price of a product increases making the product more attractive compared to similar products. This increases the demand
64
Income effect
When consumers have more purchasing power as the price of a product decreases leading to an increase in quantity demanded
65
Diminishing Marginal Utility
As more units of a product are consumed, the level of satisfaction from each unit will decline
66
As the demand increases, the price_________
increases (to maximise profit)
67
Demand curve
Diagram sloping downward from left to right showing how as the price increases, demand decreases
68
Market demand meaning
Total demand for a good or service
69
Shift of the demand curve
Complete movement of the existing demand curve either outward or inwards
70
When does a shift in the demand curve occur?
When the demand changes whilst the price stays the same (PASIFIC)
71
What happens during a movement along the demand curve ?
The price changes
72
Supply meaning
The quantity of a good or service that producers are willing and able to sell at a certain price
73
Factors that cause a shift in the demand curve
• Population
• Advertising
• Substitutes
• Income of consumers
• Fashion & trends
• Income tax
• Complementary goods
74
How does increasing interest rates affect the demand for a good?
• An increase in interest rates would increase the cost of borrowing
• This increases the reward for saving
• People are less likely to spend and more likely to save
• Demand for goods decrease and the curve shifts inwards
75
How do complementary goods affect the demand?
Complementary goods are bought together therefore they’re in joint demand. As the price of one good increases the demand for the other decreases shifting demand curve inwards.
76
How is an increase in price presented on a demand curve?
A contraction in demand
77
What does price elasticity of demand (PED) measure?
How responsive demand is to change in price
78
What value do inelastic products have?
between 0 and -1
79
PED equation
% change in quantity demanded / % change in price
80
Unitary elastic demand
When the % change in demand is the same as the % change in price
81
Inelastic demand
When demand for products are unresponsive to changes in price
82
Elastic demand
When demand for a product is responsive to changes in price
83
Revenue
• What firms earn when they sell goods or services
• Price per unit x Quantity
84
As price decreases for Inelastic products, total revenue ________
decreases because demand stays the same
85
As price decreases for elastic products, total revenue _________
Increase (because demand increases)
86
Examples of inelastic products
addictive cigarettes, healthcare, petrol, rare artwork
87
Examples of elastic products
Fizzy drinks, luxury cars and electronics
88
What are the PINTSWC factors used to measure?
Changes in supply
89
PINTSWC factors
• Productivity • Indirect taxes • Number of firms • Technology • Subsidies • Weather • Costs of production
90
Determinants of PED
• Time period
• Number/closeness of substitutes
• % of a consumer’s income used for spending on a good
• Luxury or Necessity
• habitual consumption
• peak and off peak demand
• cost of transaction (switching)
91
Transaction costs meaning
Cost of switching between different products (tends to have an inelastic demand)
92
% of a consumer’s income used for spending on a good
Products that take up a high proportion of income would tend to have an elastic demand (because price increases would be significantly large)
93
Habitually consumed goods effect on consumers
consumers become less sensitive to the price changes eg demerit goods like alcohol & cigs
94
Productivity meaning
How efficiently factors are used to produce output • Total output / total input
95
Indirect taxes meaning
When the government puts tax such as VAT on goods increasing the costs of firms and reducing supply
96
Subsidy
When the government pays a company to support production increasing supply
97
What happens to the supply curve as supply increases?
It shifts to the right (inwards)
98
What happens to the demand curve as demand increases?
Shifts to the right (outwards)
99
What curve is upwards sloping and what one is downward sloping?
Supply curve slopes upwards and demand curve slopes downwards
100
What happens to supply as price increases
Supply increases to maximise profit
101
A horizontal line is used to describe what type of demand curve
perfectly elastic
102
How does a perfectly inelastic demand curve look like?
Vertical line
103
Capacity meaning
The amount you are able to produce
104
Stock levels meaning
Quantity of products available to sell
105
Production lags meaning
Not producing as much as you are able to
106
Price competition
When firms lower their prices to attract consumers
107
Non-price competition
When firms use marketing, customer service or the product itself to attract consumers
108
Equilibrium meaning
When the quantity demanded is equal to the quantity supplied
109
Free market
Exchange of goods and services with minimal government intervention
110
Mixed economy
Control over the exchange of goods and services is shared between producers and the government
111
Impact of elastic supply on consumers
If the price increases, producers would be able to quickly adjust their production rate to decrease the price • Demand wouldn’t change much
112
Keywords to remember for economy
Factors of production • basic economic problem • opportunity cost • economic/social/environment sustainability
113
Keywords to remember for market
• factor / product market • sectors • specialisation • PED/S • movement and shift of demand curve • extension and contraction • Substitution, income, DMU effects • Incentive
114
Keywords to remember for production
revenue • economies of scale • responsiveness • efficiency • productivity
115
Signalling meaning
When price changes indicate where resources are needed (If prices rises, it indicates more resources are needed)
116
Rationing meaning
Prices help to ration scarce resources. (Higher prices restricts the demand of consumers)
117
Oligopoly meaning
Where a small number of firms control the majority share of a market
118
Transmission of preferences meaning
Producers send information to resource suppliers about the changing demand of consumers
119
The equilibrium price is also known as the
Market-clearing price
120
Allocation of resources
How scarce resources are distributed among producers and allocated among consumers
121
Determination of price
When the demand of consumers determine the price and supply of a product in a free market
122
Consumer sovereignty
The power of consumers to influence how the market allocates resources
123
Where is the surplus in relation to the equilibrium on a graph?
Above the equilibrium
124
Features of monopolies
• Only one supplier
• No competition
• Suppliers control the price
• Difficult to enter market (many barriers to entry)
• Lack of efficiency
125
Features of an oligopoly
• Firms are interdependent (work together)
• Possibility of collusions
• Product differentiation (they’re unique)
• Some barriers to entry
• Not much efficient
126
Barrier to entry meaning
Factors that prevent firms from joining a market
127
Examples of barriers to entry
Brand loyalty • Economies of scale • Geographical barriers • Patents • Vertical integration • start up costs • marketing costs
128
Brand loyalty meaning
When consumers are attached to existing products
129
Vertical integration meaning
When a lack of access to suppliers prevents someone from selling their products
130
Patent meaning
A legal barrier to copying a product
131
Types of economies of scale
**Purchasing** **(**negotiating cheaper prices to buy in larger quantities**)**
• **Managerial** **(**hiring specialists to reduce costs**)**
• **Technological** **(**Machines increase production through automation**)**
• **Financial** **(**negotiating lower interest rates on loans**)**
132
Advantages of competition
• Increases supply •
Reduces the price of products •
133
Features of competitive markets
• Large number of firms • Price is set by market forces of supply and demand • Most efficient •
134
Market economy
Where the forces of demand and supply determine the allocation of resources
135
USP (Unique Selling Point) meaning
A feature of a product or business that makes it unique compared to other firms
136
Profit
• Total revenue - Total costs
• Money left over after all costs have been paid
137
Gross Pay equation
Number of hours you work x The amount you earn per hour
138
Net Pay
Amount of money earned after deductions • Gross Pay - Deductions
139
Production meaning
The process of making a good or service over time
140
Legal monopoly
A producer with at least 25% market share
141
Salary meaning
Payment for labour calculated annually
142
Competition meaning
When different firms are trying to sell a similar product to consumers
143
What is a loss?
When total revenue is less than total cost
144
Total Cost (TC)
• All costs added together • Variable costs (VC) + Fixed costs (FC)
145
Average cost (AC)
• Unit cost of production • Total costs / Total output
146
Average Revenue
• Amount of money earned from each sale made • Total revenue / Total output
147
What are Fixed Costs (FC)?
• Costs that do not change with output • Examples: Rent, interest, Wages/salaries
148
What are Variable Costs (VC)?
• Costs that change directly with the amount of output you produce (Vc x output)
• Examples:
• Cost of raw materials
• Cost of hiring workers
• Packaging & Delivery costs
149
Impact of Fixed Costs
They are spread out over the units produced • This means that cost per unit decreases as production increases (economy of scale)
150
Labour market definition
When workers sell their labour and firms buy their labour (exchange)
151
Determination of wages
Interaction of supply of labour and demand for labour
152
What factors causes a change in labour markets?
• Net migrations • An ageing population • Self-employment rise • Decline in trade unions • Rise in temporary jobs
153
Public sector meaning
Organisations owned by the government that provide essential services through funds from tax • Eg schools and hospitals
154
Private sector meaning
Organisations owned by individuals that aim to generate profit through revenue and investments • Eg Apple (PLC) and Google (LLC)
155
Sole trader meaning
Organisation owned by an individual and is personally liable for all business debts • Eg cleaners and cooks
156
Partnership meaning
When 2 or more individuals own an organisation and share the profits / liability for debts
• Eg: PwC, Medical firms, Law firms
157
Private Limited Company meaning (LLC)
Businesses owned by shareholders who doesn’t sell its shares to the public • Has limited liability • Eg Google and YouTube
158
Shares meaning
Unit of ownership by a company in a market
159
Public Limited Company meaning (PLC)
Company whose shares are available to buy and sell in public (on the stock market) • Liability is limited • Eg Apple and Microsoft
160
What is the effect of decreasing the price in a competitive market?
It could drive out competitors or reduce supply to clear a surplus
161
Examples of deductions
• Taxes • National Insurance • Pension contributions • Student loan repayments
162
Pension meaning
A fixed amount paid to people who have retired
163
Trade Union meaning
An organisation of workers active on behalf of its workers • Helps increase wages and improve working conditions • Eg TFL strikes
164
Factors affecting supply of labour (5)
• **Wage rate**
• The higher the wage the more people are willing to work
• **Non-monetary factors**
• Eg better working conditions and promotions would make it increase
• **Other monetary payments**
• Eg overtime pay will increase supply
• **Barriers to entry**
• Eg qualification requirements
• **Size of working population**
• Eg an ageing population would have a low supply
165
Factors affecting demand for labour (6)
• **Demand for products**
• Higher demand would increase demand for labour
• **Wage rates**
• Higher wages increase the COP and decreases demand for workers
• **Real wages**
• If it falls labour may replace capital
• **Productivity of labour**
• Rise in productivity means higher wages can be paid
• **Profit of firms**
• Increase in profits would allow expansion for labour
• **State of the economy**
• Growing economy would require more labour
166
Labour markets are made up of smaller interacting ones for:
• Different qualifications • Different skills • Different geographical locations
167
What is an MNC?
Multi National Corporation • A firm that has its head office in one country but operates in other countries
168
Collective bargaining
When trade unions negotiate with employers on behalf of its members to set the wage rate
169
Inflation meaning
A rise in the price of goods and services
170
Real wage meaning
How inflation impacts the amount of goods and services you are able to buy
(Nominal wage / Price Index)
171
What is Price Index?
A measure of the price levels
172
Nominal wage meaning
The normal amount of money workers are paid
173
YED meaning
How responsive quantity demanded for a good is to a change in consumer income
174
YED equation
% change in demand / % change in income
175
Medium of exchange meaning
Something that is widely accepted for transactions eg money
176
Disadvantages of the barter system
• No consumer protection • No legal certification
177
Flow of capital meaning
The movement of money during investment and trade
178
Geographical immobility
When workers cannot easily move to another country for a job (eg lack of affordable housing or language barriers)
179
Occupational immobility meaning
When workers find it difficult to move across jobs due to factors such as: qualifications, skills and training
180
Types of labour markets
• **Local** (within a short distance of worker’s home)
• **National** (Covers whole of UK)
• **International** (Covers areas around the world)
181
What do retailers tend to do at busy times of the year?
They employ temporary workers to provide for the increased demand eg in Christmas
182
Factors that affect wages
• Training
• Age
• Skills
• Trade unions
• Experience
• Derived demand
183
Role of the labour market
• Enables workers who are willing and able to sell their labour to meet employers who are willing and able to offer them a job
• It determines the wage rate/salary for a job
184
Reasons for lack of labour mobility
• Occupational immobility
• Geographical immobility
• Personal factors (eg family ties)
185
Advantages of an increase in production
• Increase in employment may have taken place
• Increase in profits
• Gaining a greater market share
• Gaining larger economies of scale
186
Disadvantages of an increase in production
• Increase may be a result of machines replacing workers
• Workers replaced would have a lower standard of living
• Could lead to environmental problems
187
Importance of increased productivity for a country
• There’s an increased total output in the economy
• This inflicts economic growth as GDP increases (more jobs and higher wages for workers)
• More funds are available to spend on development (eg infrastructure and healthcare)
188
Disadvantage of increased productivity
It may have happened through automation which would mean workers become unemployed
189
Why does money act as a medium of exchange?
It’s widely accepted for the buying and selling of products
190
Financial sector
Section of the economy made up of firms that provide financial services to customers
191
What are the roles of the financial sector?
• Involves the lending and borrowing of money eg through banks and building societies
• Banks and building societies enable savers to provide for borrowers
• This allows for the supply of money (savers) to equal demand for money (borrowers)
192
What are the roles of the central bank?
• Issue bank notes and control the supply of money (quantitative easing)
• Control monetary by setting the bank rate
• Provide financial stability by setting the interest rate to keep inflation down
• Acts as a bank for commercial banks and the government
193
Name of central bank in England
Bank of England
194
What are the roles of commercial banks?
• They take deposits from customers and turn them into assets for the bank
• They charge interest higher than the bank rate (to cover their expenses)
• Make payments on behalf their customers
• Issue loans to individuals and firms
195
Examples of commercial banks
• Barclays
• HSBC
• Metro
196
Building society definition
Mutual financial organisations that are owned by their members
197
Building societies characteristics
• Mutual organisations
• Provide savings and mortgages
• Limited as to how much money can be borrowed
• Not listed on the stock market (PLC)
198
Insurance company
A financial institution that provides compensation for losses in return for an agreed payment
199
Examples of fixed costs
• Rent
• Insurance
• Interest
• Advertising
• Salaries
200
Mortgage definition
A financial agreement to borrow money to purchase a house
201
Factors affecting YED
• Substitutes of goods
• Necessities of goods/services
• Proportion of income spent on products
202
Importance of increased productivity for a business
• **Increased economies of scale as average costs decrease**
• Cost of production is reduced
• This increases profits
• Therefore better investments to attract specialists
• **Increases market share**
• Increases competitiveness
• Increases survival chances
203
Enterprise meaning
Risk taking to pull the other factors of production together
204
Land definition
The natural resources we have to make things eg physical space or crops
