Economics (paper 1) Flashcards
GDP (Gross Domestic Product) definition
the total value of goods and services produced in a country annually
How do we achieve a rising GDP?
Individuals are spending more, more employment opportunities are available, more tax is being paid and workers get paid more
Interest rate definition
• The cost of borrowing money
• (Also the reward for saving)
Opportunity cost definition
The cost of the next best alternative forgone
wants definition
something we desire
needs definition
something essential to survival
What are the 3 factors of the basic economic problem?
• What to produce?
• How to produce it?
• Who to produce it for?
Factors of production
• Land
• Labour
• Capital
• Enterprise
What type of industry is the Uk?
• Tertiary sector
• Also has a lack of resources
Scarcity definition
The shortage of a resource as a result of an unlimited want or need
Basic Economic Problem defintion
Limited resources being unable to provide for the unlimited wants and needs of individuals
Examples of each factor of production
Land: premises, agriculture, transport and cities
Labour: employees & employers
Capital: money & finance, equipment and machinery
Entrepreneurship: Governments and companies
Market
Exchange of goods and services
Primary sector
extraction of raw materials and natural resources
Secondary sector
Manufacturing and construction activities
Tertiary sector
Industries that provide a service
eg transport or finance
What order does the supply chain go in?
Raw materials ➡️ Manufacturing ➡️ Distribution ➡️ Retailer ➡️ Consumer
Economic sustainability
The best use of scarce resources to create growth in the economy
As the economy grows, what happens to the state of individuals?
The wealthier we become
Environmental sustainability
The impact of development on the environment now and in the future
Social sustainability
How an economic choice affects a community’s quality of life
Economy definition
Sustainable production and consumption of goods and services
Factor market definition
where services of the factors of production are bought by firms and sold by households
Product market
Final goods or services are offered to consumers and produced by firms
Expenditure definition
Money spent
How are households involved in product markets?
They consume the goods and services produced
How are households involved in factor markets?
They supply labour to firms for wages and salaries.
3 types of markets
Online, physical and auctions
Derived demand
When the demand for a product is linked to the demand for a related good
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.
Economic agents
• Consumers
• Producers
• Businesses
• Governments
Free enterprise examples
• Sole traders
• Partnerships
• Private limited companies (LLC)
• Public limited companies (PLC)
Wage definition
Payment for labour calculated per hour
Debit card
Takes money directly from your bank account and won’t work if you don’t have enough
Gross pay
Amount of money earned by employee before any deductions
Efficiency
Being able to produce more output with the same or fewer resources
Specialisation
When individuals, firms or countries focus on producing a specific product to become more efficient
Division of labour definition
Specialisation by workers in production (can be by product or process)
Division of labour by product means…
When workers specialise in producing the final product or service
Division of labour by process means…
Workers specialise in one aspect of the production of a good or service
Price Mechanism
How changes in price reflect changes in supply and demand, allowing the market to correct itself
Monopoly
A large dominant firm in a market eg Openreach (bt)
Credit cards
allow you to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash.
advantages of using debit card
• Highly convenient (widely accepted)
• Interest isn’t charged
disadvantages of using credit card
Easy to overspend due to the high interest charges
Incentive
something that entices or motivates someone to do something
What is economy of scale?
When the cost of production reduces as the production rate increases
Goods are
tangible
Services are
intangible
Barter system meaning
The exchange of goods and services without the use of money
Exchange meaning
Giving up something you have in return for something you don’t have
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
Disadvantages of specialisation
• Costs more to train workers
• Workers lose wider skills
• Mass unemployment occurs if demand drops for the product
• Workers may get bored and reduce quality
• May cause environmental damage if surplus output goes to waste
Law of demand
As the price increases, the demand decreases and as the price decreases the demand increases.
Demand definition
When consumers are willing and able to purchase a good or service
Consumers consume more as the prices _______
decrease
Extension in demand
When the market price falls
Contraction in demand
When the market price rises
Factors of production definition
The inputs used in the production of goods or services to make profit
Labour definition
The human input in producing a good or service
Capital definition
Goods used in the production process
3 Arguments for why the demand curve slopes downwards
• Substitution effect
• Income effect
• Diminishing marginal utility
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
Income effect
When consumers have more purchasing power as the price of a product decreases leading to an increase in quantity demanded
Diminishing Marginal Utility
As more units of a product are consumed, the level of satisfaction from each unit will decline
As the demand increases, the price_________
increases (to maximise profit)
Demand curve
Diagram sloping downward from left to right showing how as the price increases, demand decreases
Market demand meaning
Total demand for a good or service
Shift of the demand curve
Complete movement of the existing demand curve either outward or inwards
When does a shift in the demand curve occur?
When the demand changes whilst the price stays the same (PASIFIC)
What happens during a movement along the demand curve ?
The price changes
Supply meaning
The quantity of a good or service that producers are willing and able to sell at a certain price
Factors that cause a shift in the demand curve
• Population
• Advertising
• Substitutes
• Income of consumers
• Fashion & trends
• Income tax
• Complementary goods
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
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.
How is an increase in price presented on a demand curve?
A contraction in demand
What does price elasticity of demand (PED) measure?
How responsive demand is to change in price
What value do inelastic products have?
between 0 and -1
PED equation
% change in quantity demanded / % change in price
Unitary elastic demand
When the % change in demand is the same as the % change in price
Inelastic demand
When demand for products are unresponsive to changes in price
Elastic demand
When demand for a product is responsive to changes in price
Revenue
• What firms earn when they sell goods or services
• Price per unit x Quantity
As price decreases for Inelastic products, total revenue ________
decreases because demand stays the same
As price decreases for elastic products, total revenue _________
Increase (because demand increases)
Examples of inelastic products
addictive cigarettes, healthcare, petrol, rare artwork
Examples of elastic products
Fizzy drinks, luxury cars and electronics
What are the PINTSWC factors used to measure?
Changes in supply
PINTSWC factors
• Productivity • Indirect taxes • Number of firms • Technology • Subsidies • Weather • Costs of production
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)
Transaction costs meaning
Cost of switching between different products (tends to have an inelastic demand)
% 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)
Habitually consumed goods effect on consumers
consumers become less sensitive to the price changes eg demerit goods like alcohol & cigs
Productivity meaning
How efficiently factors are used to produce output • Total output / total input
Indirect taxes meaning
When the government puts tax such as VAT on goods increasing the costs of firms and reducing supply
Subsidy
When the government pays a company to support production increasing supply
What happens to the supply curve as supply increases?
It shifts to the right (inwards)
What happens to the demand curve as demand increases?
Shifts to the right (outwards)
What curve is upwards sloping and what one is downward sloping?
Supply curve slopes upwards and demand curve slopes downwards
What happens to supply as price increases
Supply increases to maximise profit
A horizontal line is used to describe what type of demand curve
perfectly elastic
How does a perfectly inelastic demand curve look like?
Vertical line
Capacity meaning
The amount you are able to produce
Stock levels meaning
Quantity of products available to sell
Production lags meaning
Not producing as much as you are able to
Price competition
When firms lower their prices to attract consumers
Non-price competition
When firms use marketing, customer service or the product itself to attract consumers
Equilibrium meaning
When the quantity demanded is equal to the quantity supplied
Free market
Exchange of goods and services with minimal government intervention
Mixed economy
Control over the exchange of goods and services is shared between producers and the government
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
Keywords to remember for economy
Factors of production • basic economic problem • opportunity cost • economic/social/environment sustainability
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
Keywords to remember for production
revenue • economies of scale • responsiveness • efficiency • productivity
Signalling meaning
When price changes indicate where resources are needed (If prices rises, it indicates more resources are needed)
Rationing meaning
Prices help to ration scarce resources. (Higher prices restricts the demand of consumers)
Oligopoly meaning
Where a small number of firms control the majority share of a market
Transmission of preferences meaning
Producers send information to resource suppliers about the changing demand of consumers
The equilibrium price is also known as the
Market-clearing price
Allocation of resources
How scarce resources are distributed among producers and allocated among consumers
Determination of price
When the demand of consumers determine the price and supply of a product in a free market
Consumer sovereignty
The power of consumers to influence how the market allocates resources
Where is the surplus in relation to the equilibrium on a graph?
Above the equilibrium
Features of monopolies
• Only one supplier
• No competition
• Suppliers control the price
• Difficult to enter market (many barriers to entry)
• Lack of efficiency
Features of an oligopoly
• Firms are interdependent (work together)
• Possibility of collusions
• Product differentiation (they’re unique)
• Some barriers to entry
• Not much efficient
Barrier to entry meaning
Factors that prevent firms from joining a market
Examples of barriers to entry
Brand loyalty • Economies of scale • Geographical barriers • Patents • Vertical integration • start up costs • marketing costs
Brand loyalty meaning
When consumers are attached to existing products
Vertical integration meaning
When a lack of access to suppliers prevents someone from selling their products
Patent meaning
A legal barrier to copying a product
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)
Advantages of competition
• Increases supply •
Reduces the price of products •
Features of competitive markets
• Large number of firms • Price is set by market forces of supply and demand • Most efficient •
Market economy
Where the forces of demand and supply determine the allocation of resources
USP (Unique Selling Point) meaning
A feature of a product or business that makes it unique compared to other firms
Profit
• Total revenue - Total costs
• Money left over after all costs have been paid
Gross Pay equation
Number of hours you work x The amount you earn per hour
Net Pay
Amount of money earned after deductions • Gross Pay - Deductions
Production meaning
The process of making a good or service over time
Legal monopoly
A producer with at least 25% market share
Salary meaning
Payment for labour calculated annually
Competition meaning
When different firms are trying to sell a similar product to consumers
What is a loss?
When total revenue is less than total cost
Total Cost (TC)
• All costs added together • Variable costs (VC) + Fixed costs (FC)
Average cost (AC)
• Unit cost of production • Total costs / Total output
Average Revenue
• Amount of money earned from each sale made • Total revenue / Total output
What are Fixed Costs (FC)?
• Costs that do not change with output • Examples: Rent, interest, Wages/salaries
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
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)
Labour market definition
When workers sell their labour and firms buy their labour (exchange)
Determination of wages
Interaction of supply of labour and demand for labour
What factors causes a change in labour markets?
• Net migrations • An ageing population • Self-employment rise • Decline in trade unions • Rise in temporary jobs
Public sector meaning
Organisations owned by the government that provide essential services through funds from tax • Eg schools and hospitals
Private sector meaning
Organisations owned by individuals that aim to generate profit through revenue and investments • Eg Apple (PLC) and Google (LLC)
Sole trader meaning
Organisation owned by an individual and is personally liable for all business debts • Eg cleaners and cooks
Partnership meaning
When 2 or more individuals own an organisation and share the profits / liability for debts
• Eg: PwC, Medical firms, Law firms
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
Shares meaning
Unit of ownership by a company in a market
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
What is the effect of decreasing the price in a competitive market?
It could drive out competitors or reduce supply to clear a surplus
Examples of deductions
• Taxes • National Insurance • Pension contributions • Student loan repayments
Pension meaning
A fixed amount paid to people who have retired
Trade Union meaning
An organisation of workers active on behalf of its workers • Helps increase wages and improve working conditions • Eg TFL strikes
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
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
Labour markets are made up of smaller interacting ones for:
• Different qualifications • Different skills • Different geographical locations
What is an MNC?
Multi National Corporation • A firm that has its head office in one country but operates in other countries
Collective bargaining
When trade unions negotiate with employers on behalf of its members to set the wage rate
Inflation meaning
A rise in the price of goods and services
Real wage meaning
How inflation impacts the amount of goods and services you are able to buy
(Nominal wage / Price Index)
What is Price Index?
A measure of the price levels
Nominal wage meaning
The normal amount of money workers are paid
YED meaning
How responsive quantity demanded for a good is to a change in consumer income
YED equation
% change in demand / % change in income
Medium of exchange meaning
Something that is widely accepted for transactions eg money
Disadvantages of the barter system
• No consumer protection • No legal certification
Flow of capital meaning
The movement of money during investment and trade
Geographical immobility
When workers cannot easily move to another country for a job (eg lack of affordable housing or language barriers)
Occupational immobility meaning
When workers find it difficult to move across jobs due to factors such as: qualifications, skills and training
Types of labour markets
• Local (within a short distance of worker’s home)
• National (Covers whole of UK)
• International (Covers areas around the world)
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
Factors that affect wages
• Training
• Age
• Skills
• Trade unions
• Experience
• Derived demand
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
Reasons for lack of labour mobility
• Occupational immobility
• Geographical immobility
• Personal factors (eg family ties)
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
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
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)
Disadvantage of increased productivity
It may have happened through automation which would mean workers become unemployed
Why does money act as a medium of exchange?
It’s widely accepted for the buying and selling of products
Financial sector
Section of the economy made up of firms that provide financial services to customers
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)
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
Name of central bank in England
Bank of England
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
Examples of commercial banks
• Barclays
• HSBC
• Metro
Building society definition
Mutual financial organisations that are owned by their members
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)
Insurance company
A financial institution that provides compensation for losses in return for an agreed payment
Examples of fixed costs
• Rent
• Insurance
• Interest
• Advertising
• Salaries
Mortgage definition
A financial agreement to borrow money to purchase a house
Factors affecting YED
• Substitutes of goods
• Necessities of goods/services
• Proportion of income spent on products
Importance of increased productivity for a business
• Increased economies of scale as average costs decrease
• Cost of production can be reduced
• This increases profits
• Therefore better investments to attract specialists
• Increases market share
• Increases competitiveness
• Increases survival chances
Enterprise meaning
Risk taking to pull the other factors of production together
Land definition
The natural resources we have to make things eg physical space or crops
