Key definitions

Question 1

Creative destruction

Answer 1

Schumpeter’s name for the process by which firms using old technology that are unable to adapt are swept away by the new as they can no longer compete

Question 2

Marginal Product

Answer 2

the additional amount of output produced if the factor input is increased by 1

Question 3

Diminishing Marginal Product

Answer 3

as the factor input increases by one, there is a smaller output produced than the previous factor input increase by one.

Question 4

Marginal return

Answer 4

The marginal return of a factor is the extra output derived per extra unit of factor employed

Question 5

The law of diminishing returns

Answer 5

the variable factor could be increased in the short-run (e.g. the firm employs more labour). Over time, the labour will become less productive due to the constraints of the fixed factor (e.g capital) so the marginal return of employing extra labour drops.

This is why the short-run costs curve is a U-shape

Question 6

Increasing returns to scale

Answer 6

refers to when output increases by a greater proportion to the increase in inputs. Linked to economies of scale and a lower average cost/unit

Question 7

Okun’s Law
Okun’s Coefficient

Answer 7

Okun’s Law: that growth of GDP is negatively correlated with the rate of unemployment.
Okun’s Coefficient: the change in unemployment rate in percentage points predicted to be associated with a 1% change in GDP.

Question 8

Short-run Economic Growth

Answer 8

Definition: when unemployed resources are used to maximise factors of production (on a PPF, where a point approaches the curve/AD shifts right/expansion along AD due to e.g SRAS shifts right).

Question 9

Long-run Economic Growth

Answer 9

Definition: an increase in the quantity/quality of the factors of production (makes PPF curve shift outwards/makes LRAS shift to the right).

Question 10

Income effect

Answer 10

The income effect refers to the change in quantity demanded of a good/service resulting from a change in a consumer’s real income/purchasing power

Question 11

Substitution effect

Answer 11

The substitution effect is the change in consumer behaviour when the price of a good changes relative to other goods, causing consumers to switch towards or away from it.

Question 12

2. Minimising Unemployment (define unemployment rate)

Answer 12

Unemployment rate: the % of people in the labour force without a job but registered as being willing and available for work

Question 13

3. Price stability (define inflation)

Answer 13

Inflation: ‘the rate of change of average prices in an economy - as measured by the consumer price index (CPI)

Question 14

4. Stable balance of payments on current account

Answer 14

This measures the UK’s record of economic activities with other countries (imports and exports)
if imports > exports: deficit
if exports > imports: surplus

Question 15

5. Balanced Government Budget

Answer 15

Ensured the government keeps control of state borrowing (when total spending = total receipts) - so the national debt doesn’t escalate

Question 16

6. Equitable (equal) distribution of income

Answer 16

Income and wealth should be distributed equitably so the gap between the rich and poor doesn’t escalate. Associated with a fairer society

Question 17

Market Failure

Answer 17

Market failure occurs whenever a market leads to a misallocation of resources

Question 18

Welfare

Answer 18

Welfare refers to the overall well-being and quality of life of individuals or society as a whole.

Question 19

Free Market

Answer 19

where the forced of supply and demand determine prices and resource allocation with minimal/none government intervention

Question 20

Public Goods

Answer 20

Public goods are products/services that have 2 main characteristics: non-excludability and non-rival

1. Non - excludability: means that it’s not possible to prevent people from using the good once it’s provided. For example, once a lighthouse is built, its light is available to all ships passing by, regardless of whether they contributed to its construction.
2. Non-rivalry: implies that one person’s consumption of a good doesn’t reduce its availability to others. For instance, someone benefitting from a street light doesn’t diminish the amount of light another person could use.

Question 21

Private Goods

Answer 21

They are rival and excludable e,g a chocolate bar. Property rights allow it to be yours and can only be consumed by you.

Question 22

Free rider problem

Answer 22

when individuals can benefit from a good/service without paying their fair share of it.

Question 23

The Tragedy of Commons

Answer 23

The Tragedy of Commons describes how individuals prioritise gain over the well-being of society

Question 24

Fiscal Policy

Answer 24

Changes in taxes or government in order to stabilise the economy

Question 25

Austerity

Answer 25

A set of policies the government introduces in order to control the national budget.

Question 26

Phillips Curve

Answer 26

An inverse relationship between the rate of inflation and unemployment rate - dips slightly below the x-axis.