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Economics A-level > MICRO DEFINITIONS > Flashcards

MICRO DEFINITIONS Flashcards

1
Q

factors of production?

A

economic resources are known as factors of production (land, labour, capital and enterprise) that are combines into goods and services which posses the utility to satisfy human wants and needs

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2
Q

What is land?

A

all the resources found in the natural environment

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3
Q

What is labour?

A

human resources

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4
Q

What is capital?

A

Man made resources, consisting of fixed capital such as machinery and buildings and circulating capital such as stocks of finished goods.

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5
Q

enterprise?

A

The skills involved in combining other factors of production, spotting gaps in the market and accepting risk.

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6
Q

scarcity

A

Economic resources are finite, but human wants and needs are infinite. Choices must therefore be made about which wants and needs to satisfy.

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7
Q

the basic economic problem?

A

The basic economic problem of scarcity is restated by Samuelson in the form of three questions that must be answered in allocating resources:
• What to produce?
• How to produce it?
• Who to produce it for?

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8
Q

economic activity?

A

The central purpose of economic activity is to combine scarce resources into goods and services that possess the utility to satisfy human wants and needs.

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9
Q

opportunity cost?

A

The cost of a decision expressed in terms of the next best alternative foregone.

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10
Q

goods?

A

Tangible economic outputs (they have a physical form)

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11
Q

services>

A

Intangible economic outputs (they don’t have a physical form)

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12
Q

free goods?

A

Goods that involve no opportunity cost in production (eg sunlight)

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13
Q

positive economics

A

A positive statement is a statement of fact or a testable hypothesis

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14
Q

normative economics?

A

A normative statement is a statement of opinion (a value judgement)

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15
Q

Ceteris paribus

A

“All other things being equal”

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16
Q

production possibility frontier?

A

PPF - A production possibility frontier shows the maximum possible combinations of output using the available stock of resources.

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17
Q

outwards shift of PPF?

A

This shows an increase in production possibilities (economic growth) resulting from either (i) more resources becoming available or (ii) better quality resources becoming available. It is the equivalent of an increase in long run aggregate supply (= potential output = economic capacity)

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18
Q

inwards shift of PPF?

A

This shows a decline in production possibilities as a result of fewer resources being available or resources becoming less productive. It may result from factors such as war and destruction of resources and disease leading to high death rates. It may also result from depreciation of capital, dwindling of skills, environmental resource degradation.

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19
Q

demand?

A

The quantity of a good or service that consumers are willing to purchase at a given price over a given period of time.

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20
Q

effective demand?

A

Where the wish to purchase a good or service is supported by the ability to pay.

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21
Q

extension of demand?

A

A movement along the demand curve showing that more of a good is demanded at a lower price.

22
Q

contraction of demand?

A

A movement along the demand curve showing that less of a good is demanded at a lower price.

23
Q

facrors effecting demand?

A

A demand curve is drawn on the assumption of ceteris paribus, that all things affecting demand other than the price are held constant. The factors that are held constant are the conditions of demand and if one of them changes, demand will increase (shift to the right) or decrease (shift to the left). The main factors affecting demand are:

  • The price of substitutes,
  • the price of complements,
  • national income,
  • tastes and fashions,
  • advertising,
  • interest rates,
  • the size of the population,
  • seasonality
  • government policy.
24
Q

substitutes?

A

Goods that are in competitive demand (eg butter and margarine)

25
Q

complements?

A

Goods that are in joint demand (eg games consoles and games)

26
Q

derived demand?

A

Where a good or service is demanded as a factor of production for another. Labour demand is a derived demand.

27
Q

composite demand?

A

Where a good or service is demanded for more than one purpose (eg steel is demanded for making cars and for construction)

28
Q

supply?

A

The amount of a good or service that firms are willing and able to supply at a given price over a given period of time

29
Q

extension of supply?

A

A movement along the supply curve showing that more of a good is supplied at a higher price.

30
Q

contraction of supply?

A

A movement along the supply curve showing that less of a good is supplied at a lower price.

31
Q

factors effecting supply?

A

The main factors affecting supply are:

  • the price of factors of production,
  • the productivity of factors of production
  • government policy (indirect taxes and subsidies)
32
Q

excess demand?

A

Where the quantity demanded of a good or service is greater than the quantity supplied at the ruling market price. This gives firms a reason to change their behaviour by raising prices.

33
Q

excess supply?

A

Where the quantity demanded of a good or service is less than the quantity supplied at the ruling market price. This gives firms a reason to change their behaviour by lowering prices.

34
Q

equilibrium?

A

Equilibrium exists when the market clears, such that the quantity demanded is equal to the quantity supplied at the ruling market price. An equilibrium is a state of rest in the market. This is because consumers are able to purchase the quantity of the good that they wish to at the ruling market price, and firms are able to sell the quantity they wish to. This means that no market participant has a reason to change their behaviour, so that the market will remain in equilibrium unless one of the conditions of demand or supply changes.

35
Q

price elasticity of demand

A

% ^ Qd / % ^ P Ped – refers to the responsiveness of Quantity demanded for a product as a result of a change in price.

36
Q

perfectly inelastic demand?

A

A PED coefficient equal to zero indicates perfectly inelastic demand. This means that demand for a good does not change in response to a change price

37
Q

reletively price elastic demand?

A

Demand responds more than proportionately to a change in price or income. Ignoring the sign, elasticity is in the range one to infinity.

38
Q

unitary elasticity?

A

Demand responds proportionately to a change in price or income. Ignoring the sign, elasticity is one.

39
Q

reletively price inelastic demand?

A

Demand responds less than proportionately to a change in price or income. Ignoring the sign, elasticity is in the range zero to one.

40
Q

perfectly price elastic demand?

A

A perfectly elastic demand curve is represented by a straight horizontal line and shows that the market demand for a product is directly tied to the price. In fact, the demand is infinite at a specific price. Thus, a change in price would eliminate all demand for the product.

41
Q

normal good?

A

A good with positive YED

42
Q

inferior good?

A

A good with negative YED

43
Q

giffen good?

A

A necessity such as a staple food which has a positive PED because when the price rises there is little income left to spend on other products and thus any remaining income is also spent on the good in question.

44
Q

veblen good?

A

A good purchased for reasons of ostentation which has a positive PED. The higher price makes the good more exclusive and thus more attractive. Diamonds or top of the range sports cars may be examples.

45
Q

the price mechanism?

A

Changes in the relative prices of goods serve to allocate scarce resources via the rationing, signalling and incentive functions of prices.

46
Q

rationing function?

A

An increase in price serves to ration available supplies of a good to those who are willing to pay the most (in economic theory, this is those who gain most utility)

47
Q

signaling function?

A

Prices convey information to market participants. For example, an increase in price when costs remain unchanged conveys information about an increase in demand to suppliers

48
Q

incentive function

A

Price changes incentivise changes of behaviour on the part of market participants. For example, a higher price following a demand increase raises profit margins for firms, incentivising them to extend supply.

49
Q

cost of production

A

Opportunity cost of the factors of production used to make a product or service (the revenue they could have generated in their next best use)

50
Q

revenue

A

The money generated from sales of a good or service. (Total revenue = Price x Quantity)

Economics A-level (35 decks)

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