Paper 1 Revision

Question 1

Ceteris Paribus

Answer 1

where we analyse the impact of two variables on each other but assume all other variables are equal

Question 2

PPF

Answer 2

a diagram illustrating the maximum quantities that can be produced of 2 goods with a given amount of resources and technology.

Question 3

Opportunity Cost

Answer 3

The next best alternative foregone

Question 4

Specialisation

Answer 4

When a firm or country focuses the production of one good or goods of similar qualities

Question 5

Pros and Cons of Division of labour

Answer 5

Pros:
higher productivity, improved quality of goods/services produced, improved variety for consumers, increased competition through lower prices.
Cons:
Costs include repetitive work (labour loses motivation), higher labour turnover (as work becomes unrewarding) and can lead to structural unemployment.

Question 6

PED

Answer 6

%change in QD/% Change in Price

Question 7

XED

Answer 7

% change in QD for good Y/% change in price of good X

Question 8

Derived Demand

Answer 8

a factor of production is demanded not for what it is but for what it can provide

Question 9

Productivity

Answer 9

output per unit of input

Question 10

Incentives

Answer 10

something that motivates a producer or consumer to follow a course of action or to change its behaviour

Question 11

signalling

Answer 11

Price changes send contrasting messages to consumers and producers about whether to enter or leave a market.

Question 12

Consumer Surplus

Answer 12

the difference between the price consumers are willing to pay and the price they actually pay.

Question 13

Tax

Answer 13

a charge levied on a good or service

Question 14

Progressive Tax

Answer 14

a tax that takes a greater percentage of income from the rich (e.g. income tax).

Question 15

Regressive Tax

Answer 15

a tax that takes a greater percentage of income from the poor (e.g. tax on necessities such as cigarettes or alcohol). May increase income inequality.

Question 16

Subsidy

Answer 16

a sum of money provided by government to reduce costs and increase the incentive to produce and consume. Always involves an opportunity cost for the Government

Question 17

Fixed Costs

Answer 17

costs that do not change with output (capital and fixed contract Labour).

Question 18

Variable Costs

Answer 18

costs that change with output (raw materials and part-time labour).

Question 19

Economies of Scale

Answer 19

the benefits a firm experiences where they increase their scale of output. Represented by falling average costs. Sourced internally by the firm or externally by the industry.

Question 20

Spare Capacity

Answer 20

A point within the PPF where there are unemployed factors of production.

Question 21

Government Intervention

Answer 21

the intervention of the Government to solve market failiure

Question 22

Market Failure

Answer 22

this refers to a misallocation of resources, where the market fails to allocate resources efficiently

Question 23

Positive Externalities

Answer 23

an external benefit; a positive spill-over effect on a third party. Where social benefits exceed private benefits.

Question 24

Net welfare Gain

Answer 24

this is where social benefits exceed the social costs.

Question 25

Demerit Goods

Answer 25

goods that are over consumed, have negative externalities and consumers fail to recognise the full costs of consumption

Question 26

Asymmetric Information

Answer 26

a form of information failure, where one party knows more than another

Question 27

Minimum Prices

Answer 27

A legal price floor below which the price cannot fall, set above the equilibrium

Question 28

Maximum Prices

Answer 28

a legal price ceiling above which the price cannot rise. Set below the equilibrium

Question 29

Government Failure

Answer 29

a situation whereby government intervention leads to an even greater misallocation of resources relative to the free market outcome

Question 30

Principal-Agent Problem

Answer 30

when the objectives of the managers differ to the ones of the agents/shareholders

Question 31

Organic Growth

Answer 31

growth that occurs from within. Builds on business’ own capabilities and resources.

Question 32

Vertical Integration

Answer 32

merger between two firms in the same industry but at different stages of production – backwards or forwards.

Question 33

Horizontal Integration

Answer 33

merger between two firms at the same stage of production in the same industry.

Question 34

Profit Maximisation

Answer 34

Output Level where MR=MC

Question 35

Revenue Maximisation

Answer 35

Where output level is MR=0

Question 36

Sales Maximisation

Answer 36

Where the price is set to AC = AR

Question 37

Profit Satisficing

Answer 37

Where managers do just enough to satisfy their shareholders and focus on personal or social objectives

Question 38

Productive efficiency

Answer 38

Where firms produce at the lowest possible average cost. Where firms produce the most with the least amount of scarce resources.

Question 39

Allocative Efficiency

Answer 39

Where customer satisfaction is maximised. May include factors such as a low price, choice and quality of product. Where P=MC.

Question 40

Dynamic Efficiency

Answer 40

efficiency that occurs over time with research and development and reinvestment of super normal profits. Improvements in allocative and productive efficiency over time.

Question 41

X-inefficiency

Answer 41

organisation slack. Inefficiency caused by unnecessary cost and waste. Where firms operate at a point above the long run average cost curve.

Question 42

Economies of Scale

Answer 42

the benefits firms/industries experience as they increase in size/output. It is the fall in long run average costs with increasing scale of production.

Question 43

Diseconomies of Scale

Answer 43

a rise in long run average costs of production with increasing scale of production. Can be due to communication problems

Question 44

Internal Economies of Scale

Answer 44

economies of scale that arise because a firm increases it’s scale of production. E.g. bulk buying

Question 45

Supernormal Profits

Answer 45

profit over and above that of normal profit. Occurs where average revenue operates above average cost at a specific level of output.

Question 46

Perfect Competition

Answer 46

a market that has many buyers and sellers. There are free barriers to entry and exit with symmetric (perfect) information.

Question 47

Monopolistic Competition

Question 48

MRPl