Paper 1 Revision Flashcards
Ceteris Paribus
where we analyse the impact of two variables on each other but assume all other variables are equal
PPF
a diagram illustrating the maximum quantities that can be produced of 2 goods with a given amount of resources and technology.
Opportunity Cost
The next best alternative foregone
Specialisation
When a firm or country focuses the production of one good or goods of similar qualities
Pros and Cons of Division of labour
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.
PED
%change in QD/% Change in Price
XED
% change in QD for good Y/% change in price of good X
Derived Demand
a factor of production is demanded not for what it is but for what it can provide
Productivity
output per unit of input
Incentives
something that motivates a producer or consumer to follow a course of action or to change its behaviour
signalling
Price changes send contrasting messages to consumers and producers about whether to enter or leave a market.
Consumer Surplus
the difference between the price consumers are willing to pay and the price they actually pay.
Tax
a charge levied on a good or service
Progressive Tax
a tax that takes a greater percentage of income from the rich (e.g. income tax).
Regressive Tax
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.
Subsidy
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
Fixed Costs
costs that do not change with output (capital and fixed contract Labour).
Variable Costs
costs that change with output (raw materials and part-time labour).
Economies of Scale
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.
Spare Capacity
A point within the PPF where there are unemployed factors of production.
Government Intervention
the intervention of the Government to solve market failiure
Market Failure
this refers to a misallocation of resources, where the market fails to allocate resources efficiently
Positive Externalities
an external benefit; a positive spill-over effect on a third party. Where social benefits exceed private benefits.
Net welfare Gain
this is where social benefits exceed the social costs.
Demerit Goods
goods that are over consumed, have negative externalities and consumers fail to recognise the full costs of consumption
Asymmetric Information
a form of information failure, where one party knows more than another
Minimum Prices
A legal price floor below which the price cannot fall, set above the equilibrium
Maximum Prices
a legal price ceiling above which the price cannot rise. Set below the equilibrium
Government Failure
a situation whereby government intervention leads to an even greater misallocation of resources relative to the free market outcome
Principal-Agent Problem
when the objectives of the managers differ to the ones of the agents/shareholders
Organic Growth
growth that occurs from within. Builds on business’ own capabilities and resources.
Vertical Integration
merger between two firms in the same industry but at different stages of production – backwards or forwards.
Horizontal Integration
merger between two firms at the same stage of production in the same industry.
Profit Maximisation
Output Level where MR=MC
Revenue Maximisation
Where output level is MR=0
Sales Maximisation
Where the price is set to AC = AR
Profit Satisficing
Where managers do just enough to satisfy their shareholders and focus on personal or social objectives
Productive efficiency
Where firms produce at the lowest possible average cost. Where firms produce the most with the least amount of scarce resources.
Allocative Efficiency
Where customer satisfaction is maximised. May include factors such as a low price, choice and quality of product. Where P=MC.
Dynamic Efficiency
efficiency that occurs over time with research and development and reinvestment of super normal profits. Improvements in allocative and productive efficiency over time.
X-inefficiency
organisation slack. Inefficiency caused by unnecessary cost and waste. Where firms operate at a point above the long run average cost curve.
Economies of Scale
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.
Diseconomies of Scale
a rise in long run average costs of production with increasing scale of production. Can be due to communication problems
Internal Economies of Scale
economies of scale that arise because a firm increases it’s scale of production. E.g. bulk buying
Supernormal Profits
profit over and above that of normal profit. Occurs where average revenue operates above average cost at a specific level of output.
Perfect Competition
a market that has many buyers and sellers. There are free barriers to entry and exit with symmetric (perfect) information.
Monopolistic Competition
MRPl
