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Edexcel A Level Economics > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

Ceteris paribus

A

All other things remaining the same

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2
Q

Positive statements

A

Objective statements which can be tested with factual evidence to be proven or disproven

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3
Q

Ad valorem tax

A

An indirect tax imposed on a good where the value of the tax is dependent on the value of the good

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4
Q

Asymmetric information

A

Where one party has more information than the other, leading to market failure

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5
Q

Capital

A

One of the four factors of production; goods which can be used in the production process

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6
Q

Capital goods

A

Goods produced in order to aid production of consumer goods in the future

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7
Q

Command economy

A

All factors of production are allocated by the state, so they decide what, how and for whom to produce goods

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8
Q

Complementary goods

A

Negative XED; if good B becomes more expensive, demand for good A falls

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9
Q

Consumer goods

A

Goods bought and demanded by households and individuals

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10
Q

Consumer surplus

A

The difference between the price the consumer is willing to pay and the price they actually pay

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11
Q

Cross elasticity of demand (XED)

A

The responsiveness of demand for one good to a change in the price of another good

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12
Q

Demand

A

The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment in time

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13
Q

Diminishing marginal utility

A

The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping

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14
Q

Division of labour

A

When labour becomes specialised during the production process so do a specific task in cooperation with other workers

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15
Q

Economic problem

A

The problem of scarcity; wants are unlimited by resources are finite so choices have to be made

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16
Q

Efficiency

A

When resources are allocated optimally, so every consumer benefits and waste is minimised

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17
Q

Enterprise

A

One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production

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18
Q

Equilibrium price/quantity

A

Where demand equals supply so there are no more market forces bringing about change to price or quantity sold

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19
Q

Excess demand

A

When price is set too low so demand is greater than supply

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20
Q

Excess supply

A

When price is set too high so supply is greater than demand

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21
Q

Externalities

A

The cost of benefit a third party receives from an economic transaction outside of the market mechanism.

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22
Q

External cost/benefit

A

The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit

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23
Q

Free market

A

An economy where the market mechanism allocates resources so consumers and producers make decision about what is produced, how to produce it and for whom

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24
Q

Free rider principle

A

People who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit

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25
Q

Government failure

A

When government intervention leads to a net welfare loss in society

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26
Q

Habitual behaviour

A

A cause of irrational behaviour; when consumers are in the habit of making certain decisions

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27
Q

Incidence of tax

A

The tax burden on the taxpayer

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28
Q

Income elasticity of demand (YED)

A

The responsiveness of demand to a change in income

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29
Q

Indirect tax

A

Taxes on expenditure which increase production costs and lead to a fall in supply

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30
Q

Inferior goods

A

YED<0; goods which see a fall in demand as income increases

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31
Q

Information gaps

A

When an economic agent lacks the information needs to make a rational, informed decision

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32
Q

Labour

A

One of the four factors of production; human capital

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33
Q

Land

A

One of the four factors of production; natural resources such as oil, coal, wheat, physical space

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34
Q

Luxury goods

A

YED>1; an increase in incomes causes an even bigger increase in demand

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35
Q

Market failure

A

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources

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36
Q

Market forces

A

Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand

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37
Q

Minimum price

A

A floor price which a firm cannot charge below

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38
Q

Mixed economy

A

Both the free market mechanism and the government allocate resources

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39
Q

Model

A

A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words

40
Q

Negative externalities of production

A

Where the social costs of producing a good are greater than the private costs of producing the good

41
Q

Non-excludability

A

A characteristic of public goods; someone cannot be prevent from using the good

42
Q

Non-renewable resources

A

Resources which cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed

43
Q

Non-rivalry

A

A characteristic of public goods; one person’s use of the good does not prevent someone else from using it

44
Q

Normal goods

A

YED>0; demand increases as income increases

45
Q

Normative statements

A

Subjective statements based on value judgements and opinions; cannot be proven or disproven

46
Q

Opportunity cost

A

The value of the next best alternative forgone

47
Q

Perfectly price elastic good

A

PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes

48
Q

Perfectly price inelastic good

A

PED/PES=0; quantity demanded/supplied does not change when price changes

49
Q

Positive externalities of consumption

A

Where the social benefits of consuming a good are larger than the private benefits of consuming that good

50
Q

Positive statements

A

Objective statements which can be tested with factual evidence to be proven or disproven

51
Q

Possibility production frontier (PPF)

A

Depicts the maximum productive potential of an economy, using a combination of two goods or services

52
Q

Price elasticity of demand

A

The responsiveness of demand to a change in price

53
Q

Price elasticity of supply

A

The responsive of supply to a change in price

54
Q

Price mechanism

A

The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves

55
Q

Private cost/benefit

A

The cost/benefit to the individual participating in the economic activity

56
Q

Private goods

A

Goods that are rivalry and excludable

57
Q

Producer surplus

A

The difference between the price the producer is willing to charge and the price they actually charge

58
Q

Public good

A

Goods that are non-excludable, non-rivalry, non-rejectable and have zero marginal cost

59
Q

Rationality

A

Decision-making that leads to economic agents maximising their utility

60
Q

Regulation

A

Laws to address market failure and promote competition between firms

61
Q

Relatively price elastic good

A

When PED/PES>1; demand/ supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied

62
Q

Relatively price inelastic good

A

When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied

63
Q

Renewable resources

A

Resources which can be replenished, so the stock of resources can be maintained over a period of time

64
Q

Scarcity

A

The shortage of resources in relation to the quantity of human wants

65
Q

Social cost/benefit

A

The cost/benefit to society as a whole due to the economic activity

66
Q

Social optimum position

A

Where social costs equal social benefits; the amount which should be produced/consumed in order to maximise social welfare

67
Q

Social science

A

The study of societies and human behaviour

68
Q

Specialisation

A

The production of a limited range of goods by a company/country/individual so they aren’t self-sufficient and have to trade with others

69
Q

Specific tax

A

A tax imposed on a good where the value of the tax is dependent on the quantity that is bought

70
Q

State provision

A

When the government provides public goods or merit goods which are underprovided in the free market

71
Q

Subsidy

A

Government payments to a producer to lower their costs of production and encourage them to produce more

72
Q

Substitutes

A

Positive XED; if good B becomes more expensive, demand for good A rises

73
Q

Supply

A

The ability and willingness to provide a particular good/service at a given price at a given moment in time

74
Q

Symmetric information

A

Where buyers and sellers both have access to the same information

75
Q

Trade pollution permits

A

Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control the amount of pollution. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute

76
Q

Unitary price elastic good

A

When PED/PES=1; a change in price leads to a change in output by the same proportion

77
Q

Utility

A

The satisfaction derived from consuming a good

78
Q

Weakness at computation

A

A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs

79
Q

Advantages for Specialisation

A
  • Higher output and potentially higher quality, since production focusses on what people and businesses are best at. o There could be a greater variety of goods and services produced. o There are more opportunities for economies of scale, so the size of the market increases. o There is more competition and this gives an incentive for firms to lower their costs, which helps to keep prices down.
80
Q

Disadvantages of specialisation

A

o Work becomes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity. Workers could become dissatisfied. o There could be more structural unemployment, since skills might not be transferable, especially because workers have focussed on one task for so long. o By producing a lot of one type of good through specialisation, variety could in fact decrease for consumers. o There could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly.

81
Q

Functions of money

A

o A medium of exchange: without money, transactions were conducted through bartering. Goods and services were traded with other goods and services, but people did not always get exactly what they wanted or needed. The goods and services exchanged were not always of the same value, which also posed a problem. Exchange could only take place if there was a double coincidence of wants, i.e. both parties have to want the good the other party offer. Using money eliminates this problem. o A measure of value (unit of account): Money provides a means to measure the relative values of different goods and services. For example, a piece of jewellery might be considered more valuable than a table because of the relative price, measured by money. Money also puts a value on labour. o A store of value: Money has to hold its value to be used for payment. It can be kept for a long time without expiring. However, the quantity of goods and services that can be bought with money fluctuates slightly with the forces of supply and demand. o A method of deferred payment: Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. This relies on money storing its value.

82
Q

Free market advantage

A

o Firms are likely to be efficient because they have to provide goods and services demanded by consumers. They are also likely to lower their average costs and make better use of scarce resources. Therefore, overall output of the economy increases. o The bureaucracy from government intervention is avoided. o Some economists might argue the freedom gained from having a free economy leads to more personal freedom.

83
Q

Free market disadvantage

A

o The free market ignores inequality and tends to benefit those who hold most of the wealth. There are no social security payments for those on low incomes.

o There could be monopolies, which could exploit the market by charging higher prices.

o There could be the overconsumption of demerit goods, which have large negative externalities, such as tobacco.

o Public goods are not provided in a free market, such as national defence. Merit goods, such as education, are underprovided.

84
Q

Command economy advantage

A

o It might be easier to coordinate resources in times of crises, such as wars. o The government can compensate for market failure, by reallocating resources. They might ensure everyone can access basic necessities. o Inequality in society could be reduced, and society might maximise welfare rather than profit. o The abuse of monopoly power could be prevented.

85
Q

Command economy advantage

A

o It might be easier to coordinate resources in times of crises, such as wars. o The government can compensate for market failure, by reallocating resources. They might ensure everyone can access basic necessities. o Inequality in society could be reduced, and society might maximise welfare rather than profit. o The abuse of monopoly power could be prevented.

86
Q

Command economy disadvantage

A

o Governments fail, as do markets, and they may not be fully informed for what to produce. o They may not necessarily meet consumer preferences. o It limits democracy and personal freedom.

87
Q

Factors affecting demand

A

P- Population. The larger the population, the higher the demand. Changing the structure of the population also affects demand, such as the distribution of different age groups. o I- Income. If consumers have more disposable income, they are able to afford more goods, so demand increases. o R- Related goods. Related goods are substitutes or complements. A substitute can replace another good, such as two different brands of TV. If the price of the substitute falls, the quantity demanded of the original good will fall because consumers will switch to the cheaper option. A complement goes with another good, such as strawberries and cream. If the price of strawberries increases, the demand for cream will fall because fewer people will be buying strawberries, and hence fewer people will be buying cream. o A- Advertising. This will increase consumer loyalty to the good and increase demand. o T- Tastes and fashions. The demand curve will also shift if consumer tastes change. For example, the demand for physical books might fall, if consumers start preferring to read e-books. o E- Expectations. This is of future price changes. If speculators expect the price of shares in a company to increase in the future, demand is likely to increase in the present. o S- Seasons. Demand changes according to the season. For example, in the summer, the demand for ice cream and sun lotions increases.

88
Q

Factors influencing PED

A

Necessity Substitutes Addiction income Durability Peak/off-peak Time

89
Q

Burden of tax graph

A
90
Q

Subsidies graph

A
91
Q

Factors Shifting supply

A

o P- Productivity. Higher productivity causes an outward shift in supply, because average costs for the firm fall. o I- Indirect taxes. Inward shift in supply.

N- Number of firms. The more firms there are, the larger the supply.

T- Technology. More advanced technology causes an outward shift in supply.

S- Subsidies. Subsidies cause an outward shift in supply.

W- Weather. This is particularly for agricultural produce. Favourable conditions will increase supply.

C- Costs of production. If costs of production fall, the firm can afford to supply more. If costs rise, such as with higher wages, there will be an inward shift in supply.

92
Q

Factors influencing PES

A

1) time scale
2) spare capacity
3) level of stocks
4) barriers to enter the market

93
Q

Functions of price mech

A

Rationing

When there are scarce resources, price increases due to the excess of demand. The increase in price discourages demand and consequently rations resources. For example, plane tickets might rise as seats are sold, because spaces are running out. This is a disincentive to some consumers to purchase the tickets, which rations the tickets.

Incentive

This encourages a change in behaviour of a consumer or producer. For example, a high price would encourage firms to supply more to the market, because it is more profitable to do so.

Signalling

The price acts as a signal to consumers and new firms entering the market. The price changes show where resources are needed in the market. A high price signals firms to enter the market because it is profitable. However, this encourages consumers to reduce demand and therefore leave the market. This shifts the demand and supply curves.

94
Q

Government policies to intervene

A

Indirect taxes: to reduce the quantity of demerit goods consumed. This increases the price of the good. If the tax is equal to the external cost of each unit, then the supply curve becomes MSC rather than MPC, so the free market equilibrium becomes the socially optimum equilibrium. This internalises the externality. In other words, the polluter pays for the damage.

Subsidies: encourage the consumption of merit goods. This includes the full social benefit in the market price of the good.

Regulation: to enforce less consumption of a good. For example, the minimum school leaving age. If there was a compulsory recycling scheme, it would be difficult to police and there could be high administrative costs. Bans could be enforced for harmful goods, although they can still be consumed on the black market. Bans are only useful where MSC > MPB (the MSC curve is above MPB).

Provide the good directly: The government could provide public goods which are underprovided in the free market, such as with education.

Provide information: so there is no information failure, and consumers and firms can make informed economic decisions. Property rights: this encourages innovation because entrepreneurs can create new ideas, which are protected, and earn profit.

Personal carbon allowances: They could be tradeable, so firms and consumers can pollute up to a certain amount, and trade what they do not use.

Max and min prices

95
Q

Government failure

A

Disortion of price signals

unintended consequences

excessive administrative costs

Information gaps

96
Q

Evaulation

A

time - long run, short run

Opportunity cost/ costs in general

Governemnt failure

Extend of effectiveness

Edexcel A Level Economics (5 decks)

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