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A-Level Economics (Theme One) > Theme 1 Definitions > Flashcards

Theme 1 Definitions Flashcards

1
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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2
Q

Asymmetric information

A

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

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3
Q

Capital

A
  • One of the four factors of production; goods which can be used in the production process
  • Producer goods
  • That only indirectly satisfy wants (eg machinery and factories)
  • Its reward is interest
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4
Q

Capital goods

A

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

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5
Q

Ceteris paribus

A

All other things remaining the same

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6
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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7
Q

Complementary goods

A

Negative XED; if good B becomes more expensive, demand for good A falls
* Goods that are used in conjunction with others

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8
Q

Consumer goods

A
  • Goods bought and demanded by households and individuals
  • Goods that directly satisfy wants
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9
Q

Consumer surplus (3)

A
  • The difference between the price the consumer is willing to pay and the price they actually pay
  • This represents the extra utility that a consumer gains above the price they pay for it
  • It is the area below the demand curve and above the price level

For example, if a consumer is willing to pay £18 to watch a movie and the price is £15, their consumer surplus is £3

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10
Q

Cross elasticity of demand (XED)

A

The responsiveness ofthe quantity demanded for one good (A) to a change in price of another good (B) in percentage terms
%change in QD (Quantity Demanded) of A
%change in P (Price) of B

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11
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 of time
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12
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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13
Q

Division of labour

A
  • When labour becomes specialised during the production process
  • To do a specific task in cooperation with other workers
  • This allows workers to specialise by focusing on one (or a few) of the components that make up the production process and thereby gain significant skill in doing it
  • This results in higher output per worker and so increases productivity
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14
Q

Economic problem

A

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

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15
Q

Efficiency

A

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

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16
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
  • Organises and controls the other factors
  • And takes the risks in the production process
  • Its reward is profit
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17
Q

Equilibrium price/quantity

A

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

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18
Q

Excess demand

A

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

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19
Q

Excess supply

A

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

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20
Q

Externalities

A

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

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21
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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22
Q

Free market

A

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

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23
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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24
Q

Government failure

A

When government intervention leads to a net welfare loss in society

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25
Q

Habitual behaviour

A

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

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26
Q

Incidence of tax

A

The tax burden on the taxpayer

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27
Q

Income elasticity of
demand (YED)

A

The responsiveness of quantity demanded of a product to a change in income in percentage terms
%change in QD
%change in Y

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28
Q

Indirect tax

A

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

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29
Q

Inferior goods

A

YED<0; goods which see a fall in demand as income increases
* Demand decreases as income rises
* This means that the YED is negative
* Inferiority in this sense, is an observable fact rather than a statement about the quality of the good

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30
Q

Information gap

A

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

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31
Q

Information provision

A

When the government intervenes to provide information to correct
market failure

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32
Q

Labour

A
  • One of the four factors of production; human capital
  • The mental or phyiscal effort of humans in the production process
  • For which they are paid
  • Its reward is wages
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33
Q

Land

A
  • One of the four factors of production; natural resources such as oil, coal, wheat, physical space
  • Any free gift of nature
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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

Maximum price

A

A ceiling price which a firm cannot charge above

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38
Q

Minimum price

A

A floor price which a firm cannot charge below

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39
Q

Mixed economy

A

Both the free market mechanism and the government allocate resources

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40
Q

Model

A

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

41
Q

Negative externalities of
production

A

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

42
Q

Non-excludable

A

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

43
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

44
Q

Non-rivalry

A

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

45
Q

Normal goods (3)

A
  • YED>0; demand increases as income increases
  • This beams that YED is positive
  • The term does not refer to the quality of the good
46
Q

Normative statement

A
  • Subjective statements based on value judgements and opinions; cannot be proven or disproven
  • These judgements are built around opinions and beliefs as to what the best economic policies or solutions may be

For example - Every economy should aim to provide free healthcare for its citizens

47
Q

Opportunity cost

A

The value of the next best alternative forgone

  • Due to the problem of scarcity, choices have to be made about how to best allocate limited resources amongst competing wants and needs
48
Q

Perfectly price elastic good

A

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

49
Q

Perfectly price inelastic good

A

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

50
Q

Positive externalities of consumption

A

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

51
Q

Positive statement

A
  • Objective statements which can be tested with factual evidence to be proven or disproven
  • Based on empirical evidence
  • Tend to be statements of fact

For Example - “The UK unemployment rate has fallen from 4% to 3.7% in the past three months”

52
Q

Possibility production
frontier (PPF)

A

Depicts the maximum productive potential of an economy, using a
combination of two goods or services, when resources are fully and
efficiently employed

53
Q

Price elasticity of
demand (PED)

A
  • The responsiveness of demand to a change in price
  • In percentage terms
    %change in QD
    %change in P
54
Q

Price elasticity of
supply (PES)

A

The responsive of supply to a change in price
%change in QD
%change in P

55
Q

Price mechanism (4)

A
  • The method through which the market allocates scarce resources
  • By responding to changes in the conditions oof supply and demand
  • Prices create signals and incentives
  • to determine what is produced, how its produced and who recieves the product
56
Q

Private cost/benefit

A

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

57
Q

Private goods

A

Goods that are rivalry and excludable

58
Q

Producer surplus

A

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

For example, if a producer is willing to sell a laptop for £450 and the price is £595, their producer surplus is £145

59
Q

Public goods

A

Goods that are non-excludable and non-rivalry

60
Q

Rationality

A

Decision-making that leads to economic agents maximising their utility

61
Q

Regulation

A

Laws to address market failure and promote competition between firms

62
Q

Relatively price elastic 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

The basic economic problem is that resources are scarce

Scarcity

A
  • The shortage of resources in relation to the quantity of human wants
  • Results from finite resources
  • And results in being unable to produce enough to fufil infinite wants

In economics, these resources are called the factors of production

  • Economics is the study of scarcity and its implications for resource allocation in society
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 equals 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 of goods

A

Through taxation, 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

Goods that compete for the same market
* * Positive XED; if good B becomes more expensive, demand for good A rises

73
Q

Supply

A
  • The quantity of the good firms are willing and able to offer for sale
  • At any given price
  • Over a period of time

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

What is an Economic Model?

A
  • A simplified description of reality
  • Designed to yield hypotheses about economic behaviour
  • That can be tested
80
Q

What is Social Science?

A
  • Concerned with society
  • And the relationships among individuals within society
81
Q

What are Positive statements?

A

Positive statements are value-free, objective and testable

82
Q

What is a Normative Statement?

A
  • Normative statements are subjective, non-testable, value judgements
83
Q

What is an Opportunity cost?

A
  • This is the next best alternative
  • Which is foregone
  • Whenever an economic decision is made
84
Q

What is a Production Possibility Frontier?

A
  • A curve showing the maximum possible alternative combinations of two goods that an economy can produce
  • Using all the available factors of production efficiently
  • Moving from one point on the curve to another indicates the opportunity cost of increasing one item’s production in terms of the units of the other foregone
85
Q

Productive Efficiency

A
  • Producing the greatest value output out of the least value inputs (1)
  • For a firm it means producing at the lowest average total cost (ATC) (1)
86
Q

Allocative efficiency

A
  • Producing the correct bundle of goods to maximise welfare ( finding the optimal allocation of economic resources, goods, and income to best improve the overall good of society.)
  • For a firm it means producing where price = marginal cost* (the change in total production cost that comes from making or producing one additional unit.)*
87
Q

Division of Labour

A

The separation of tasks in the production process and their allocation to different groups of workers

88
Q

Diminishing Marginal Returns (DMR)

A
  • The idea that as successive units of a variable factor are added to a fixed factor
  • That each extra unit of the variable factor adds less output that the one before it
89
Q

Short Run

A

The time period in which at least one factor of production is fixed

90
Q

Long Run

A

The time period in which all factors are variable

91
Q

Market economy (4)

A
  • An economy based on competition
  • The private ownership of factors
  • Little government intervention
  • And where the price mechanism determines the allocation of scarce resources through market forces of supply and demand
92
Q

Control economy (2)

A
  • A type of economic system where the resources are state owned
  • And their allocation and use is determined by the centralized decisions of a planning authority (eg North Korea)
93
Q

Mixed Economy (3)

A
  • An economic system which is a combination of Market and Command economic systems
  • Where market forces control control the allocation of some resources
  • But also governments intervene in the allocation to try correct market failures
94
Q

Transition economy

A
  • An economy which is changing from a planned economy to a free market
  • This economic change (letting market forces set price, lowering trade barriers and moving from public to private ownership of resources) often leads to initial high inflation and may lead to increased inequalities of incomes and wealth
95
Q

Competitive Markets (3)

A
  • Characterised by large numbers of buyers and sellers
  • Freedom to enter and exit the market
  • And a homogenous product - goods and services that have identical quality and features and are indistinguishable from each other by the consumer. Homogeneous goods only differ in their price and their availability
96
Q

Rational economic behaviour (1)

A
  • A decision-making process by individuals and firms in which they act to maximise their welfare
97
Q

Effective Demand (3)

A
  • The quantity of the good people are willing and able to buy
  • At any given price
  • Over a period of time
98
Q

DMU (The law of diminishing marginal utility)

A
  • The idea that satisfaction recieved
  • Freom each extra unit
  • Consumed falls

  • The Law of Diminishing Marginal Utility helps to explain the reason why the demand curve is downward sloping
    When the first unit is purchased, the utility is high and consumers are willing to pay a high price
    When subsequent units are purchased, each one offers less utility and the willingness of the consumer to pay the initial price decreases
    Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units
    This is one reason why firms offer discounts such as ‘50% off the second item’

A-Level Economics (Theme One) (5 decks)

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