Unit 1 Flashcards
What are the factors of production?
CELL (mnemonic)
CELL (mnemonic)
Capital
Enterprise
Labour
Land
Needs
Something essential to survive
Wants
Something you would like to have, but is not essential to survival
Resources
Something used to produce output
Productivity
Output per worker per period of time
Capital
Goods that are used to produce other goods and services
Enterprise
Having ideas and taking risks in setting up or running a business
Goods
Items that you can touch and see
Service
Something that someone provides for you, that you cannot touch
Primary sector
Where the extraction of raw materials takes place
Secondary sector
Where raw materials are manufactured into goods
Tertiary sector
The service sector
Opportunity cost
The next best alternative foregone when making a choice
Market
Where buyers and sellers meet to exchange goods and services
Market economy
Where all resources are allocated by private individuals and firms
Planned economy
Where all resources are allocated by the government
Mixed economy
Where some resources are allocated by the government, and other resources are allocated by private individuals and firms
Private sector
The sector of the economy where firms are owned and run by private individuals and groups - their main aim is profit maximization
Public sector
The government sector of the economy, where organisations are owned and run by the government
Benefits of specialisation to a firm
Workers become quicker at producing goods
Production becomes cheaper per good
Production levels are increased
Benefits of specialisation to a worker
Specialised workers tend to get higher pay
Workers’ specific skills will be improved
More motivation from job satisfaction
Costs of specialisation to a firm
Greater cost of training workers
Quality may suffer if workers get bored
More expensive workers
Costs of specialisation to a worker
Boredom from doing the same job every day
Workers’ skills may suffer as they are only doing one job
Workers may eventually be replaced by machinery
Advantages of competitive markets to a consumer
Consumers can ‘shop around’ to get highest quality and lowest prices
Firms will try hard to innovate in order to provide more benefits for consumers
Firms will compete through location, opening hours and customer service
Disadvantages of competitive markets to a consumer
If all firms are small they can’t gain economies of scale and so lower prices
Confusion over too much competition
Advantages of competitive markets to a firm
Firms that can successfully provide products will thrive and earn profits
It may be able to grow large and gain market share
Disadvantages of competitive markets to a firm
Firms that fail to satisfy consumers sufficiently will fail
Surplus
When more is produced than required
Money
What we pay in exchange for goods and services
Medium of exchange
To buy something in a shop, you must have money - money is the medium of exchange in this case
Unit of account
If I were to say that a magazine is £1, I am giving this magazine a unit of account
Store of value
If I put £100 in a bank and take my £100 out later, it has kept its value (store of value).
Means of deferred payment
When you defer a figure of payment over a few payments over a period of time (e.g. loans).
Competitive market
A market in which there are many buyers and sellers
Monopoly
When there is only one firm selling in a market
How can firms achieve monopoly power?
Merger and takeover
Statutory monopoly
Internal expansion
Branding
Cost barriers
Statutory monopoly
Key industries are given monopoly status by the government
Internal expansion
When a firm builds more factories and shops
Cost barriers
Firms with low average costs can keep prices below the price at which small firms could enter the market
Monopoly power
When a firm has more than 25% of the market share
What are the advantages of a monopoly?
R&D for a consumer
International competitiveness for a firm
Exploitation of economies of scale for a firm
What are the disadvantages of a monopoly?
High prices for a consumer
Poor quality for a consumer
Demand
The quantity buyers are willing and able to buy at a given price in a given period of time
Effective demand
A consumer must be both willing and able to buy the good and service when demand is effective
Contraction of demand
The fall in the quantity demanded due to a rise in price
Extension of demand
The increase in the quantity demanded due to a fall in price
Factors that cause the demand curve to shift
PASIFIC
PASIFIC
Population
Advertising
Substitutes
Income
Fashion and trends
Interest rates
Complements
Inferior goods
Good for which the demand falls when income rises
Substitutes
Goods that can be used instead of each other
Interest rates
The reward for saving, and the cost of borrowing
Complements
Goods that are in joint demand
Price elasticity of demand (PED)
The responsiveness of the quantity demanded to a change in the price of a good
PED =
% change in quantity demanded / % change in price
Factors that influence PED
Number of close substitutes within the market
Luxuries and necessities
Percentage of income spent on a good
Habit-forming goods
How do the number of close substitutes in a market influence PED?
The more substitutes are available in the market, the more elastic demand will be in response to a change in price
How do luxuries and necessities influence PED?
Necessities tend to have a more inelastic demand, whereas luxury goods and services tend to be more elastic
Supply
The quantity a producer is willing and able to produce in a given period
Factors that cause the supply curve to shift
PINTSWC
PINTSWC
Productivity
Indirect taxes
Number of firms entering market
Technology
Subsidies
Weather
Costs of production
Price elasticity of supply (PES)
The responsiveness of quantity supplied to a change in price
Factors that influence PES
Level of stocks
Production lags
Substitutability of factors of production
How does the level of spare capacity influence PES?
If a price were to suddenly increase and the firm had spare capacity, it would be able to react very quickly and increase supply
How does the substitutability of the factors of production influence PES?
If a firm can easily move the factors of production it uses in producing its goods between production lines, it will be able to respond mre quickly to changes in price
Equilibrium
The point where demand and supply meet
Indirect tax
A tax on spending
Specific tax
A specific amount of a good or service per unit bought
Ad valorem tax
A percentage of the price of a good or service
Subsidy
A payment given to a firm by a company
Minimum price
A price set above the equilibrium, and the price is not allowed to go below it
Maximum price
A price set below the equilibrium, and the price is not allowed to rise above it
Fixed costs
Costs that do not vary with output
Variable costs
Costs that vary directly with output
Total costs
All the costs of producing a good or service added together
Total costs =
Fixed costs + Variable costs
Average costs =
Total costs / output
Output
The number of goodsor services produced by a firm
Total revenue =
Price x Quantity sold
Profit =
Total revenue / costs
Production
The process of combining scarce resources to make an output
What are the benefits of higher productivity from competition?
Lower average costs
Lower, more competitive price
Higher profits
Specialisation
When an individual, firm, or country only produces a limited range of goods or services
Internal growth
Growth generated from an increase in sales
External growth
Growth through a merger or takeover
Merger
Agreed coming together of two firms
Takeover
When one firm seeks to take over another
Integration
The coming together of two firms through a merger or takeover
Economies of scale
As a firm grows larger in size, the long run average costs fall
Internal economies of scale
When one firm grows in size and benefits from lower average costs
External economies of scale
When a whole industry grows in size, so a firm within that industry benefits from lower average costs
The 6 types of internal economies of scale
Risk bearing
Financial
Marketing
Technical
Managerial
Purchasing
Risk bearing economies of scale
As a firm grows larger, it is able to spread the risk over a larger number of outlets/factories/products
Financial economies of scale
As a firm grows larger, it is able to obtain cheaper sources of finance
Marketing economies of scale
As a firm grows larger, it will be more cost-effective to advertise nationally
Technical economies of scale
As a firm grows larger, it will be able to invest in machinery that can increase productivity
Managerial economies of scale
As a firm grows larger, it is able to employ specialist managers to make workers more efficient
Purchasing economies of scale
As a firm grows larger, it will be able to take advantage of price reductions from suppliers, as it can buy in bulk
Diseconomies of scale
When a firm grows too large and average costs rise
Causes of diseconomies of scale
Loss of control
Lack of co-ordination / lack of co-operation
Reasons for the differences in wages within and between occupations
Differences in productivity of workers
Elasticity of supply of labour
Trade union power
Compensation
How does the elasticity of supply of labour affect a difference in wages?
The more inelastic the supply, the higher the wage
Why might a doctor’s salary be higher than a nurse’s salary?
A doctor’s salary is higher because the supply of doctors is inelastic, due to the high level of qualifications needed
Why does compensation affect a difference in wages?
Higher pay may be a reward for risk-taking in certain jobs - working in poor conditions or unsocial hours
National minimum wage
A pay floor introduced by the government, which sets a wage level below which producers cannot legally go
What are the arguments for a national minimum wage?
Higher tax revenue
Income is more fairly distributed across the population
Poverty is reduced
What are the arguments against a national minimum wage?
More expensive to employ workers, so firms may cut jobs and increase unemployment
Other workers may demand higher wages to maintain pay differentials
Higher wage costs lead to rising inflation
