Edexcel Economics Unit 1

Front 1

Define : Opportunity cost

Back 1

The value of the next best alternative foregone.

Front 2

Differentiate between renewable and non-renewable resources

Back 2

Renewable = stock can be managed over a period of time
Non-renewable = stock decreases over time as it is increased.

Front 3

Define : PPF

Back 3

A PPF shows the maximum potential output for two goods in an economy or for the economy as a whole, when all resources are fully and efficiently utilised.

Front 4

What does an outward shift in the PPF show?

Back 4

Economic growth

Front 5

Define : Specialisation

Back 5

When an individual, firm, region or country concentrates on producing a limited range of goods or services.

Front 6

Define : The division of labour

Back 6

A form of specialisation, where workers focus on one specific part of the production process.

Front 7

Give two advantages and disadvantages of the division of labour

Back 7

+
- workers become very skilled at one job
- more effecient, no friction between moving jobs
- workers can do the jobs that suit there skills best
Dis
- workers get bored
- creates interdependant production
- easy to replace workers with machines and cause structural unemployment

Front 8

Define : Free market economy

Back 8

An economy where decisions of what, how and for whom things are produced is left entirely down to the price mechanism.

Front 9

Define : Mixed economy

Back 9

Where decision of what, how and for whom is made partly by the private sector and partly by the government.

Front 10

Define : Positive statement

Back 10

A positive statement is concerned with facts and value free. It can be tested as true or false.

Front 11

Define : Normative statement

Back 11

A normative statement is a value-judgement which cannot be tested as true or false.

Front 12

Define : Market

Back 12

A market is where buyers and sellers come together for the purpose of exchange.

Front 13

Define : Commodity

Back 13

A raw material or mineral used in the production of goods and services.

Front 14

Why does the demand curve slope down?

Back 14

Substitution effect:
As products become cheaper, they become relatively cheaper against other products thus people buy the cheaper good instead
Income effect:
As products become cheaper, people can buy more of them with there income thus their real incomes rise.

Front 15

What is the formula for PED?

Back 15

percentage change in demand / percentage change in price = PED

Front 16

How do you work out percentage change?

Back 16

difference of numbers / original number = percentage change

Front 17

Recite what 0, 0.5, 1, 1.5 mean in PED terms

Back 17

Perfectly inelastic, inelastic, unit elasticity, elastic

Front 18

How is inelastic and elastic demand shown on a graph?

Back 18

Inelastic = vertical
Elastic = horizontal

Front 19

What are 4 determinants of PED?

Back 19

Availability of substitutes, habit forming goods, proportion of income spent on good, time period and luxery and necessity goods.

Front 20

What is income elasticity of demand?

Back 20

The reponsiveness of the demand for a product to a change in income.

Front 21

What is the formula for income elasticity of demand?

Back 21

YED = percentage change in demand for a good / percentage change in real income

Front 22

When is YED positive and negative?

Back 22

Normal goods = positive - real income and demand move in the same direction

Inferior goods = negative, - demand and real income move in opposite directions

Front 23

What is the formula for cross elasticity of demand?

Back 23

percentage change in demand for product B / percentage change in price of product A = XED

Front 24

When is XED positive and negative

Back 24

Competitive goods = positive - demand for product B goes up as the price for product A goes up

Complements = As the price for good A goes up, the demand for product B goes down

Front 25

Why does the supply curve go from right to left?

Back 25

1. As prices go up, firms are more attracted to the profits gained from a product
2. As firms have to produce more in the short term, production costs rise.

Front 26

What is the calculation for price elasticity of supply?

Back 26

percentage change in supply for a good / percentage change in price for a good = PES

Front 27

What 5 things might shift the demand curve for a product?

Back 27

Advertising, change in prices of compliments and substitutes, changes in fashions and tastes, a change in the age structure/population, changes in indirect taxation, a change in interest rates and the change in the availibility of credit for a product.

Front 28

What 5 things might shift the supply curve for a product?

Back 28

An change in government subsidy, increase in technology, reduction in labour costs, discovery or exhaustion of raw materials and changes in indirect taxation.

Front 29

What are 5 determinants for the price elasticity of supply?

Back 29

Spare capacity, the state of the economy, perishability (ability to stockpile), regulations (barriers into supplying a product) and the time frame (short term, long term).

Front 30

Define : Equilibrum

Back 30

Equilibrum means that there is no tendency for output or price change.

Front 31

What is consumer surplus and where is it shown on a chart?

Back 31

The price consumers were willing to pay above what they did pay.

It is shown by the triangle area below the demand curve above equilibrum price line.

Front 32

What is producer surplus and where is it shown on a chart?

Back 32

The price that producers were willing to supply a product below that which they did.

It is shown by the triangle area above the supply curve below the equilibrum price line.

Front 33

What 3 functions does the price mechanism have?

Back 33

Rationing device (those who can pay most for it, get it), an incentive device and a signalling.

Front 34

Define : Direct tax

Back 34

Taxes levied directly on individuals or organisations which are generally paid on incomes. These income income and corporation tax.

Front 35

Define : Indirect tax

Back 35

An expenditure tax levied directly on the purchase of goods and services. This can either be a specific or ad valorem indirect tax.

Front 36

Differentiate between a specific and an ad valorem tax

Back 36

A specific tax is charged as a fixed amount per unit of a good. An ad valorem is charged as a percentage of the price of a good.

Front 37

For an elastic good, indirect taxation on a product would lay most of its incidence on whom?

Back 37

Producers

Front 38

What type of demand is the demand for labour?

Back 38

Derived demand

Front 39

Name 5 determinants for the demand of labour

Back 39

Demand for final product, the wage rate, other labour costs (employer NI contributions), the productivity of labour, costs of other factor inputs and government regulations (less makes employing people more attractive).

Front 40

Name 5 determinants for the supply of supply

Back 40

Fashion and social trends, wage rate, working tax credits, government schemes, net migration, income tax and government regulations.

Front 41

What is market failure?

Back 41

Market failure is when the price mechanism leads to an inefficient allocation of resources and thus a net welfare loss in society.

Front 42

Define: Externality

Back 42

Third party effects external to and ignored by the price mechanism.

Front 43

What are social costs?

Back 43

They are the sum of external costs (costs to society) and private costs (how much the private buyer pays for an item).

Front 44

On a graph, how can one work out external costs?

Back 44

MSC - MPC = external cost

Front 45

What is a social benefit?

Back 45

The sum of external benefits and private benefits (the benefits from buying something).

Front 46

How can one work out external benefit from a diagram?

Back 46

MSB - MPB = external benefit

Front 47

Why does the MSB slope downwards from right to left?

Back 47

Because for each extra unit which is consumed, the extra benefit of each one to the individual and to society, is less.

Front 48

Where is the net welfare gain triangle?

Back 48

Where the MSC=MSB meets the MPB and MSB, the third side being created by the external benefits between MSB and MPB.

Front 49

Define: public good

Back 49

A good which has the characteristics of non-rivalry (one person consuming does not reduce the amount available) and non-excludability (once it has been produced for one person to benefit, no-one else can be stopped from benefiting.

Front 50

Define: private good

Back 50

A good which contains the characteristics of excludability and rivalry.

Front 51

Why are public goods under provided?

Back 51

Because of the free rider problem (provided for one, provided for all, rational consumer would not pay for it - it may never get paid for) and the valuation problem (it is hard to measure to benefit and thus market price of a public good).

Front 52

Define: asymmetric information

Back 52

Asymmetric information is when either the producer or buyer has more information than the other, meaning imperfect market knowledge to make economic decision thus leading to a possible misallocation of resources.

Front 53

Define: Frictional unemployment

Back 53

Unemployment between moving jobs.

Front 54

Define: Structural unemployment

Back 54

Where there is a mismatch of skills and location between job seekers and job providers.

Front 55

Define: Geographical immobility

Back 55

Where job seekers are prevented from moving between jobs because of geographical limitations - perhaps for family or social reasons or because houses are too expensive in a particular location.

Front 56

Define: Occupational immobility

Back 56

Where workers are prevented from obtaining a job because of a lack of education, training, skills or experience.

Front 57

How might a government increase the geographical mobility of labour?

Back 57

Relaxation of planning laws, relocation grants for places with acute skill shortages, improved operation of job centers and the creation of social housing.

Front 58

How might a government increase the occupational mobility of labour?

Back 58

Increasing provision of training services (subsidies for private firms?), increase provision of further and higher education.