Edexcel Economics Theme 1 Introduction To Markets And Market Failure

Front 1

The economic problem

Back 1

The need to make choices regarding how to allocate limited resources between unlimited and competing wants

Front 2

Specialisation

Back 2

The concentration of a worker, firm, region or country on a narrow range of tasks or goods and services

Front 3

Opportunity cost

Back 3

The next best alternative foregone when a choice is made

Front 4

Production Possibility Frontier (PPF)

Back 4

The maximum output combinations of two goods and services that can be produced with all resources fully employed

Front 5

Factors of production

Back 5

Land, labour, capital and enterprise

Front 6

Market

Back 6

Any interaction between buyers and sellers for the exchange of goods and services

Front 7

Demand

Back 7

The quantity of a good or service that consumers are willing and able to purchase at a given price over a specified period of time

Front 8

The conditions of demand

Back 8

The price of the good or service

The prices of substitutes

The prices of complements

Households' disposable income and wealth

Tastes and fashion

Front 9

Ceteris paribus

Back 9

Other things (e.g. the other determinants of demand) remaining equal; essential for ensuring that the effects of changes in only one variable can be analysed

Front 10

Price elasticity of demand (PED)

Back 10

The responsiveness of the quantity demanded to a change in price

(% change in quantity demanded / % change in price)

Demand is price-elastic if PED > 1 (ignoring the -)

Demand is price-inelastic if 0 < PED < 1

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Cross elasticity of demand (XED)

Back 11

The responsiveness of the quantity demanded of product A to a change in the price of product B

(% change in the quantity demanded of product A / % change in the price of product B)

(remember to comment on the sign and size)

Front 12

Substitutes

Back 12

Two goods or services that perform a similar function

Products that are in competitive demand

Have a positive XED

Front 13

Complements

Back 13

Two goods or services that are consumed together

Products that are in joint demand

Have a negative XED

Front 14

Income elasticity of demand (YED)

Back 14

The responsiveness of the quantity demanded to a change in income

(% change in quantity demanded / % change in income)

(remember to comment on the sign and size)

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Normal good

Back 15

Good or service for which the demand increases as income increases

Has a positive YED

Front 16

Inferior good

Back 16

Good or service for which the demand decreases as income increases

Has a negative YED

Front 17

Revenue

Back 17

Price multiplied by quantity demanded

Front 18

Consumer surplus

Back 18

The difference between the price consumers are willing to pay and the market price actually paid

Front 19

Supply

Back 19

The quantity of a good or service that producers are willing and able to sell at a given price over a specified period of time

Front 20

Producer surplus

Back 20

The difference between the price that producers are willing to supply at and the market price actually received

Front 21

Allocative efficiency

Back 21

Achieved where supply equals demand, resources are allocated in accordance with consumers' wants and consumer welfare is maximised

Front 22

Market failure

Back 22

Where the free market mechanism fails to achieve allocative efficiency

Front 23

Externalities

Back 23

Spillover effects on third parties arising from production or consumption

Front 24

Private costs

Back 24

Costs incurred by the firm to acquire the factors of production necessary to produce the good or service being supplied

Front 25

External costs

Back 25

The costs imposed on third parties as a consequence of negative externalities

Front 26

Marginal social cost

Back 26

The additional cost to society of producing one more unit of a good or service, equal to marginal private cost plus marginal external cost

Front 27

Negative externality

Back 27

Adverse or unfavourable spillover effect on a third party arising from production or consumption; exists when the marginal social cost of an activity is greater than the marginal private cost (or the MPB > MSB if arising from consumption)

Front 28

Positive externality

Back 28

Beneficial or favourable spillover effect on a third party arising from production or consumption; exists when the marginal social benefit of an activity is greater than the marginal private benefit (or the MPC > MSC if arising from production)

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Social optimum

Back 29

The best possible outcome from society's point of view; exists where marginal social cost equals marginal social benefit

Front 30

Merit good

Back 30

A good or service which is better for consumers than they realise; a good or service with more private benefits than consumers realise

(consumption also tends to create positive externalities)

Front 31

Demerit good

Back 31

A good or service which is worse for consumers than they realise; a good or service with more private costs than consumers realise

(consumption also tends to create negative externalities)

Front 32

The conditions of supply

Back 32

The price of the good or service

The costs of production

Changes in productivity

Changes in technology / capital investment

Taxes and/or subsidies

Weather / climate (for primary products)

Expected price changes

Prices of other goods that could be supplied

Front 33

State provision

Back 33

Where market failure leads to a good or service being provided by the state, often free at the point of consumption (e.g. roads, health care)

(commonly used for public goods, and often alongside private provision for quasi-public goods)

Front 34

The determinants of the PED

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Whether consumption is habitual

The percentage of income spent on the good or service

The time period available for adjustments to consumer spending patterns

The availability of substitutes

Front 35

Information failure

Back 35

A lack of information resulting in consumers and producers making decisions that do not maximise welfare

Front 36

Competitive market

Back 36

The interaction of supply and demand without government intervention to set an equilibrium price and quantity for a good or service

Front 37

Asymmetric information

Back 37

Where information is not shared equally between producers and consumers

Front 38

Public good

Back 38

Collectively consumed goods that are both non-excludable and non-rival

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Non-excludability

Back 39

Where an individual cannot be prevented from consuming a good or service

Front 40

Non-rivalry

Back 40

Where the consumption of a good or service by one individual doesn't reduce the amount available for others

Front 41

Free rider

Back 41

Someone able to enjoy the benefits of consuming a good or service without paying for its provision

Front 42

Quasi-public good

Back 42

A good or service having one but not both of the characteristics of a public good

Front 43

Indirect tax

Back 43

A tax levied on goods and services, the burden of which can be passed on to others (usually from producers to consumers)

Front 44

Subsidy

Back 44

A payment to producers or consumers, usually made by the government, to encourage production or consumption

Front 45

Regulation

Back 45

Laws, standards and guidelines imposed by the government to influence the behaviour of producers and consumers and correct market failure

Front 46

Tradable pollution permit

Back 46

Gives the holder the right to generate a specified level of pollution

Front 47

Market equilibrium

Back 47

The combination of price and quantity that corresponds to the point of intersection of the supply and demand curves

Front 48

Private benefits

Back 48

The benefits accruing to individuals arising from the consumption of a good or service

Front 49

External benefits

Back 49

The benefits enjoyed by third parties as a consequence of positive externalities

Front 50

Marginal social benefit

Back 50

The additional benefit to society of consuming one more unit of a good or service, equal to marginal private benefit plus marginal external benefit

Front 51

Information provision

Back 51

Providing information to encourage or discourage consumption of a good or service

(may be done directly by the government or as part of the regulation of a particular market)

Front 52

Positive economics

Back 52

Fact-based and objective; e.g. the distribution of income in the UK is unequal

Front 53

Normative economics

Back 53

Opinion- or value-based and subjective; e.g. the distribution of income in the UK is unfair

Front 54

Renewable resource

Back 54

Natural resources that can be replenished (e.g. solar energy, wave power, managed forests)

Front 55

Non-renewable resource

Back 55

Natural resources that cannot be replenished once they have been used (e.g. oil, coal, unmanaged forests)

Front 56

Capital goods

Back 56

Man-made goods used for the future production of other goods and services (e.g. machinery, factories)

Front 57

Consumer goods

Back 57

Used for immediate benefits / utility; may be durable (e.g. an Apple computer) or non-durable (e.g. an apple)

Front 58

Division of labour

Back 58

Allocating workers to the specific tasks at which they are most efficient

Front 59

The functions of money

Back 59

medium of exchange, measure of value, store of value, method of deferred payment

Front 60

Free market economy

Back 60

An economy in which the market forces of supply and demand determine the allocation of resources free from state intervention

Front 61

Command economy

Back 61

An economy in which decisions on what to produce, how to produce it and for whom are made by the state

Front 62

Mixed economy

Back 62

An economy in which resources are allocated through a combination of free markets and state intervention

Front 63

Utility

Back 63

A subjective measure of the benefits / satisfaction that an individual gains from the consumption of a good or service; consumers are assumed to aim to maximise utility

Front 64

Law of diminishing utility

Back 64

As successive units of a good or service are consumed the additional (or marginal) utility enjoyed by the consumer will become smaller; demand curves are downward-sloping because consumers are only willing to pay lower prices for the additional units that yield less and less marginal utility

Front 65

Profit

Back 65

The difference between the revenue received from selling a good or service and the cost of the factors of production used to make that good or service; producers are assumed to aim to maximise profits

Front 66

Price elasticity of supply (PES)

Back 66

The responsiveness of the quantity supplied to a change in price; % change in quantity supplied / % change in price

Front 67

The determinants of the PES

Back 67

availability of stock, availability of the necessary factors of production, time period need to produce

Front 68

Incidence of a tax (or subsidy)

Back 68

The way in which the burden of an indirect tax (or subsidy) on expenditure is shared between the producers and consumers

Front 69

Behavioural economics

Back 69

A relatively new branch of economics that suggests that consumers and producers may not act rationally

Front 70

Reasons for irrational consumer behaviour

Back 70

peer pressure / herd behaviour, habitual behaviour, inertia, computational problems, research costs

Front 71

Welfare loss

Back 71

The loss of consumer and producer surplus arising from the overproduction of a good or service where the MSC exceeds the MSB

Front 72

Welfare gain

Back 72

The consumer and producer surplus foregone arising from the underproduction of a good or service where the MSB exceeds the MSC

Front 73

Specific tax (indirect)

Back 73

A tax of a fixed monetary amount levied on expenditure (e.g. Air Passenger Duty is currently £13 for standard class passengers on short haul flights)

Front 74

Ad valorem tax (indirect)

Back 74

A tax of a fixed percentage levied on expenditure (e.g. the standard rate of VAT is 20%); ad valorem means 'according to value' so the amount paid in tax increases as the price of a good increases although the percentage tax rate remains the same

Front 75

Government failure

Back 75

A misallocation of resources arising from government intervention (e.g. the loss of jobs from the imposition of a sugar tax, or inefficient producers being kept in business through the payment of a subsidy)