Edexcel Economics Unit 1 Definitions

Front 1

Basic economic problem

Back 1

resources have to be allocated between competing uses because wants are infinite whilst resources are scarce.

Front 2

Opportunity cost

Back 2

the benefits foregone of the next best alternative.

Front 3

Production possibility frontier (also known as the production possibility curve or the production possibility boundary or the transformation curve)

Back 3

a curve which shows the maximum potential level of output of one good given a level of output for all other goods in the economy, with all its resources fully and efficiently employed.

Front 4

Scarce resources

Back 4

resources which are limited in supply so that choices have to be made about their use.

Front 5

Capital (or capital stock)

Back 5

All inputs to production that have themselves been produced (e.g. tractors, spades, factories and office buildings).

Front 6

Investment

Back 6

an increase in capital.

Front 7

Depreciation (or capital consumption)

Back 7

the wearing out of capital over time.

Front 8

Division of labour

Back 8

where a productive process is broken down into a sequence of jobs with a particular worker doing one or a few only of them (e.g. pin factory observed by Adam Smith).

Front 9

Factors of production

Back 9

the inputs to the production process

Front 10

Human capital

Back 10

the value of the productive potential of an individual or group of workers. It is made up of the skills, talents, education and training of an individual or group and represents the value of future earning and production.

Front 11

Labour productivity

Back 11

output per worker.

Front 12

Market

Back 12

any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services.

Front 13

Primary sector

Back 13

extractive and agricultural industries.

Front 14

Productivity

Back 14

output per unit of input.

Front 15

Profits

Back 15

the reward to the owners of a business. It is the difference between a firm’s revenue and its costs.

Front 16

Secondary sector

Back 16

production of goods, mainly manufactured.

Front 17

Specialization

Back 17

a system of organization where economic units such as households or nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others.

Front 18

Sustainable resource

Back 18

renewable resource which is being economically exploited in such a way that it will not diminish or run out.

Front 19

Tertiary sector

Back 19

provision of services, e.g legal, medical.

Front 20

Unit labour costs

Back 20

cost of employing labour per unit of output or production.

Front 21

Base period

Back 21

the period such as a year or a month, with which all other values in a series are compared.

Front 22

Index number

Back 22

an indicator showing the relative value of one number to another from a base of 100.

Front 23

Nominal values

Back 23

values unadjusted for the effects of inflation (i.e. values at current prices).

Front 24

Real values

Back 24

values adjusted for inflation (i.e. values at constant prices).

Front 25

Ceteris paribus

Back 25

the assumption that all other variables within the model remain constant whilst one change is being considered. “All other things being equal (or constant).”

Front 26

Equilibrium (or market equilibrium)

Back 26

a position of balance from which there is no inherent tendency to move away.

Front 27

Normative economics

Back 27

the study and presentation of policy prescriptions involving value judgements about the way scarce resources are allocated.

Front 28

Normative statement

Back 28

a statement which cannot be supported or refuted because it is a value judgement.

Front 29

Positive economics

Back 29

the scientific or objective study of the allocation of resources.

Front 30

Positive statement

Back 30

a statement which can be supported or refuted by evidence.

Front 31

Command or planned economy

Back 31

an economic system where government through a planning process allocates resources in society.

Front 32

Free market economy/Free enterprise economy/Capitalist economy or Market

Back 32

an economic system which resolves the basic economic problem through the market mechanism.

Front 33

Market mechanism (aka the price system)

Back 33

the way prices respond to changes in demand and supply for a product, service or factor input so that a new market equilibrium is reached. It is the principal method of allocating resources in a market economy.

Front 34

Mixed economy

Back 34

an economy where both the free market mechanism and the government planning process allocate significant proportions of total resources.

Front 35

Consumer surplus

Back 35

the difference between how much buyers are prepared to pay for a good and what they actually pay.

Front 36

Demand or effective demand

Back 36

the quantity of a good purchased at any given price over a period of time. The ‘Law of Demand’ says that demand is inversely related to price, all other things being equal.

Front 37

Producer surplus

Back 37

the difference between the market price that firms receive and the price at which they are prepared to supply.

Front 38

Supply

Back 38

the quantity of goods that suppliers are willing and able to sell at any given price over a period of time.

Front 39

Competitive demand

Back 39

when two or more goods are substitutes for each other.

Front 40

Complement

Back 40

a good which is purchased with another good e.g. gin and tonic. Gin is the driver; if its price falls, more tonic will be bought. The XED of the complement (tonic) is negative.

Front 41

Composite demand

Back 41

when a good is demanded for two or more distinct uses.

Front 42

Derived demand

Back 42

when the demand for one good is the result of or derived from another good.

Front 43

Joint demand

Back 43

when two or more goods are bought together, e.g. marijuana and Rizla+ papers.

Front 44

Joint supply

Back 44

when two or more goods are produced together so that a change in supply of one good will necessarily change the supply of the other good(s) with which it is in joint supply; e.g. mutton and wool.

Front 45

Substitute

Back 45

a good which can be replaced by another to satisfy a want e.g. gin or vodka. If the price of gin falls, less vodka will be bought. The XED of the substitute is positive.

Front 46

Elastic demand

Back 46

where the price elasticity of demand is greater than 1. The responsiveness of demand is proportionally greater than the change in price. Demand is infinitely elastic if price elasticity of demand is infinity.

Front 47

Inelastic demand

Back 47

where the price elasticity of demand is less than 1. The responsiveness of demand is proportionally less than the change in price. Demand is infinitely inelastic if price elasticity of demand is zero.

Front 48

Price elasticity of demand (PED)

Back 48

the proportionate response of changes in quantity demanded to a proportionate change in price. PED = % change in Qd ÷ % change in P.

Front 49

Unitary elasticity

Back 49

where the value of price elasticity of demand is 1. The responsiveness of demand is proportionally equal to the change in price.

Front 50

Cross or cross-price elasticity of demand (XED)

Back 50

a measure of the responsiveness of quantity demanded of one good to a change in price of another good. XED = % change in Qd for good A ÷ % change in P of good B.

Front 51

Income elasticity of demand (YED)

Back 51

a measure of the responsiveness of quantity demanded to a change in income. YED = % change in Qd ÷ % change in real income.

Front 52

Price elasticity of supply (PES)

Back 52

a measure of the responsiveness of quantity supplied to a change in price. PES = % change in Qs ÷ % change in P.

Front 53

Income

Back 53

the flow of payments like wages, salaries, dividends and/or interest over a period of time.

Front 54

Inferior good

Back 54

a good where demand falls when income increases (i.e. it has a negative income elasticity of demand).

Front 55

Normal good

Back 55

a good where demand increases when income increases (i.e. it has a positive income elasticity of demand).

Front 56

Wealth

Back 56

the stock of assets owned by an individual or institution at one point in time (e.g. house, car, shares).

Front 57

Wealth effect

Back 57

where people feel better off because of an increase in the value of their assets (house and/or shares, typically).

Front 58

Ad valorem tax

Back 58

tax levied as a percentage of the value of the good or service.

Front 59

Incidence of tax

Back 59

the ultimate distribution of the burden on the taxpayers, i.e. whom does it fall on?

Front 60

Specific or unit tax

Back 60

tax levied per unit, e.g. excise duty of £3.35 on a packet of cigarettes.

Front 61

Subsidy

Back 61

a grant given by government to firms to encourage production of a good.

Front 62

Market failure

Back 62

where resources are inefficiently allocated due to imperfections in the working of the market mechanism.

Front 63

Deadweight loss

Back 63

net welfare lost from not producing the socially optimal quantity.

Front 64

Negative externality

Back 64

the spillover costs inflicted on third parties not party to a transaction which are not reflected in the market price and which are not compensated. Social costs minus private costs = external costs. Or MSC – MPC = MEC.

Front 65

Positive externality

Back 65

the spillover benefits enjoyed by third parties not party to the transaction and for which they have not had to pay, e.g. inoculation. Or MSB = MPB + MEB.

Front 66

Free rider

Back 66

a person or organization which receives benefits which others have paid for without making any contribution themselves.

Front 67

Merit good

Back 67

a good which is underprovided and underconsumed by the market mechanism.

Front 68

Demerit good

Back 68

a good which is overprovided and overconsumed by the market.

Front 69

Private good

Back 69

a good where consumption by one person results in the good not being available for consumption by another.

Front 70

Public good or pure public good

Back 70

a good where consumption by one person does not reduce the amount available for consumption by another person and where once provided, all individuals benefit or suffer whether they wish to or not. NB

Front 71

Quasi-public good or non-pure public good

Back 71

a good which may not possess perfectly the characteristics of being non-excludable and non-rival, e.g. motorways, the police force.

Front 72

Principal-agent problem

Back 72

occurs when the goals of principals, those standing to gain or lose from a decision, are different from agents, those making decisions on behalf of the principal. Examples include shareholders (principals) and managers (agents), or children (principals) and parents (agents).

Front 73

Symmetric information

Back 73

where buyers and sellers have access to the same information.

Front 74

Asymmetric information

Back 74

where buyers and sellers have different amounts of information.

Front 75

Buffer stock scheme

Back 75

a scheme whereby an organization buys and sells in the open market so as to maintain a minimum price in the market for a product.

Front 76

National Minimum Wage

Back 76

a floor below which wages cannot legally fall.

Front 77

Tradable permit

Back 77

a legal right to pollute a fixed amount which can be bought and sold between firms.

Front 78

Government failure

Back 78

occurs when government intervention leads to a net welfare loss compared to the free market solution.

Front 79

Optimal tax (aka Pigouvian tax)

Back 79

a tax equal to marginal external cost; aiming to ‘internalise the externality’.