AQA A-level Economics (Microeconomics)

Positive Statement

a statement that is objective and can be tested by referring to the evidence available and so can be scientifically proven

Normative Statement

a statement that is subjective as it includes a value judgement, therefore not possible to test as it is based on opinion

Need

something that is necessary for human survival, such as food, clothing, warmth or shelter

Want

something that is desirable such as fashionable clothing, but is not necessary for human survival

The basic economic problem

There are a limited amount of resources to fulfil our infinite number of wants

Economic Welfare

the economic well-being of an individual, a group within society, or an economy. It is maximised when scarce resources are allocated efficiently in economic activity to produce a good people want/need

Production

a process, or set of processes, that converts inputs into outputs of goods

Capital Good

a good which is used in the production of other goods or services. Also known as a producer good

Consumer Good

a good which is consumed by individuals or households to satisfy their needs or wants

Factors of Production

inputs into the production process, such as land, labour, capital and enterprise

Finite Resource

a resource, such as oil, which is scarce and runs out as it is used. Also known as a non-renewable resource

Renewable Resource

a resource, such as timber, that with careful management can be renewed as it is used

Fundamental Economic Problem

how best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare

Scarcity

results from the fact that people have unlimited wants but resources to meet these wants are limited. In essence, people would like to consume more goods and services than the economy is able to produce with its limited resources

Opportunity Cost

is the cost be the next best alternative foregone when a decision is made

Production Possibility Curve (PPC)

combinations of two products (or types of product) that can be produced when all the available resources are fully and efficiently employed

Economic Growth

the increase in the potential level of real output the economy can produce over a period of time

Full Employment

when all who are able and willing to work are employed at the current wage rate

Unemployment

when not all those who are able and willing to work are employed

Resource Allocation

the process through which the available factors of production are assigned to produce different goods and services

Productive Efficiency

for the economy as a whole occurs when it is impossible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised MC=AC producing at the bottom of the ATC

Allocative Efficiency

occurs when all the available economic resources are used to produce the combination of goods and services that best matches people's tastes and preferences P=MC

Competitive Market

a market in which the large number of buyers and sellers possess goods market information and can easily enter or leave the market

Equilibrium Price

the price at which planned demand for a good or service exactly equals planned supply

Supply

the quantity of a good or service that firms are willing or able to sell at given prices in a given period of time

Demand

the quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time. For economists, demand is always effective demand

Market Demand

the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices

Increase in Demand

a rightward shift of the demand curve

Decrease in Demand

a leftward shift of the demand curve

Normal Good

has a positive elasticity of demand as demand increases as income rises and demand decreases as income falls

Normal necessities

have an income elasticity of demand between 0 and 1 so demand is rising less proportionately to income

Luxury good

have an income elasticity of demand above 1 as demand rises more than proportionate to a change in income

Inferior Good

has a negative income elasticity of demand so demand decreases as income rises and demand increases as income falls. These exist where superior goods are available if the consumer has the money to be able to buy it

Sales forecasting

how much they will expect to make in the future so a firm can forecast the impact of a change in income on sales volume and sales revenue

Elasticity

the proportionate responsiveness of a second variable to an initial change in the first variable

Price Elasticity of Demand

measures the extent to which the demand for a good changes in response to a change in the price of that good

Income Elasticity of Demand

measures the extent to which the demand for a good changes in response to a change in income; it is calculated by dividing the percentage change in income

Cross-Elasticity of Demand

measures the extent to which the demand for a good changes in response to a change in the price of another good; it is calculated by dividing the percentage change in quantity demanded of ne good by the percentage change in the price of the other good

Market Supply

the quantity of a good or service that all firms plan to sell at given prices in a given period of time

Total Revenue

the money a firm receives from selling its output, calculated by multiplying the price by quantity sold

Increase in Supply

a rightward shift of the supply curve

Decrease in Supply

a leftward shift of the supply curve

Price Elasticity of Supply

measures the extent to which the supply of a good changes in response to a change in the price of that good

Market Equilibrium

a market is in equilibrium when planned demand equals planned supply and the demand curve crosses the supply curve. In this situation there is no excess demand or excess supply in the market. Unless some event disturbs the equilibrium, there is no reason for the price to change

Market Disequilibrium

exists at any other price other than the equilibrium price. When the market in in disequilibrium, either excess demand or excess supply exists in this market. Excess demand causes the price to rise until a new equilibrium is established. Conversely, excess supply causes the market price to fall until equilibrium is achieved

Excess Supply

when firms wish to sell more than consumers wish to buy, with the price above the equilibrium price

Excess Demand

when consumers wish to buy more than firms wish to sell, with the price below the equilibrium price

Complementary Good

a good in joint demand, or a good which is demanded at the same time as the other good

Substitute Good

a good in competing demand, namely a good which can be used in place of another good

Composite Demand

demand for a good which has more than one use

Derived Demand

demand for a good which is an input into the production of another good

Merit Good

a good which when consumed leads to benefits which other people enjoy, or a good for which the long-term benefit of consumption exceeds the short-term benefit enjoyed by the person consuming the good

Short-run production

occurs when a firm adds variable factors of production to fixed factors of production

Long-run production

occurs when a firm changes the scale of all the factors of production

Productivity

output per worker per period of time

Labour productivity

output per worker

Capital productivity

output per unit of capital

Specialisation

a worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services

Division of labour

different workers perform different tasks in the course of producing a good or service

Trade

the buying and selling of goods and services

Exchange

to give something in return for something else received. Money is a medium of exchange

The short run

the time period in which at least one factor of production is fixed and cannot be varied

The long run

the time period in which no factors of production are fixed and in which all the factors of production can be varied

Fixed cost

cost of production which, in the short run, does not change with output

Variable cost

cost of production which changes with the amount that is produced, even in the short run

Total cost

the whole cost (fixed + variable) of producing a particular level of output

Average cost

total cost of production divided by output

Long-run average cost

long-run total cost divided by output

Economies of scale

falling long run average costs of production that result from an increase in the size or scale of the firm

Technical economy of scale

a cost saving generated through changed to the 'productive process' as the scale of production and the level of output increase

Internal economy of scale

cost saving resulting from the growth of the firm itself

External economy of scale

cost saving resulting from the growth of the industry or market of which the firm is a part

Total revenue

all the money received by a firm from selling its total output

Average revenue

total revenue divided by output; in a single-product firm, average revenue equals the price of the product

Profit

the difference between total sales revenue and total cost of production

Diseconomies of scale

occurs when an increase in output leads to rising long run average costs production

Loss of control

dedelegation and bad decisions increasing costs

Loss of cooperation

employees may feel alienated as the company grows

Loss of co-ordination

too many layers within the organisation meaning difficult to communicate from top to bottom causing loss of productivity and efficiency

Market Structure

the organisation of a market in terms of the number of firms in the market and the ways in which they behave

Price taker

a firm which passively accepts the ruling market price set by market conditions outside its control

Price maker

a firm possessing the power to set the price within the market, usually they have a monopoly

Perfect competition

a market which displays the 6 conditions of: a large number of buyers and seller so no one has market power; perfect market information all act rationally; the ability to buy or sell for as much as is desired at the ruling market price; a uniform or homogenous product; and no barriers to entry or exit in the long run this is unrealistic but govts try to promote this so more firms can be productively and allocatively efficient by encouraging enterprise, deregulating the market firms are profit maximisers so operate at MC=MR

Competitive market

one in which firms strive to outdo their rivals, but it does not necessarily meet all the conditions of perfect competition

Concentrated market

a market containing very few firms, in the extreme, only one firm

Pure monopoly

when there is only one firm in the market so they are the price maker, there is product differentiation, high barriers to entry, SNP are made in the long and short run, strong brand loyalty they are not allocatively or productively efficient and so therefore are not dynamically efficient but can choose to be if they reinvest their SNP also might not have economies of scale as they restrict supply they can benefit society as they may be more efficient in providing a good than lots of small firms who can't achieve economies of scale and those benefits from increased efficiency can be passed onto the consumer and also help with international competitiveness a nationalised monopoly is not interested in making a profit like the NHS so there will be high inefficiency and costs of production so a natural monopoly (privatised) may be more efficient as they are profit concerned as explained above wanting to reduce costs of production

Monopoly power

the power of a firm to act as a price maker rather than as a price taker

Imperfect competition

any market structure lying between the extremes of perfect competition and pure monopoly

Profit maximisation

occurs when a firm's total sales revenue is furthest above total cost of production

Sales maximisation

occurs when sales revenue is maximised

Market share maximisation

occurs when a firm maximises its percentage share of the market in which it sells its product

Barriers to entry/exit

makes it difficult or impossible for new firms to enter a market and the same to exit

Consumer sovereignty

through exercising their spending power, consumers collectively determine what is produced in a market. Consumer sovereignty is strongest in a perfectly competitive market

Producer sovereignty

producers or firms in a market determine what is produced and what prices are charged

Natural monopoly

the term has two meanings, first when a country or firm has complete control over a natural resource, and second when there is only room in a market for one firm benefitting from economies of scale to the full

Patent

a strategic or manmade barrier to market entry caused by government legislation protecting the right of a firm to be the sole producer of a patented good, unless the firm grants royalties for other firms to produce the good

Natural barrier to entry

a barrier to market entry which is not manmade

Artificial barrier to entry

a barrier to market entry which is manmade these can be intellectual barriers like patents which can occur in a monopoly which can benefit consumers with new and innovative products

Informative advertising

provides consumers and producers with useful information about goods or services

Product differentiation

making a product different from other products through product design, the method of producing the product, or through its functionality in monopolistic the smaller the differences the more elastic the demand for the product is as it can be easily substituted