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Economics A level Edexcel A > definitions and need to knows > Flashcards

definitions and need to knows Flashcards

1
Q

what is economics

A

the study of how to best allocate scarce resources amongst alternative needs and wants.

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2
Q

Ceteris paribus

A

where we analyse the impact of two variables on each other but assume all other variables are equal

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3
Q

Positive Statements

A

– statements that can be proven right or wrong according to data.

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4
Q

Normative Statements

A

value judgement based on opinion.

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5
Q

the economic problem

A

resources are scarce but wants are infinite. A choice within the allocation process therefore needs to be made. Distinguished by 3 parts - what is to be produced? How is production organised? For whom is production for?

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6
Q

what are the four firms

A

the top 4 supermarkets - Asda, Morrisons , Tesco Sainsburys

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7
Q

what is a monopsony

A

when a single buyer controls the market for a particular good or service

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8
Q

enterprise

A

a human resource that takes risks and seeks to make profit from organising the other factors of production

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9
Q

labour

A

human resources. Related to human capital - the economic value of a person’s skills.

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10
Q

land

A

raw materials. Includes anything that is extracted from land.

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11
Q

ppf

A

a diagram illustrating the maximum quantities that can be produced of 2 goods with a given amount of resources and technology

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12
Q

capital

A

machinery. It can make labour more productive but may also be used as a substitute for labour

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13
Q

productive capacity

A

. The point at which all factors of production are fully employed.

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14
Q

specialisation

A

where the production process is broken up into specific tasks. The benefits of which were first discovered by Adam Smith via his example of a pin factory.

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15
Q

division of labour

A

the breaking up of the labour production process into specific tasks

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16
Q

money

A

a medium of exchange for goods and services. Ensures exchange is fast and effective

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17
Q

different economies

A

Command Economy – an economic system where decisions about how to allocate resources are made by the government.
Free Market Economy – an economic system where all resources are allocated by the forces of demand and supply.
Mixed Economy – an economic system that allows for some government intervention where the market fails to allocate resources efficiently.

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18
Q

The law of Diminishing marginal utility

A

where an individual experiences decreasing utility/value per extra unit of a product consumed. A reason as to why the demand curve is downward sloping.

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19
Q

profits

A

Profits = Revenue - Costs.

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20
Q

demand

A

Demand – the willingness and ability of consumers to buy a good or service at a given price.

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21
Q

Derived Demand

A

where a factor of production is demanded not for what it is but for what it can provide e.g. Transport is demanded for a destination or labour is demanded for its skills.

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22
Q

supply

A

the willingness and ability of producers to supply a good or service at a given price.

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23
Q

productivity

A

Productivity – output per unit of input.
Labour productivity – output per unit of labour input.

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24
Q

Substitution effect

A

the impact on quantity demanded where a change in price switches the consumer from or to another substitute product.

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25
Q

Stamp duty

A

a tax paid on a property when it is sold.

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26
Q

Revenue

A

price x quantity

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27
Q

costs

A

Fixed costs - costs that do not change with output (capital and fixed contract Labour).

Variable costs - costs that change with output (raw materials and part-time labour).

Menu costs – an inflation cost for firms as they have to change the prices on their menus.
Administration costs – an inflation cost for firms as they have to renegotiate wages for labour and search for cheaper raw materials.

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28
Q

spare capacity

A

A point within the PPF where there are unemployed factors of production.

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29
Q

Habitual behaviour

A

where consumers have a preference towards consuming a good based purely on habit as opposed to rational decision making based on net benefits.

30
Q

Consumer computation

A

where consumers behave irrationally based on their inability to accurately compute the probability of an outcome resulting from a purchasing decision.

31
Q

socially optimum

A

The target point to eliminate externalities. This is where MSB=MSC.

32
Q

Net welfare Loss

A

this is where social costs are greater than social benefits.

33
Q

tax

A

a charge that is levied on a good or service.

34
Q

regulation

A

a law or piece of legislation designed to increase consumption or production.

35
Q

REAL GDP

A

The total value of goods and services in the economy for inflation

36
Q

NOMINAL GDP

A

the total value of goods and services in the economy, unadjusted for inflation.

37
Q

GROSS NATIONAL INCOME

A

the total value of income generated at home and abroad.

38
Q

National happiness

A

is a qualitative measure of progress or development. Differs to material growth (real GDP) which is quantifiable

39
Q

Sustainable economic growth

A

economic growth that meets the needs of today without compromising the needs of future generations

40
Q

GROWTH

A

Actual Growth - where AD is equal to AS.

Potential growth - Where AS is operating at full capacity. Equates to the PPF, where all resources in an economy are fully employed.

41
Q

INFLATIONS

A

Inflation – a sustained rise in the price level.
Deflation – a sustained fall in the price level
Disinflation - a fall in the rate of inflation, where inflation is rising but at a slower rate than the previous year.
Cost-push inflation – a general rise in the price level because of increasing costs of production (a decrease in SRAS). This shows a decrease in Real GDP and a fall in productive capacity.
Demand-pull inflation – when AD increases at a faster rate than AS. Milton Friedman quoted it as, ‘too much money chasing too few goods’.

42
Q

WAGE PRICE SPIRAL

A

Where labour demands higher wages due to inflation, which in turn creates more inflation through higher costs for firms.

43
Q

UNEMPLOYMENT DEFINITIONS

A

Claimant count – a measure of unemployment. Counts how many are collecting benefits. Claimant count is often lower than the labour force survey as not everyone collects benefits when out of work.
Labour force survey – a measure of unemployment that takes into account the composition of the unemployed via a survey of households.
Unemployment rate - % of the labour market that are unemployed.

Structural unemployment – unemployment caused by occupational immobility and declining industries. Linked to specialisation and occupational immobility. Providing skills/training in areas that are experiencing high demand will reduce this type of unemployment.

Cyclical unemployment – also known as demand deficient unemployment. Unemployment that is due to a lack of AD

Frictional unemployment – unemployment that occurs as workers move between jobs. Providing better job information will reduce this type of unemployment.

Seasonal unemployment - unemployment caused due to reduced demand for labour over a seasonal period

Real wage unemployment - unemployment caused by a wage disequilibrium resulting in surplus labour. Unemployment as a result of the NMW being set above the natural equilibrium.

44
Q

Real wage inflexibility

A

where the labour market is inflexible to wage changes

45
Q

IMMOBILITY

A

Occupational immobility – where workers do not have the desired skills to find a job.
Geographical immobility – where workers cannot find a job in different areas due to the cost of moving (due to house prices or high transport costs).

46
Q

GOVT ACCOUNTS DEFINITIONS

A

Balance of payments - a total record of the inflow and outflow of income from an economy. Payments must balance between the current and the capital account.
Current account - consists of 4 parts : 1) a country’s visible and 2) invisible trade balance (X-M) plus 3) net income (remittances - wages from abroad) and 4) net transfers (payments to and from other countries e.g. foreign aid, debt repayments).
Current account deficit – where import expenditure is greater than export expenditure.

47
Q

INTERNATIONAL COMPETITIVENESS

A

the extent to which an economy is able to produce goods and services at a more efficient and cheaper rate than other countries.

48
Q

WEALTH EFFECT

A

the gain in consumer confidence as a result of increasing asset prices owned by households.

49
Q

Keynes and ‘animal spirits

A

Keynes used this term to describe the instinct and emotions that influence and guide human behaviour.

50
Q

AD COMPONENETS DEFINITIONS

A

INVESTMENT - spending on capital goods by firms.
Consumption – planned expenditure by households.
Exports – an injection into the circular flow of income, a component of AD - income coming in goods going out to other countries.
Imports – leakage from the circular flow of income - income going out from goods coming in from other countries.
Government expenditure - an injection into the circular flow of income based on current spendinG

51
Q

Accelerator theory

A

this is where a change in demand for goods and services, beyond current capacity, will lead to an even greater percentage change in investment. Can be negative as well as positive.

52
Q

SHORT AND LRAS

A

Short-run aggregate supply - The total supply of goods and services in an economy that are determined by costs (mainly raw materials and wages).

53
Q

SPARE AND FULL CAPACITY

A

Full capacity – Where the factors of production are fully employed
Spare capacity – Where the factors of production are unemployed.

54
Q

Circular flow of income

A

Circular flow of income – a simplified model of income/money flows into/out of and around a country between firms, households, governments and other countries.

55
Q

circular flow of income sub categories

A

Income - a flow of money, the return on the ownership of the factors of production.
Wealth - a stock of money, often held by households in the ownership of assets.
Injections – income and money that flows into an economy. Investment, government spending and exports. These injections will create a multiplier effect.
Leakages – income and money that flows out of an economy. Taxes, saving and imports. These leakages will reduce the strength of the multiplier effect.

56
Q

MULTIPLIER EFFECT

A

Multiplier effect – Where one person’s spending is another person’s income, where an injection of AD leads to an even greater final increase in real GDP.

57
Q

MULTIPLIER RATIO

A

Multiplier ratio - the ratio of the final change in income to the initial change in an injection. It can be calculated as - 1/1-MPC or 1/(MPS+MPT+MPM) or 1/MPW

58
Q

MPC/MPS/MPI EQUATIONS

A

Marginal propensity to consume (MPC) - The increase in consumption divided by the increase in income that caused it. (i.e ΔC/ΔY)
Marginal propensity to save (MPS) - The increase in saving divided by the increase in income that caused it. (i.e ΔS/ΔY)
Marginal propensity to tax (MPT) - The increase in tax revenue divided by the increase in income that caused them. (i.e ΔT/ΔY)
Marginal propensity to import (MPM) - The increase in imports divided by the increase in income that caused them. (i.e ΔM/ΔY)
Marginal propensity to withdraw (MPW) - The increase in withdrawals from the circular flow (T+S+M) divided by the increase in income that caused them. (i.e ΔW/ΔY)

59
Q

OUTPUT GAPS

A

Output gap – where actual GDP is different to potential GDP.
Negative output gap - where actual GDP is less than potential GDP - the economy may be experiencing higher rates of unemployment and low rates of economic growth. (DIAGRAM)
Positive output gap - where potential GDP is greater than actual GDP - the economy may be overheating, experiencing higher rates of inflation.

60
Q

TRADE CYCLE DEFS

A

Trade (business) cycle - a model that demonstrates the fluctuations in actual growth in comparison to potential growth.
Recession - 6 months of negative economic growth.
Boom - a positive output gap, where an economy is overheating, experiencing high rates of inflation.

61
Q

POVERTY AND INCOME INEQUALITY

A

Income inequality – a consequence of economic growth, where there is a widening income gap between the rich and the poor. Linked closely to relative poverty.
Absolute poverty – where households/individuals cannot afford their basic needs.
Relative poverty – where households/individuals live below the national income average.

62
Q

MEASURES OF INFLATION

A

Consumer Price Index – An price index that measures inflation using a basket of 650 goods. Each good is given a weighting depending on the % of income spent. A base year is allocated and a % increase in price is calculated. It is a price index that is compared internationally and used by the Monetary Policy Committee.
Retail price index – measurement of inflation in the UK that is calculated in a similar way to CPI, except it includes house prices and mortgage interest repayments.Changes in monetary policy directly affect the RPI. It is used to calculate housing and unemployment benefits.

63
Q

BASE RATE

A

Base rate – the rate of interest the Bank of England sets from which commercial banks borrow.

64
Q

VAT

A

an indirect tax on goods and services. Currently at 17.5% for non-essential items.

65
Q

STRUCTURAL DEFICIT

A

where governments run a budget deficit during high rates of economic growth.

66
Q

Corporation tax

A

a tax on firms profit.

67
Q

NMW

A

NMW – a minimum wage law that improves the income of the lowest paid. If raised, it may increase the opportunity cost of staying out of work - thus stimulating employment. It may also create real wage unemployment if it is set above the equilibrium. Reducing the NMW will reduce costs for firms also benefiting the supply side.

68
Q

SUPPLY SIDE POLICIES

A

Supply side policy – any policy that seeks to improve competitiveness, productivity and efficiency of labour and product markets

69
Q

Human Development Index

A

a composite measure of economic development that includes health, education and income indicators.

70
Q

Short-run Phillips curve

A

This simple statistical model demonstrates a trade off between inflation and unemployment.

71
Q

Standard of living

A

income per head (GDP/capita) or material living standards

72
Q

exchange rate

A

the value of one currency in terms of another

Economics A level Edexcel A (22 decks)

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