Microeconomics Revision - A Levels

the problem of scarcity; wants are unlimited but resources are finite so choices have to be made

one of the four factors of production; goods which can be used in the production process

goods which have an opportunity cost and suffer from the problem of scarcity

goods with no opportunity cost, since there is no scarcity of the good; they are not traded

one of the four factors of production; human capital

one of the four factors of production; natural resources such as oil, coal, wheat, physical space

requirements necessary for an individual to live and function, such as food and shelter

subjective statements based on value judgements and opinions; cannot be proven or disproven

objective statements which can be tested with factual evidence to be proven or disproven

decision-making that leads to economic agents maximising their utility

the shortage of resources in relation to the quantity of human wants

something that people desire to have, but do not necessarily need to survive

when resources are allocated to the best interests of society, when there is maximum social welfare and maximum utility; P=MC

when resources are allocated optimally, so every consumer benefits and waste is minimised

something which motivates an individual to make a decision and behave a certain way

an economy where the market mechanism allocates resources so consumers make decisions about what is produced

consumers aim to generate the greatest utility possible, firms aim to generate the highest profits possible

both the free market mechanism and the government allocate resources

all factors of production are allocated by the state, so they decide what, how and for whom to produce goods

when resources are used to give the maximum possible output at the lowest possible cost; MC=AC

how resources are distributed among producers and how goods and services are distributed among consumers

the value of the next best alternative forgone

depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed

when one thing is lost to gain something else

the production of a limited range of goods by a company/country/individual so they aren't self-sufficient and have to trade with others

when labour becomes specialised during the production process so workers carry out a specific task in co-operation with other workers

when goods are substitutes, so buying one means you don't buy the other

when a good or service can be obtained from different sources

the quantity of a good/service that consumers are able and willing to buy at a given price during a given period of time

demand of an individual or firm, measured by the quantity bought at a certain price at one point in time

when goods are bought together

sum of all individual demands in a market

when a business could make more than one good with its resources, and producing one means they can't produce the other

when a good or service can be obtained from different sources

supply of a single firm

increasing supply of one good causes an increase in the supply of a byproduct

sum of all individual supplies in the market

the ability and willingness to provide a particular good/service at a given price at a given moment in time

the difference between the price the consumer is willing to pay and the price they actually pay

the difference between the price the producer is willing to charge and the price they actually charge

the demand for one good is linked to the demand for a related good

when price is set too low so demand is greater than supply

when price is set too high so supply is greater than demand

where demand and supply interact; the collection of many sub-markets

negative XED; if good B becomes more expensive, demand for good A falls

the responsiveness of demand of one good (A) to a change in price of another good (B), calculated by: % change in QD of A divided by % change in P of B

how responsive demand or supply is to a change in price

the responsiveness of demand to a change in income, calculated by: % change in QD divided by % change in income

YED < 0; goods which see a fall in demand as income increases

YED > 1; an increase in incomes causes an even bigger increase in demand

YED > 0; demand increases as income increases

PED/PES = infinity; quantity demanded/supplied falls to 0 when price changes

PED/PES = 0; quantity demanded/supplied does not change when price changes

when PED/PES > 1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied

the responsiveness of demand to a change in price, calculated by: % change in QD divided by % change in P

the responsive of supply to a change in price, calculated by: % change in QS divided by % change in P

when PED/PES < 1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied

positive XED; if good B becomes more expensive, demand for good A rises

XED = 0; if the price of good B changes, it has no impact on the demand for good A

the extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping

the effect of an additional action

the cost or benefit a third party receives from an economic transaction outside of the market mechanism

the extra benefit to a third party not involved in the economic activity, per unit consumed

the extra cost to a third party not involved in the economic activity, per unit consumed, expressed by: marginal social cost - marginal private cost.

the extra benefit to the individual per unit consumed

the extra cost to the individual per unit consumed

the extra benefit to society per unit consumed, expressed by: marginal external benefit + marginal private benefit

the extra cost to society per unit consumed, expressed by: marginal external cost + marginal private cost

when the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources

where the social costs of consuming a good are greater than the private costs of consuming the good

where the social costs of producing a good are greater than the private costs of producing the good

where the social benefits of consuming a good are larger than the private benefits of consuming that good

where the social benefits of producing a good are larger than the private benefits of producing that good

where one party has more information than the other, leading to market failure

goods with negative externalities

when an economic agent lacks the information needed to make a rational, informed decision

goods with positive externalities

where individuals make decisions in their own best interests knowing there are potential risks for others

people who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit

a characteristic of public goods; one person's use of the good does not prevent someone else from using it

a characteristic of public goods; someone cannot be prevented from using the good

a characteristic of public goods; people cannot choose not to consume the good

goods that are rivalrous and excludable

goods that are non-excludable, non-rivalrous, non-rejectable and have zero marginal cost

goods which aren't perfectly non-rivalrous/non-excludable but aren't perfectly rivalrous/excludable

when the government provides public goods or merit goods which are underprovided in the free market.

the introduction of both a maximum and minimum price in the market to prevent large fluctuations in prices

government action to increase competition in markets

when government intervention leads to a net welfare loss in society

taxes on expenditure which increase production costs and lead to a fall in supply

when the government intervenes to provide information to correct market failure

a ceiling price which a firm cannot charge above

a floor price which a firm cannot charge below

when the government and the private sector work together to build and operate projects

laws to address market failure and promote competition between firms

government payments to a producer to lower their costs of production and encourage them to produce more

licenses which allow businesses to pollute up to a certain amount; the government controls the number of licenses and so can control the amount of pollution; businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute

the merger of firms with no common connection

when firms take responsibility for consequences on the environment and behave more ethically

when firms grow by expanding their production through increasing output, widening their customer base, developing a new product or diversifying their range