Edexcel A-Level Economics: Theme 1 - Markets and Market Failure

Economic Concepts

• Ad valorem tax: An indirect tax imposed on a good where the value of the tax is dependent on the value of the good.
• Asymmetric information: A situation where one party has more information than the other, leading to market failure.

Factors of Production

• Capital: One of the four factors of production; goods which can be used in the production process.
• Capital goods: Goods produced in order to aid production of consumer goods in the future.
• Enterprise: One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.

Market Concepts

• Command economy: An economy where all factors of production are allocated by the state, deciding what, how, and for whom to produce goods.
• Complementary goods: Goods that are used together, where an increase in the price of one good leads to a decrease in demand for the other good.
• Consumer goods: Goods bought and demanded by households and individuals.
• Consumer surplus: The difference between the price the consumer is willing to pay and the price they actually pay.
• Cross elasticity of demand (XED): The responsiveness of demand for one good to a change in the price of another good.

Demand and Supply

• Demand: The quantity of a good or service that consumers are able and willing to buy at a given price at a given moment in time.
• Diminishing marginal utility: The extra benefit gained from consumption of a good generally declines as extra units are consumed, explaining why the demand curve is downward sloping.
• Equilibrium price/quantity: Where demand equals supply, so there are no more market forces bringing about change to price or quantity sold.

Market Failure

• Externalities: The cost or benefit a third party receives from an economic transaction outside of the market mechanism.
• External cost/benefit: The cost or benefit to a third party not involved in the economic activity, the difference between social cost/benefit and private cost/benefit.

Market Structure

• Free market: An economy where the market mechanism allocates resources, so consumers and producers make decisions about what is produced, how to produce it, and for whom.

Other Concepts

• Ceteris paribus: All other things remaining the same.
• Division of labour: When labour becomes specialized during the production process to do a specific task in cooperation with other workers.
• Economic problem: The problem of scarcity, where wants are unlimited, but resources are finite, so choices have to be made.
• Efficiency: When resources are allocated optimally, so every consumer benefits and waste is minimized.
• Excess demand: When price is set too low, so demand is greater than supply.
• Excess supply: When price is set too high, so supply is greater than demand.
• Free rider principle: 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.
• Government failure: When government intervention leads to a net welfare loss in society.
• Habitual behaviour: A cause of irrational behaviour, when consumers are in the habit of making certain decisions.
• Incidence of tax: The tax burden on the taxpayer.
• Indirect tax: Taxes levied on goods and services, which increase production and lead to a fall in supply, although this is often partially, or fully, passed onto consumers.### Economic Concepts

Inferior Goods

• An increase in income leads to a decrease in demand
• Example: buying inferior goods like cheap bread when income increases

Market Failure

• The free market fails to allocate resources in the best interest of society
• Results in an inefficient allocation of scarce resources

Market Forces

• Forces that act to reduce prices when there is excess supply and increase prices when there is excess demand in a free market
• Help to allocate resources efficiently

Minimum Price

• A floor price that a firm cannot charge below
• May be set by governments to protect consumers or producers

Mixed Economy

• A system that combines elements of capitalism and socialism
• Both the free market and the government allocate resources

Model

• A hypothesis that can be tested and proven or disproven by evidence
• Tends to be mathematical, whereas a theory is in words

Negative Externalities of Production

• The social costs of producing a good are greater than the private costs
• Example: pollution caused by a factory

Non-Excludability

• A characteristic of public goods, where someone cannot be prevented from using the good
• Example: national defense, where everyone benefits regardless of payment

Non-Renewable Resources

• Resources that cannot be replenished or replaced at a level equal to consumption
• Example: fossil fuels, minerals, and metals

Non-Rivalry

• A characteristic of public goods, where one person's use of the good does not prevent someone else from using it
• Example: a public park, where many people can use it simultaneously

Demand and Supply

Normal Goods

• Demand increases as income increases
• Example: buying more expensive bread when income increases

Price Elasticity of Demand

• The responsiveness of demand to a change in price
• Can be measured using the PED formula

Price Elasticity of Supply

• The responsiveness of supply to a change in price
• Can be measured using the PES formula

Perfectly Price Elastic Good

• PED/PES = Infinity; quantity demanded/supplied falls to 0 when price changes
• Example: a perfectly competitive market with many substitutes

Perfectly Price Inelastic Good

• PED/PES = 0; quantity demanded/supplied does not change when price changes
• Example: a life-saving medicine with no substitutes

Possibility Production Frontier (PPF)

• Depicts the maximum productive potential of an economy, using a combination of two goods or services
• Shows the opportunity cost of producing one good over another