List of Most Important Definitions For Unit 1: Markets-How They Work and Why They Fail?

This will be a brief but useful guide for all Edexcel candidates sitting for Economics paper Unit 1 this January

(1) Production possibility frontier (PPF). A curve that shows the combination of two goods that can be produced in an economy shall all resources are fully & efficiently employed

(2) Opportunity cost. The value of next best alternative forgone

(3) Specialisation. Where a production process is broken into many stages each done by a small group of people or an individual

(4) Free market economy. An economy where resources are all privately owned & price mechanism will act to allocate scarce resources

(5) Command economy. An economy where all resources are publicly owned & state government will intervene to allocate scarce resources

(6) Mixed economy. An economy where resources are owned & allocated by both private sector & government

(7) Positive statement. Statement that can be testified true or false by referring to facts

(8) Normative statement. A form of value judgement & cannot be proven true or false

(9) Substitutes. Goods that can be used in place of another

(10) Complements. Goods that are jointly used with another

(11) Consumer surplus. The difference between what the consumers are willing to pay & what they are actually paying

(12) Producer surplus. The difference between the actual price a producer receives for its good & the lower price it is willing to accept

(13) Price elasticity of demand (PED). Measures the responsiveness of demand for a good to a change in price

(14) Cross elasticity of demand (XED). Measures the responsiveness of demand for a good (say Good X) to a change in the price of another good (say Good Y)

(15) Income elasticity of demand (YED). Measures the responsiveness of demand for a good to a change in income

(16) Price elasticity of supply (PES). Measures the responsiveness of supply of a good to a change in price

(17) Indirect tax. Levied by the government onto a particular good or service to discourage its production or consumption/ to raise its production costs

(18) Subsidies. Grants given by the government to encourage the production or consumption of a particular good or service/ to lower the production costs

(19) Incidence of tax. Means upon who the tax fall onto

(20) Minimum guaranteed price. Price floor set by government onto agriculture produce in order to stabilise prices and farmers’ income

(21) National minimum wage. Price floor on wages set by government, below which is illegal for employers to hire workers

(22) Private costs. Costs directly incurred by an individual consumer or producer when they engaged in an economic activity

(23) External costs. Costs incurred by a third party which is not part of an economic transaction/ divergence between social cost and private cost

(24) Private benefits. Benefits directly gained by an individual consumer or producer when they engaged in an economic activity

(25) External benefit. Benefits gained by a third party which is not part of an economic transaction/ divergence between social benefits and private benefits

(26) Public goods. Must have two characteristics, non-rivalry & non-excludability. Non-rivalry means consumption of a good by an individual will not reduce the amount available for others to consume. Non-excludability means once the good is provided, no one can be excluded from benefiting it

(27) Free rider. Someone who receives the benefits that others have paid for without making any contribution themselves

(28) Government failure. When the government intervention into an economic activity leads to net loss in economic welfare

(29) Market failure. When price mechanism fails to allocate resources efficiently

(30) Property rights. Legal entitlement to use & sell a property, plus a legal rights that others have or do not have over the property

(31) Price mechanism. The interaction between demand and supply to resolve the issue of scarcity and infinite wants

(32) Asymmetric information. Where one party, (usually the sellers) is better informed than the other (buyers)