CAPE Economics Unit 1 key terms

The basic economic problem that resources are limited while human wants are unlimited, so choices must be made about what to produce, how to produce it and for whom.

The value of the next best alternative forgone when a choice is made. It is measured in terms of the goods or services given up, not in money alone.

A curve showing the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed, given constant technology.

The resources used to produce goods and services: land, labour, capital and entrepreneurship. Each earns a reward known as rent, wages, interest and profit respectively.

A statement about what is or what will be, which can be tested against evidence and shown to be true or false. It is free of value judgements.

A statement about what ought to be, based on opinion or value judgement. It cannot be proved or disproved by facts alone.

A Latin phrase meaning 'all other things being equal'. It is used to isolate the effect of one variable by assuming all other influences stay constant.

The quantity of a good or service that consumers are willing and able to buy at a given price over a given period, other things being equal.

The principle that, ceteris paribus, as the price of a good rises the quantity demanded falls, and as price falls quantity demanded rises, giving a downward-sloping demand curve.

The quantity of a good or service that producers are willing and able to offer for sale at a given price over a given period, other things being equal.

The principle that, ceteris paribus, as the price of a good rises the quantity supplied rises, and as price falls quantity supplied falls, giving an upward-sloping supply curve.

The price at which the quantity demanded equals the quantity supplied, so there is no shortage or surplus and no tendency for price to change.

A situation where quantity demanded does not equal quantity supplied, creating either a shortage (excess demand) or a surplus (excess supply) that pushes price toward equilibrium.

A measure of how responsive quantity demanded is to a change in price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

A measure of how responsive quantity demanded is to a change in consumer income, calculated as the percentage change in quantity demanded divided by the percentage change in income.

A measure of how responsive the quantity demanded of one good is to a change in the price of another good, showing whether the goods are substitutes or complements.

A measure of how responsive quantity supplied is to a change in price, calculated as the percentage change in quantity supplied divided by the percentage change in price.

A good whose demand rises when consumer income rises, so that it has a positive income elasticity of demand. Most goods are normal goods.

A good whose demand falls when consumer income rises, so that it has a negative income elasticity of demand. Examples include cheaper staple foods.

Goods that can replace each other in use, so that a rise in the price of one increases demand for the other, giving a positive cross elasticity of demand.

Goods that are used together, so that a rise in the price of one reduces demand for the other, giving a negative cross elasticity of demand.

The system in a free market where changes in price, driven by shifts in demand and supply, allocate scarce resources and signal information to buyers and sellers.

The difference between the maximum price a consumer is willing to pay for a good and the price actually paid, shown as the area below the demand curve and above price.

The difference between the price a producer actually receives and the minimum price at which they would be willing to supply, shown as the area above the supply curve and below price.

A market structure with many small buyers and sellers, identical products, free entry and exit, and perfect information, so that firms are price takers earning only normal profit in the long run.

A market structure with a single seller of a product with no close substitutes, protected by high barriers to entry, giving the firm significant price-setting power.

A market structure dominated by a few large firms whose decisions are interdependent, often characterised by non-price competition and the risk of collusion.

A market structure with many firms selling differentiated products, free entry and exit, and some price-setting power, with firms earning only normal profit in the long run.

Obstacles that make it difficult or costly for new firms to enter a market, such as economies of scale, patents, licences and control of essential resources.

An agreement between rival firms, often secret, to fix prices, share markets or limit output in order to raise profits and reduce competition, usually illegal.

A formal group of independent firms that agree to coordinate prices, output or market share so as to act like a single monopolist and maximise joint profits.

The process of making a product appear distinct from rivals through branding, quality, design or location, giving the firm some control over its price.

The minimum return needed to keep a firm in an industry, occurring where total revenue equals total cost including the opportunity cost of the entrepreneur's resources.

Profit earned above the minimum needed to keep a firm in the industry, occurring where total revenue exceeds total cost including normal profit, and attracting new entrants.

A situation in which the free market, left alone, fails to allocate resources efficiently, so that social welfare is not maximised, for example through externalities or market power.

A cost or benefit arising from production or consumption that falls on third parties not involved in the transaction, and which is not reflected in the market price.

A good that is non-rival and non-excludable, meaning one person's use does not reduce availability to others and no one can be prevented from using it.

A good that society believes people should consume more of because it yields positive externalities or because consumers underestimate its private benefits.

A good whose consumption creates negative externalities or harms consumers who underestimate the costs, so society believes consumption should be reduced.

A tax set equal to the marginal external cost of an activity, designed to internalise a negative externality and bring output closer to the socially efficient level.

A government-issued licence allowing a firm to emit a set amount of pollution, which can be bought and sold so that emissions are reduced at least cost.

The extra revenue a firm earns from employing one more unit of a factor, equal to marginal product multiplied by the price of the output.

The additional cost to a firm of employing one more unit of a factor of production. Under perfect competition it equals the factor price.

Demand for a factor of production that arises from the demand for the goods and services it helps to produce, rather than from the factor itself.

The rewards paid to owners of factors of production: rent for land, wages for labour, interest for capital and profit for entrepreneurship.

The process by which wage rates are set through the interaction of demand for and supply of labour, influenced by unions, government and employer power.

A market situation in which there is a single buyer of a good, service or factor of production, giving that buyer power to push the price below the competitive level.