Edexcel (A) Economics A-level

Theme 1: Introduction to Markets and

Market Failure
Definitions

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Key word Definition

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

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

Ceteris paribus All other things remaining the same

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

Complementary goods Negative XED; if good B becomes more expensive, demand for
good A falls

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 The responsiveness of demand for one good (A) to a change in
demand (XED) price of another good (B)
%change in QD of A
%change in P of B

Demand The quantity of a good/service that consumers are able and willing
to buy at a given price at a given moment of time

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

Division of labour When labour becomes specialised during the production process so
do a specific task in cooperation with other workers

Economic problem The problem of scarcity; 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 minimised

Enterprise One of the four factors of production; the willingness and ability to
take risks and combine the three other factors of production

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Equilibrium Where demand equals supply so there are no more market forces
price/quantity bringing about change to price or quantity demanded

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

Externalities The cost or benefit a third party receives from an economic

transaction outside of the market mechanism

External cost/benefit The cost/benefit to a third party not involved in the economic
activity; the difference between social cost/benefit and private
cost/benefit

Free market An economy where the market mechanism allocates resources so

consumers and producers make decisions about what is produced,
how to produce and for whom

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

Income elasticity of The responsiveness of demand to a change in income

demand (YED) %change in QD
%change in Y

Indirect tax Taxes on expenditure which increase production costs and lead to a
fall in supply

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

Information gap When an economic agent lacks the information needed to make a
rational, informed decision

Information provision When the government intervenes to provide information to correct

market failure

Labour One of the four factors of production; human capital

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

Luxury goods YED>1; an increase in incomes causes an even bigger increase in

demand

Market failure When the free market fails to allocate resources to the best interest

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 of society, so there is an inefficient allocation of scarce resources

Market forces Forces in free markets which act to reduce prices when there is
excess supply and increase them when there is excess demand

Maximum price A ceiling price which a firm cannot charge above

Minimum price A floor price which a firm cannot charge below

Mixed economy Both the free market mechanism and the government allocate
resources

Model A hypothesis which can be proven or tested by evidence; it tends to

be mathematical whilst a theory is in words

Negative externalities of Where the social costs of producing a good are greater than the
production private costs of producing the good

Non-excludable A characteristic of public goods; someone cannot be prevented from

using the good

Non-renewable Resources which cannot be readily replenished or replaced at a

resources level equal to consumption; the stock level decreases over time as
they are consumed

Non-rivalry A characteristic of public goods; one person’s use of the good does
not prevent someone else from using it

Normal goods YED>0; demand increases as income increases

Normative statement Subjective statements based on value judgements and opinions;

cannot be proven or disproven

Opportunity cost The value of the next best alternative forgone

Perfectly price elastic PED/PES=Infinity; quantity demanded/supplied falls to 0 when price

good changes

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

Positive externalities of Where the social benefits of consuming a good are larger than the
consumption private benefits of consuming that good

Positive statement Objective statements which can be tested with factual evidence to
be proven or disproven

Possibility production Depicts the maximum productive potential of an economy, using a

frontier (PPF) combination of two goods or services, when resources are fully and
efficiently employed

Price elasticity of The responsiveness of demand to a change in price

demand (PED) %change in QD

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 %change in P

Price elasticity of The responsive of supply to a change in price

supply (PES) %change in QD
%change in P

Price mechanism The system of resource allocation based on the free market
movement of prices, determined by the demand and supply curves

Private cost/benefit The cost/benefit to the individual participating in the economic

activity

Private goods Goods that are rivalry and excludable

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

Public goods Goods that are non-excludable and non-rivalry

Rationality Decision-making that leads to economic agents maximising their

utility

Regulation Laws to address market failure and promote competition between

firms

Relatively price elastic When PED/PES>1; demand/supply is relatively responsive to a

good change in price so a small change in price leads to a large change
in quantity demanded/supplied

Relatively price inelastic When PED/PES<1; demand/supply is relatively unresponsive to a

good change in price so a large change in price leads to a large change
in quantity demanded/supplied

Renewable resources Resources which can be replenished, so the stock of resources can
be maintained over a period of time

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

Social cost/benefit The cost/benefit to society as a whole due to the economic activity

Social optimum position Where social costs equals social benefits; the amount which should
be produced/consumed in order to maximise social welfare

Social science The study of societies and human behaviour

Specialisation 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

Specific tax A tax imposed on a good where the value of the tax is dependent on
the quantity that is bought

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State provision of Through taxation, the government provides public goods or merit
goods goods which are underprovided in the free market

Subsidy Government payments to a producer to lower their costs of

production and encourage them to produce more

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

Supply The ability and willingness to provide a particular good/service at a

given price at a given moment in time

Symmetric information Where buyers and sellers both have access to the same information

Trade pollution permits 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

Unitary price elastic When PED/PES=1; a change in price leads to a change in output by
good the same proportion

Utility The satisfaction derived from consuming a good

Weakness at A cause of irrational behaviour; when consumers are bad at making

computation calculations, estimating probabilities and working out future
benefits/costs

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