AS-LEVEL & A-LEVEL AQA 2025 ECONOMICS

AS-LEVEL & A-LEVEL AQA 2025 ECONOMICS The Law of Demand - ANSWER-consumers will buy more of a good when its price is lower and less when its price is higher The Law of Supply - ANSWER-producers offer more of a good as its price increases and less as its price falls Equilibrium Price - ANSWER-the price at which the quantity demanded equals the quantity supplied Excess Supply - ANSWER-the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price Surplus - ANSWER-A situation in which quantity supplied is greater than quantity demanded Excess Demand - ANSWER-The situation that exists when demand is greater than supply. Deficit - ANSWER-A situation in which quantity supplied is less than the quantity demanded Economics - ANSWER-A social science that studies how people seek to satisfy their needs and wants by making choices Price Elasticity of Demand - ANSWER-a measure of how much the quantity demanded of a good responds to a change in the price of that good. Income Elasticity of Demand - ANSWER-a measure of the responsiveness of the quantity demanded to changes in income. Cross Price Elasticity of Demand - ANSWER-measures the response of demand for one good to changes in the price of another good PED Formula - ANSWER-% change in quantity demanded / % change in price YED Formula - ANSWER-% change in quantity demanded / % change in income XED Formula - ANSWER-% change in quantity demanded of good X / % change in price of good Y Luxury Good - ANSWER-a good with an income elasticity greater than 1 for which demand rises by a greater amount than the rise in income. Normal Good - ANSWER-a good for which the demand increases as income rises and decreases as income falls Veblen Good - ANSWER-A good with a positively sloped demand curve. As price increases people buy more of these goods to demonstrate their social status. Inferior Good - ANSWER-a good for which, other things being equal, an increase in income leads to a decrease in demand Substitute Good - ANSWER-A good that can be used in place of another good Complementary Good - ANSWER-Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely). Positive Economic Statement - ANSWER-A statement that can be proved or disproved by reference to facts Normative Economic Statement - ANSWER-A statement that reflects on opinion, which cannot be proved or disproved by reference to the facts. Production Possibilities Frontier (PPF) - ANSWER-a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available Opportunity Cost - ANSWER-The cost of the next best alternative forgone. Scarcity - ANSWER-A situation in which unlimited wants exceed the limited resources available to fulfill those wants The Basic Economic Problem - ANSWER-Resources have to be allocated between competing uses because wants are infinite whilst resources are scarce Value Judgement - ANSWER-An opinion based on a person's individual values and beliefs Productive Efficiency - ANSWER-Goods are being produced at lowest possible cost. To be productively efficient means the economy must be producing on its production possibility frontier. Allocative Efficiency - ANSWER-When the mix of goods being produced represents the mix that society most desires. A more precise definition of is at an output level where the price equals the Marginal Cost (MC) of production. This is because the price that consumers are willing to pay is equivalent to the marginal utility that they get Economic Good - ANSWER-Things people want that are scarce - there is an opportunity cost involved. The Factors of Production - ANSWER-Land, labour, capital and enterprise. Land - ANSWER-Natural resources that are used to make goods and services Capital - ANSWER-The equipment and structures used to produce goods and services Enterprise - ANSWER-The skill and risk taking abilities of an individual that are needed to make a new idea work Unlimited Wants - ANSWER-The side of human nature that wants an endless number of things, yet has a limited amount of resources to achieve these wants. Limited Resources - ANSWER-The condition of there not being enough resources to fulfill all wants and needs Resource Allocation - ANSWER-Assigning available resources, or factors of production, to specific uses chosen among many possible and competing alternatives. It involves answering "What to produce" and "How to produce". Trade-Offs - ANSWER-Alternative that must be given up when one choice is made rather than another Productively Inefficient - ANSWER-Points inside of the PPF curve showing that a firm is not producing at its lowest unit cost. Extension of Demand - ANSWER-When quantity demanded for a good increases because its price falls; it is shown by a movement down the demand curve Contraction of Demand - ANSWER-When quantity demanded for a good falls because its price rises; it is shown by a movement up the demand curve Shift in Demand - ANSWER-When a change in some economic factor (other than price) causes a different quantity to be demanded at every price Factors of Demand - ANSWER-Population, Income, Tastes and Preferences, Complementary Goods, Substitutes Factors of Supply - ANSWER-...ROTTEN Resources: cost and availability Other goods' prices Taxes, subsidies, gov regulations Technology (productivity) Expectations of the producer Number of firms in the industry Elasticity of Supply - ANSWER-a measure of how responsive producers are to price changes in the marketplace Total Revenue - ANSWER-Price x Quantity Disequilibrium - ANSWER-Describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market Joint Demand - ANSWER-Joint demand refers to the relationship between two or more commodities or services when they are demanded together. There is joint demand for cars and petrol, pens and ink, tea and sugar, etc. Jointly demanded goods are complementary. Composite Demand - ANSWER-Demand for a good which has more than one use e.g. land for housing or a factory. Derived Demand - ANSWER-Derived demand occurs when there is a demand for a good or factor of production resulting from demand for an intermediate good or service. The rise in demand for mobile phones and other devices has led to a strong rise in demand for lithium. Lithium is used in the batteries. Joint Supply - ANSWER-Refers to the production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other. Example: Butter and Skimmed milk are both produced from whole milk, producing more of one means to produce more of the other. Productivity - ANSWER-The value of a particular product compared to the amount of labour needed to make it. Production - ANSWER-The process of creating goods and services Labour Productivity - ANSWER-Output per time period / number of employees Specialisation of labour - ANSWER-When a worker becomes an expert in a particular profession or in a part of a production process. Division of Labour - ANSWER-The breaking down of the production process into small parts with each worker allocated to a specific task. Money as a medium of exchange - ANSWER-something that buyers will exchange with a seller when they want to purchase goods or services from the seller Short Run - ANSWER-The period of time during which at least one factor of production is fixed (usually capital) Long Run - ANSWER-The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant Fixed Cost - ANSWER-Costs that do not vary with the quantity of output produced Variable Cost - ANSWER-a cost that varies with changes in the level of output Total Costs - ANSWER-fixed costs + variable costs Average Costs - ANSWER-Total costs / output Long Run Average Cost Curve - ANSWER-a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed. The curve is assumed to be 'U' shaped, because of the impact of internal economies and diseconomies of scale. Economies of Scale - ANSWER-factors that cause a producer's average cost per unit to fall as output rises Diseconomies of Scale - ANSWER-the situation in which a firm's long-run average costs rise as the firm increases output Internal Economies of Scale - ANSWER-The cost benefits that an individual firm can enjoy when it expands. Purchasing Economies of Scale - ANSWER-A reduction in unit costs as a result of buying in large quantities; these are sometimes called buying economies of scale. Managerial Economies of Scale - ANSWER-Reductions in average cost as a result of being able to employ specialist managers who are more productive Technical Economies of Scale - ANSWER-reductions in average costs of production due to the use of more advanced machinery. Financial Economies of Scale - ANSWER-A situation where large firms are able to borrow money on better terms than smaller firms which makes the cost of financing investment and therefore unit costs lower. Marketing Economies of Scale - ANSWER-A situation where larger firms are able to lower the unit cost of advertising and promotion perhaps through access to more effective marketing media. Risk Bearing Economies of Scale - ANSWER-The ability of large firms to spread the costs of uncertainty over a wider range of activities and therefore reduce their unit cost. Examples of Diseconomies of Scale - ANSWER-Coordination & Control Communication Motivation External Economies of Scale - ANSWER-The cost benefits that all firms in the industry can enjoy when the industry expands Profit - ANSWER-total revenue minus total cost Product Differentiation - ANSWER-A positioning strategy that some firms use to distinguish their products from those of competitors Barriers to Entry - ANSWER-business practices or conditions that make it difficult for new firms to enter the market Barriers to Exit - ANSWER-Factors which make it difficult or impossible for firms to cease production and leave an industry Sunk Costs - ANSWER-Costs that have already been incurred and cannot be recovered Spectrum of Competition - ANSWER-A range of market structures with the two extremes of monopoly and perfect competition at each end. Somewhere in between lie all markets. Survival Objective - ANSWER-In some instances, profits, sales, and market share are less important objectives of the firm than mere survival Profit Maximisation - ANSWER-Occurs when a firms total sales revenue is furthest above total cost of production Profit Satisficing - ANSWER-Making just enough profit to satisfy the demands of business owners Shareholders - ANSWER-The owners of a company Stakeholders - ANSWER-Any individual or group who hold a vested interest in the activities of a business. Growth Objective - ANSWER-Aims to increase the product's market share. Perfectly Competitive Market - ANSWER-A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. Monopoly - ANSWER-A market in which there are many buyers but only one seller. Monopolistic Competition - ANSWER-A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products. It is characterised as having a downwards sloping demand curve. Pure Monopoly - ANSWER-the only supplier of a unique product with no close substitutes Monopoly Power - ANSWER-In the UK a firm is said to have monopoly power if it has more than 25% of the market share. For example, Tesco at 30% market share or Google 90% of search engine traffic. They seek to profit maximise and produce where MR=MC. Natural Monopoly - ANSWER-A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms e.g. water suppliers Oligopoly - ANSWER-A market structure in which a few large firms dominate a market Nth Firm Concentration Ratio - ANSWER-How much market share is held by the top N firms in the market. Characteristics of a Monopoly - ANSWER--A single producer -No close substitutes -Barriers to entry -Price setting powers Misallocation of Resources - ANSWER-Occurs when a good or service is not consumed by the person who values it the most, and typically results when a price ceiling creates an artificial shortage in the market. Competitive Market - ANSWER-A market in which there are many buyers and many sellers so that each has a negligible impact on the market price Invention - ANSWER-A new product, system, or process that has never existed before, created by study and experimentation. Innovation - ANSWER-Innovation is about putting a new idea or approach into action. Innovation is commonly described as 'the commercially successful exploitation of ideas'. Public Goods - ANSWER-Goods that are neither excludable nor rivalrous in consumption Private Goods - ANSWER-goods that are both excludable and rivalrous in consumption Quasi-Public Goods - ANSWER-A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an under-allocation of resources. Excludability - ANSWER-the situation in which anyone who does not pay for a good cannot consume it Rivalrous - ANSWER-A characteristic of a good according to which its consumption by one person reduces its availability for another person. The Free Rider Problem - ANSWER-when an individual cannot be excluded from consuming a good, and thus has no incentive to pay for its provision Missing Market - ANSWER-the absence of a market for a good or service, most commonly in the case of public goods and externalities Market Failure - ANSWER-a situation in which a market left on its own fails to allocate resources efficiently Rationing Function of Prices - ANSWER-The ability of market forces in competitive markets to equalise quantity demanded and quantity supplied and to eliminate shortages and surpluses via changes in prices. Incentive Function of Prices - ANSWER-Prices create incentives for people to alter their economic behaviour; for example, a higher price creates an incentive for firms to supply more of a good or service. Signalling Function of Price - ANSWER-Prices give signal to both producers and consumers. A rising price gives a signal to producers that they should increase their quantity supplied and signals to consumers that they should decrease the quantity demanded, and vice versa. Complete Market Failure - ANSWER-Where the free market fails to provide a product at all, i.e the case of public goods. Partial Market Failure - ANSWER-a market does function, but it delivers the 'wrong' quantity of a good or service, which results in resource mis-allocation Positive Externalities - ANSWER-benefits created by a public good that are shared by the primary consumer of the good and by society more generally Negative Externalities - ANSWER-a cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost Merit Goods - ANSWER-Goods that are held to be desirable for consumers, but which are under-provided by the market. Reasons for under-provision: Good may have positive externalities, or consumer ignorance about the benefits of the good. Demerit Goods - ANSWER-Goods that are thought to be harmful to consumers/society, eg cigarettes and addictive drugs. They are over-produced and consumed. Income Inequality - ANSWER-the unequal distribution of household or individual income across the various participants in an economy Wealth Inequality - ANSWER-The unequal distribution of assets within a population Private Costs - ANSWER-the costs of an economic activity directly borne by the immediate producer or consumer (excluding externalities) Social Costs - ANSWER-the full resource costs of an economic activity, including externalities. Private costs + external costs Private Benefits - ANSWER-The benefits directly accruing to those taking a particular action Social Benefits - ANSWER-External Benefits + Private Benefits. Imperfect Information - ANSWER-The absence of full knowledge concerning product characteristics, available prices, and so on. Asymmetric Information - ANSWER-a situation in which one party to an economic transaction has less information than the other party Government Failure - ANSWER-an inefficient allocation of resources caused by government intervention in the economy Progressive Taxation - ANSWER-the tax as a percentage of income increases as income increases Economic Inequality - ANSWER-Differences in the income/wealth of different households (rich, middle class and poor) Government Spending - ANSWER-Goods and services that government buys Public Expenditure - ANSWER-"Spending by central government and local authorities on providing goods and services, transfer payments and debt repayments." Subsidies - ANSWER-a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. Price Controls - ANSWER-government-imposed limits on the prices that producers may charge in the market State Provision - ANSWER-The government can provide public goods and merit goods directly to consumers free of charge in order to overcome market failure Regulation - ANSWER-the use of governmental authority to control or change some practice in the private sector Indirect Taxation - ANSWER-a tax imposed upon expenditure. A tax placed upon the selling price of a product, so it raises the firm's costs and shift the supply curve for the product vertically upwards by the amount of the tax. Causes of Government Failure - ANSWER-1) Distortion of Price Signals; 2) Unintended consequences; 3) Excessive administration costs; 4) Information gaps Law of Unintended Consequences - ANSWER-The actions of government, producer or consumers will always have effects that are unintended or unanticipated. Market Distortion - ANSWER-a situation where some incident has caused the market price to be either higher or lower than the price that would have been obtained in the presence of a perfectly competitive market Rational Economic Decision Making - ANSWER-The assumption in economics that all economic decision-makers act in their best self-interest, trying to maximize the satisfaction or benefit they receive from their economic-decisions; for example consumers try to maximise consumptions, firms try to maximise profit, workers try to secure the highest wage possible, etc Behavioural Economics - ANSWER-Branch of economics that studies the impact of psychological and social factors on economic decision making Economic Man - ANSWER-a person who is both self-interested and rational (this is the standard assumption within mainstream economics) Utility - ANSWER-the measurement of the the total satisfaction or "useful-ness" that a consumer receives from consuming a good or service. Marginal Utility (MU) - ANSWER-the additional satisfaction gained by the consumption or use of one more unit of a good or service Law of Diminishing Marginal Utility - ANSWER-The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases. Utility Maximisation - ANSWER-The proposal that people make decisions by selecting the option that has the greatest utility. Bounded Rationality - ANSWER-A set of boundaries or constraints that tend to complicate the rational decision-making process Bounded self-control - ANSWER-limited self-control in which individuals lack the self-control to act in what they see as their self-interest Rules of Thumb - ANSWER-rules that tell us what we should do based on what has usually worked best in similar situations. This might mean that decisions do not produce optimal choices. Anchoring - ANSWER-the tendency, in making judgements, to rely on the first piece of information encountered or information that comes most quickly to mind Social Norms - ANSWER-A group's expectations regarding what is appropriate and acceptable for its members' attitudes and behaviours. Choice Architecture - ANSWER-Term describing how decisions can be influenced by how the choices are presented Framing - ANSWER-the way an issue is posed; how an issue is framed can significantly affect decisions and judgments. Nudges - ANSWER-factors which encourage people to think and act in particular ways. Nudges try to shift group and individual behaviour in ways which comply with desirable social norms Restricted Choice - ANSWER-Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. If there are too many choices, people may make a poorly thought-out decision or not make any decision Mandated Choice - ANSWER-People are required by law to make a decision Heuristics - ANSWER-Mental shortcuts or "rules of thumb" that often lead to a solution (but not always). The Law of Diminishing Returns - ANSWER-the principle that, at some point, adding more of a variable input, such as labour, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline Return to Scale - ANSWER-the relationship between changes in the scale of production and the corresponding change in the amount of output Increasing returns to scale - ANSWER-when output increases more than in proportion to an increase in all inputs Constant Returns to Scale - ANSWER-when output increases directly in proportion to an increase in all inputs Decreasing Returns to Scale - ANSWER-when output increases less than in proportion to an increase in all inputs The L-Shaped Long Run Average Cost Curve - ANSWER-At the start as output grows through an increase in plant size and other variable factors, cost per unit falls rapidly due to economies of scale. The LRAC does not rise; it may either remain constant or it may even go on falling slightly. At a very large scale of production, the managerial cost per unit of output may rise, but the technical or production economies more than offset the managerial diseconomies so that the total LRAC does not rise or may even fall, though at a very small rate. Average Cost Curve - ANSWER-This curve is u-shaped with firms taking advantage of economies of scale which explains the initial downward sloping of the curve before reaching the minimum efficient scale and then experiencing diseconomies which cause the curve to rise once more. Minimum Efficient Scale - ANSWER-The lowest rate of output at which a firm takes full advantage of economies of scale Supernormal Profit - ANSWER-refers to the extra profit over normal profit. If the AC curve is below the AR (demand) curve then a firm can earn supernormal profit. Normal Profit - ANSWER-Normal profit is an economic condition that occurs when the difference between a firm's total revenue and total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market. X-inefficiency - ANSWER-occurs when a firm produces output at a higher cost than is necessary to produce it Collusion - ANSWER-secret agreement or cooperation Collusive Oligopoly - ANSWER-Where a few firms in an oligopoly act together to avoid competition by resorting to agreements to fix prices or output. 3rd Degree Price Discrimination - ANSWER-charging different prices to different groups of consumers with varying elasticities Price Discrimination - ANSWER-the business practice of selling the same good at different prices to different customers Revenue Maximisation - ANSWER-An alternative goal of firms (as opposed to profit maximization). This occurs when marginal revenue is equal to zero (MR = 0). Sales Maximisation - ANSWER-When firms choose to produce at an output where AC = AR Creative Destruction - ANSWER-the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies Divorce of Ownership and Control - ANSWER-When a public limited company is owned by shareholders yet controlled by directors Non-Price Competition - ANSWER-a way to attract customers through style, service, or location, but not a lower price Non-Collusive Oligopoly - ANSWER-Where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable. Kinked Demand Curve - ANSWER-the demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase Cartels - ANSWER-an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition. Price War - ANSWER-successive price cutting by competitors to increase or maintain their unit sales or market share Price Leadership - ANSWER-a form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change interdependence - ANSWER-the dependence of two or more people, businesses or things on each other. legal monopoly - ANSWER-A firm with 25% or more of the market share Hit and Run Competition - ANSWER-When firms can enter a market at low cost attracted by high profits and then leave the market at low cost when profits fall Contestable Market - ANSWER-a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants Static Efficiency - ANSWER-the most efficient combination of existing resources at a given point in time Dynamic Efficiency - ANSWER-Dynamic efficiency is concerned with the productive efficiency of a firm over a period of time. A firm which is dynamically efficient will be reducing its cost curves by implementing new production processes. Dynamic efficiency will enable a reduction in both SRAC and LRAC. Consumer Surplus - ANSWER-the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays Producer Surplus - ANSWER-the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives Deadweight Loss of Monopoly - ANSWER-The consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost Marginal Physical Product of Labour - ANSWER-The addition to a firm's total output brought by employing one more worker. Marginal Revenue Product - ANSWER-the extra revenue the firm gets from hiring an additional unit of a factor of production Labour Demand Curve - ANSWER-The number of workers firms are willing and able to employ at a given wage rate. Monopsony - ANSWER-a market structure in which there is only a single buyer of a good, service, or resource Monopsony Characteristics - ANSWER--One firm hiring workers -Workers are relatively immobile -Firm is wage maker Elasticity of Demand for Labour - ANSWER-Measures the change in demand for labour when the wage level changes. % change in quantity demanded of labour / % change wage rate Labour Supply Curve - ANSWER-A curve that shows the quantity of labour supplied at different wage rates. Its shape depends on how households react to changes in the wage rate Wage Determination - ANSWER-The wage rate in a labour market is determined by the interaction of supply and demand for labour. Perfectly Competitive Labor Market - ANSWER--Many small firms are hiring workers -Many workers with identical skills -Wage is constant -Workers are wage takers Trade Union - ANSWER-A trade body who represent the interests of their members by seeking to promote better working conditions and higher wages through negotiations with employers. Wage Discrimination - ANSWER-people getting paid less based on gender/race/age e.g.: wage gap for women National Minimum Wage - ANSWER-A pay floor introduced by the government, which sets a wage level below which producers cannot legally go The Lorenz Curve - ANSWER-A Lorenz curve shows the % of income earned by a given % of the population. A 'perfect' income distribution would be one where each % received the same % of income. The further the Lorenz curve is from the 45 degree line, the less equal is the distribution of income. Gini Coefficient - ANSWER-A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income. Relative Poverty - ANSWER-The condition in which people lack the minimum amount of income needed in order to maintain the average standard of living in the society in which they live. Absolute Poverty - ANSWER-A condition where household income is below a necessary level to maintain basic living standards (food, shelter, housing). Income - ANSWER-Income is a flow. It measures the receipt of money per period of time ( e.g. £200 a week) Wealth - ANSWER-Wealth is a Stock. It measures the value of a person's wealth at a given point in time including all of their assets minus any debts. The Tragedy of the Commons - ANSWER-The tendency of a shared, limited resource to become depleted because people act from self-interest for short-term gain Privatisation - ANSWER-The sale of public sector organisations to the private sector Nationalisation - ANSWER-The transfer of ownership of a firm from the private to public sector Pollution Permits - ANSWER-involve giving firms the legal right to pollute a certain amount Regulatory Capture - ANSWER-The situation that occurs when a governmental regulatory agency ends up being controlled by the industry that it is supposed to be regulating. Deregulation - ANSWER-The lifting of government restrictions on business, industry, and professional activities. State-Owned Enterprises - ANSWER-Organisations wholly owned by the government. - ANSWER-