Key Terms in the EdExcel Economics Papers for 2023

Here is a summary of key terms used in the mark schemes for Edexcel economics in 2023.

Paper 1 (Micro)

Allocative Efficiency

The state of an economy where resources are allocated in a way that maximizes the satisfaction of consumer preferences. This occurs when the production of goods and services matches consumer demands, typically resulting in an optimal distribution of resources.

Command Economy

An economic system where the government controls the production, distribution, and prices of goods and services. In this system, central authorities make the major economic decisions rather than allowing market forces to determine these factors.

Consumer Sovereignty

The concept that consumer preferences dictate the production of goods and services in a market. In a free-market economy, businesses respond to consumer demands to maximize profits, reflecting the power of consumers in influencing market outcomes.

Consumer Surplus

The difference between the total amount consumers are willing to pay for a good or service and the total amount they actually pay. It represents the additional benefit consumers receive from purchasing a product at a market price lower than their maximum willingness to pay.

Dynamic Efficiency

A situation where the market is continually improving its efficiency over time through innovation, investment, and improvements in production processes. It often leads to better quality goods and services, cost reductions, and enhanced productivity.

Inefficiency

A state where resources are not being used in the best possible way, leading to waste, higher costs, or lower output. Inefficiency can result from various factors, including poor management, regulatory constraints, or monopolistic practices.

Marginal Cost (MC)

The cost of producing one additional unit of a good or service. This concept is essential in determining the optimal level of production for a firm, where marginal cost equals marginal revenue to maximize profits.

Marginal Revenue (MR)

The additional income generated from selling one more unit of a good or service. It is crucial for firms in decision-making to ensure they are producing the optimal quantity of goods to maximize their profits.

Monopsony

A market condition where there is only one buyer and many sellers. This gives the buyer significant power over pricing and employment conditions. In such a market, wages or prices may be suppressed due to the lack of alternative buyers.

Oligopoly

A market structure dominated by a small number of large firms. These firms have significant market power and often engage in non-price competition, such as advertising and product differentiation, while avoiding price wars.

Price Elasticity of Demand (PED)

A measure of how much the quantity demanded of a good responds to a change in its price. High elasticity means consumers are sensitive to price changes, while low elasticity indicates that changes in price have little effect on the quantity demanded.

Price Discrimination

The practice of charging different prices to different groups of consumers for the same good or service, based on their willingness or ability to pay. This strategy maximizes revenue by capturing consumer surplus.

Private Sector

The part of the economy that is controlled by private individuals or companies rather than the government. It includes businesses that operate for profit in competitive markets.

Producer Surplus

The difference between the amount producers are willing to accept for a good or service and the actual amount they receive. It represents the benefit producers gain from selling at a market price higher than their minimum acceptable price.

Productive Efficiency

The condition in which a firm or economy is producing at the lowest possible cost, using all resources efficiently. This occurs when goods are produced at the minimum average total cost.

Public Sector

The portion of the economy composed of government-owned institutions and enterprises. It includes entities that provide services funded by taxation, such as healthcare, education, and public safety.

Spare Capacity

Refers to unused resources or underutilized production capabilities within an economy or firm. It indicates that the economy or firm could produce more output without needing additional resources.

Substitutes

Goods or services that can replace each other in consumption. When the price of one substitute increases, the demand for the other typically increases as consumers switch to the cheaper alternative.

Wage Determination

The process by which wages are established for workers in a labor market. This can be influenced by factors such as demand for labor, the level of skills required, and the bargaining power of employees or employers.

X-Inefficiency

Refers to the inefficiency that occurs when a firm lacks competitive pressure, leading to higher costs and less effort to minimize expenses. This often happens in monopolies or other non-competitive markets where firms do not need to be as efficient to remain profitable.

Paper 2: Macro

Aggregate Demand (AD)

The total demand for goods and services within an economy at a given overall price level and in a given time period. AD consists of consumption, investment, government spending, and net exports.

Aggregate Supply (AS)

The total quantity of goods and services that producers in an economy are willing and able to supply at a given overall price level in a given period.

Circular Flow of Income

A model that illustrates how money moves through an economy between producers and consumers. It demonstrates the flow of goods and services and the corresponding flow of payments between firms and households.

Consumption

The total value of all goods and services consumed by households. It is a key component of aggregate demand and reflects consumer spending in the economy.

Deficit

Occurs when a government's expenditures exceed its revenues over a specified period. A fiscal deficit implies that the government is borrowing to cover the gap between spending and revenue.

Derived Demand

A demand for a good or service that results from the demand for another good or service. In labor markets, the demand for workers is often considered derived demand because it depends on the demand for the goods or services that the workers produce.

Depreciation (Currency)

A decrease in the value of a currency relative to other currencies. This can make a country’s exports cheaper and imports more expensive.

Fiscal Policy

The use of government spending and taxation to influence the economy. Fiscal policy is often used to combat inflation, influence the level of economic activity, and redistribute income.

Fiscal Deficit

Occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings. It is an indicator of the financial health of a government.

Foreign Direct Investment (FDI)

Investment made by a firm or individual in one country into business interests located in another country. FDI usually involves participation in management, joint-venture, transfer of technology, or expertise.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country during a specific period. It is a broad measure of a nation’s overall economic activity.

Human Capital

The economic value of a worker's experience and skills. Human capital includes factors like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality.

Income Tax

A tax imposed by governments on individuals or entities in respect to the income they earn. It is a major source of government revenue.

Inflation

A general increase in prices and fall in the purchasing value of money. Inflation indicates the rate at which the general level of prices for goods and services is rising.

Infrastructure

The basic physical systems of a business or nation, including transportation, communication, sewage, water, and electric systems. Infrastructure projects can be funded by governments or private companies.

Labour Market

The supply and demand for labor, where employees provide the supply and employers provide the demand. It determines the price of labor (wages) and the amount of employment.

Long-Run Aggregate Supply (LRAS)

Represents the total amount of goods and services an economy can produce when both labor and capital are fully employed. It is a vertical curve because, in the long run, the economy is at full employment, meaning output is determined by factors such as capital and technology, not by price levels.

Marginal Propensity to Save (MPS)

The proportion of additional income that a household saves rather than spends. It is a key component in the multiplier effect in macroeconomics.

Multiplier Effect

The process by which an initial increase in spending (such as government expenditure) leads to further rounds of spending and results in a larger impact on the overall level of economic activity than the initial injection.

National Debt

The total amount of money that a country’s government has borrowed, by various means. It consists of domestic and foreign debt and includes government bonds and loans.

Privatisation

The transfer of ownership of a business, industry, or service from public (government) to private control. It is often associated with the sale of state-owned assets to private investors.

Productivity

The efficiency with which output is produced by a set amount of inputs (e.g., labor and capital). Higher productivity means that more output is being produced with the same amount of inputs.

Real GDP

A measure of the value of economic output adjusted for price changes (i.e., inflation or deflation). It reflects the real value of goods and services produced in an economy in a given year, adjusted for changes in the price level.

Subsidy

A financial contribution provided by the government to businesses or industries, which helps to reduce the cost of production or encourages the production of a particular good or service.

Supply-Side Policies

Government policies aimed at increasing productivity and shifting long-run aggregate supply to the right. These include measures such as reducing regulation, lowering taxes, improving infrastructure, and enhancing labor market flexibility.

Tariff

A tax or duty to be paid on a particular class of imports or exports. Tariffs are often used by governments to protect domestic industries from foreign competition.

Trade Liberalisation

The removal or reduction of restrictions or barriers on the free exchange of goods between nations. This includes reducing tariffs, subsidies, and quotas to encourage increased international trade.

Unemployment

The situation where individuals who are able and willing to work cannot find a job. The unemployment rate is a key indicator of economic performance.

Withdrawal (Economics)

A situation where money leaves the circular flow of income, reducing the total amount of income in the economy. Withdrawals can take the form of savings, taxes, or imports.

Paper 3 (Synoptic)

Aggregate Demand (AD)

The total demand for goods and services in an economy at a given overall price level and in a specific time period. It includes consumption, investment, government spending, and net exports.

Aggregate Supply (AS)

The total quantity of goods and services that producers are willing and able to supply at a given price level in an economy over a period of time.

Cost-Push Inflation

A rise in prices caused by an increase in the cost of production, such as higher wages or raw material prices. This reduces aggregate supply and leads to higher prices.

Demand-Pull Inflation

Inflation that occurs when aggregate demand in an economy outpaces aggregate supply, typically during periods of economic growth, leading to increased prices.

Derived Demand

The demand for a factor of production or a good that results from the demand for another good or service. For example, the demand for labor is derived from the demand for the goods or services that the labor produces.

Dynamic Efficiency

A situation where firms improve efficiency over time by investing in innovation, technology, and new processes, leading to better quality products or lower production costs.

Equity Markets

Financial markets where corporate stocks (equities) are traded. These markets provide companies with a way to raise capital and offer investors a way to own a portion of a company.

Exchange Rate

The value of one currency for the purpose of conversion to another. Exchange rates affect international trade by influencing the cost of imports and exports.

External Shock

An unexpected event that impacts an economy, such as a natural disaster, pandemic, or geopolitical event, which can affect inflation, production, and growth.

Financial Markets

Markets where financial securities, such as stocks, bonds, and commodities, are traded. They facilitate saving, borrowing, and the allocation of capital to productive uses.

Fiscal Policy

The use of government spending and taxation to influence the economy. Fiscal policy can be used to combat inflation, boost economic growth, or redistribute wealth.

Grants and Subsidies

Financial assistance provided by the government to businesses or individuals to support economic activities or reduce the cost of essential goods and services.

Interest Rates

The cost of borrowing or the return on savings. Interest rates are often set by central banks and influence the level of investment, consumption, and overall economic activity.

Laffer Curve

A theoretical representation of the relationship between tax rates and tax revenue, suggesting that there is an optimal tax rate that maximizes revenue. Higher rates beyond this point may reduce incentives to work or invest.

Labour Mobility

The ease with which workers can move between different jobs, industries, or regions in search of employment. High labour mobility can enhance economic efficiency and reduce unemployment.

Lorenz Curve

A graphical representation of income or wealth distribution within an economy. The further the curve is from the line of equality, the greater the inequality in the distribution.

Market Failure

A situation where market forces lead to an inefficient allocation of resources, often requiring government intervention. Common causes include externalities, monopolies, and information asymmetries.

Monopsony

A market condition in which there is only one buyer for many sellers, giving the buyer considerable control over the price and terms of purchase. It often leads to lower wages or prices for suppliers.

Multiplier Effect

The process by which an initial change in spending (such as an increase in government spending) leads to further rounds of spending, ultimately increasing national income by a larger amount than the initial injection.

Normative Statement

A value-based statement that expresses opinions about what ought to be. Normative economics deals with subjective judgments about economic policies and outcomes.

Positive Statement

A factual statement that can be tested and validated. Positive economics deals with objective analysis of how economies function, without value judgments.

Price Discrimination

A pricing strategy where a company charges different prices to different consumers for the same product or service based on their willingness or ability to pay, often to maximize revenue.

Price Elasticity of Demand (PED)

A measure of how sensitive the quantity demanded of a good is to a change in its price. Goods with high elasticity see large changes in demand when prices change, while inelastic goods see little change in demand.

Producer Surplus

The difference between what producers are willing to accept for a good or service and the price they actually receive. It represents the benefit producers gain from selling at a market price higher than their minimum acceptable price.

Progressive Tax

A tax system in which the tax rate increases as the taxable income increases, placing a higher tax burden on wealthier individuals. It is often used as a tool for reducing income inequality.

Regressive Tax

A tax system where the tax rate decreases as income increases, placing a proportionally higher burden on lower-income earners.

Supply-Side Policies

Government strategies aimed at increasing the productive capacity of an economy by improving efficiency, reducing regulation, or enhancing infrastructure and education. These policies seek to shift the long-run aggregate supply curve outward.

Tariff

A tax on imports or exports between sovereign states. Tariffs are often used to protect domestic industries from foreign competition or to generate government revenue.

Unemployment

The situation where individuals who are willing and able to work cannot find employment. The unemployment rate is a key economic indicator reflecting the health of the labor market.

Wealth Inequality

The unequal distribution of assets and wealth across individuals or households within an economy. Wealth inequality can be greater than income inequality, and it affects economic mobility and overall social equity.