Key Terms in the EdExcel Economics Papers for 2024

We have put together a glossary of the key economics terms used in EdExcel Papers 1 to 3 for June 2024. As part of revision, it is a great idea to check through them and consider if you are confident with each term.

Paper 1 Microeconomics

Here is a detailed glossary of key terms based on the content of the published mark scheme:

1. Price Elasticity of Demand (PED):

A measure of the responsiveness of the quantity demanded of a good to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price. It indicates how sensitive consumers are to price changes.

2. Price Elasticity of Supply (PES):

A measure of the responsiveness of the quantity supplied of a good to a change in its price. PES reflects how easily producers can increase or decrease production in response to price changes.

3. Market Equilibrium:

The point where the supply of a good matches demand, determining the market price and quantity. At this point, there is no surplus or shortage in the market.

4. Maximum Price (Price Ceiling):

A government-imposed limit on how high a price can be charged for a product. It is set below the market equilibrium price to make goods more affordable, typically resulting in increased demand and potential shortages.

5. Revenue Maximisation:

The business objective of generating the highest possible sales revenue. This occurs when marginal revenue (MR) is zero, meaning any additional sales do not add to total revenue.

6. Profit Maximisation:

A firm's primary objective of producing the quantity of output where marginal cost (MC) equals marginal revenue (MR), ensuring the highest possible profit is achieved.

7. Oligopoly:

A market structure dominated by a few large firms, each with significant market power. Firms in oligopolies often engage in strategic behavior, as their decisions are interdependent on competitors' actions.

8. Concentration Ratio:

A measure of market dominance, typically expressed as the combined market share of the largest firms in a market. A high concentration ratio indicates limited competition.

9. Barriers to Entry:

Obstacles that prevent new competitors from easily entering a market, such as high startup costs, strong brand identity of existing firms, economies of scale, or regulatory restrictions.

10. Allocative Efficiency:

A situation where resources are distributed in a way that maximizes consumer satisfaction, occurring when the price of a good equals the marginal cost of production. It ensures that goods are produced in the right quantity from society's perspective.

11. Productive Efficiency:

Achieved when a firm produces goods at the lowest possible cost, minimizing waste and making the most efficient use of resources.

12. Economies of Scale:

Cost advantages that firms obtain due to the scale of operation, with costs per unit of output decreasing as scale increases. Types include purchasing, managerial, and technical economies.

13. Diseconomies of Scale:

The phenomenon where a company grows so large that costs per unit increase. This can be due to factors like management inefficiencies, coordination problems, or over-expansion.

14. Collusion:

An agreement between firms to limit competition, set prices, or control output, which can lead to higher prices for consumers. Collusion can be explicit (direct communication) or tacit (unspoken cooperation).

15. Monopsony:

A market situation where there is only one buyer for a product or service, giving that buyer significant control over prices and terms of exchange.

16. Dynamic Efficiency:

Occurs when firms innovate over time, improving products and processes in response to competition or technological advancements, which leads to long-term improvements in productivity and economic growth.

17. X-inefficiency:

The inefficiency that occurs when firms operate at higher costs than necessary, often due to a lack of competition, resulting in wasted resources.

18. Negative Externalities:

Costs imposed on third parties due to the production or consumption of goods, not reflected in market prices. Examples include pollution from factories or waste generated from electronic products.

19. Tradable Pollution Permits:

A market-based environmental policy tool that allows firms to buy and sell permits to emit a certain amount of pollutants, providing an incentive to reduce emissions.

20. Indirect Tax:

A tax imposed on goods or services rather than on income or profits. It is typically used to reduce negative externalities, such as environmental damage, by raising the cost of the harmful activity.

21. Subsidies:

Financial support provided by the government to encourage the production or consumption of a good, often used to correct market failures, such as under-provision of goods with positive externalities.

22. Sunk Costs:

Costs that have already been incurred and cannot be recovered. Sunk costs can act as a barrier to exit in markets because they reduce the incentives for firms to leave an industry.

23. Contestable Market:

A market with no significant barriers to entry or exit, where potential competition forces incumbent firms to behave competitively, even if there are few firms currently operating in the market.

24. Limit Pricing:

A strategy used by dominant firms to set prices low enough to deter new entrants into the market, while still maintaining profitability. It is a way to maintain market dominance without engaging in overtly anti-competitive practices.

25. Contraction of Supply:

Occurs when the quantity supplied of a good decreases due to a rise in price or other supply-related factors, shown as an upward movement along the supply curve.

26. Extension in Demand:

Refers to the increase in quantity demanded of a good as a result of a fall in its price, represented as a movement along the demand curve.

27. Labour Supply Elasticity:

The responsiveness of the quantity of labor supplied to changes in wages. A higher elasticity means workers are more willing to enter or leave the labor market in response to wage changes.

28. Government Failure:

When government intervention intended to correct market failures leads to inefficient outcomes or creates new inefficiencies, such as through excessive regulation, poor targeting of subsidies, or unintended consequences like illegal dumping.

Paper 2 Macroeconomics

Here is a detailed glossary of key terms based on the content of the mark scheme:

1. Multiplier Effect:

An economic concept where an initial increase in spending leads to an even greater increase in national income. It measures the total increase in GDP resulting from an initial injection into the economy, such as government spending or investment.

2. Fiscal Deficit:

The shortfall that occurs when a government's total expenditure exceeds its total revenue, excluding borrowing. This is often financed by borrowing, which increases national debt.

3. National Debt:

The total amount of money that a country's government has borrowed and still owes. It accumulates over time from consecutive fiscal deficits and represents the liabilities of the state.

4. Quantitative Easing (QE):

A monetary policy used by central banks to increase the money supply and encourage lending and investment. It involves the purchase of government bonds or other securities to inject liquidity into the economy.

5. Crowding Out:

Occurs when high levels of government borrowing reduce the availability of capital for private sector investment. This typically leads to higher interest rates, making borrowing more expensive for businesses and households.

6. Progressive Tax:

A tax system where the tax rate increases as the taxpayer’s income increases. It places a higher burden on those who earn more, contributing to a reduction in income inequality.

7. Regressive Tax:

A tax system where the tax rate decreases as income increases, placing a higher relative burden on lower-income earners. Examples include indirect taxes like VAT or consumption taxes.

8. Market Rigging:

The illegal practice of artificially manipulating financial markets to achieve a favorable outcome for traders or firms. It involves collusion or the manipulation of prices, interest rates, or exchange rates to benefit certain players at the expense of others.

9. Fiscal Drag:

The effect of inflation or income growth pushing taxpayers into higher income tax brackets without an actual increase in real income. This can reduce disposable income and potentially dampen economic growth.

10. Supply-Side Policies:

Government measures designed to increase the productive capacity of the economy by improving the efficiency of labor and capital markets. These policies include education, training, deregulation, and tax incentives for businesses.

11. Trade Liberalisation:

The removal or reduction of restrictions or barriers on the free exchange of goods between nations. This can include reducing tariffs, quotas, and subsidies to allow for more open international trade.

12. Protectionism:

Government actions and policies, such as tariffs and quotas, that restrict international trade to protect domestic industries from foreign competition. It aims to safeguard local jobs and businesses but can lead to retaliatory measures from other countries.

13. Comparative Advantage:

An economic principle stating that a country should specialize in producing goods and services it can produce more efficiently than others, and trade for goods where it has a comparative disadvantage. This leads to increased global efficiency and trade.

14. Inflation:

The rate at which the general level of prices for goods and services rises, eroding purchasing power over time. Moderate inflation is common in growing economies, but high inflation can lead to economic instability.

15. Deflation:

A decrease in the general price level of goods and services, often associated with a reduction in consumer spending and economic growth. While it benefits consumers in the short term, prolonged deflation can harm economic confidence and increase real debt burdens.

16. Current Account Deficit:

Occurs when a country's total imports of goods, services, and transfers exceed its total exports. This deficit must be financed by borrowing or attracting foreign investment, and prolonged deficits can weaken a nation's financial stability.

17. Trade Bloc:

A group of countries that have agreed to reduce or eliminate trade barriers between them, promoting trade within the group. Examples include the European Union (EU) and the North American Free Trade Agreement (NAFTA).

18. Tariffs:

Taxes imposed on imported goods and services. Tariffs are used to protect domestic industries from foreign competition by making imported goods more expensive, but they can lead to higher prices for consumers and retaliatory measures from other countries.

19. Oligopoly:

A market structure dominated by a small number of large firms, leading to limited competition. Firms in an oligopoly may engage in collusion to set prices or output, reducing consumer welfare.

20. Real Disposable Income:

Income available to households after accounting for taxes and inflation. It represents the amount of money individuals have to spend or save, influencing consumption and savings behavior in the economy.

21. Gross Domestic Product (GDP):

The total monetary value of all finished goods and services produced within a country’s borders in a specific time period. It is a broad measure of a nation’s overall economic activity.

22. Circular Flow of Income:

An economic model illustrating how money flows between households, businesses, and the government. Injections (such as investment, government spending, and exports) and leakages (like savings, taxes, and imports) influence the level of national income.

23. Monetary Policy:

Actions by a central bank to influence the availability and cost of money in the economy. This includes setting interest rates and engaging in open market operations to control inflation and stabilize the economy.

24. Expansionary Monetary Policy:

A policy used to stimulate economic growth, usually by lowering interest rates and increasing the money supply. It encourages borrowing and investment but can lead to inflation if overused.

25. Exchange Rate:

The value of one country's currency in relation to another. Exchange rates fluctuate due to factors like interest rates, inflation, and market speculation. A weaker exchange rate can make exports cheaper but imports more expensive.

26. Supply-Side Shocks:

Unexpected events that significantly impact the productive capacity of an economy, such as natural disasters, technological changes, or significant shifts in input costs like oil prices.

27. Laffer Curve:

A representation of the relationship between tax rates and tax revenue. It suggests there is an optimal tax rate that maximizes revenue; beyond this point, increasing tax rates can reduce total revenue as it discourages work, savings, and investment.

28. Externalities:

Costs or benefits incurred by third parties from economic activities that are not reflected in market prices. Negative externalities, such as pollution, result in social costs, while positive externalities, like education, provide societal benefits.

29. Interest Rates:

The cost of borrowing money, usually expressed as a percentage of the amount borrowed. Interest rates influence consumer spending, investment, inflation, and exchange rates.

30. Structural Deficit:

A budget deficit that remains even when the economy is operating at its full potential, indicating that government spending consistently exceeds revenues, independent of the economic cycle.

Paper 3 (Synoptic)

Here is a detailed glossary of key terms based on the published mark scheme:

1. Price Elasticity of Demand (PED):

A measure of how responsive the quantity demanded of a good is to a change in price. When demand is price inelastic (PED < 1), the percentage change in quantity demanded is smaller than the percentage change in price.

2. Externalities:

Costs or benefits that affect third parties who are not directly involved in a market transaction. Negative externalities, such as pollution, lead to social costs that exceed private costs, while positive externalities create additional benefits for society.

3. Social Costs:

The total cost to society, including both private costs borne by firms and consumers, and external costs imposed on third parties. Social costs are greater than private costs when negative externalities are present.

4. Private Costs:

Costs incurred directly by firms or individuals involved in a market transaction. These do not take into account externalities or the wider social impact.

5. Predatory Pricing:

A pricing strategy where a dominant firm sets prices very low to drive competitors out of the market, potentially resulting in monopoly power once competition is eliminated.

6. Economies of Scale:

Cost advantages that firms experience as their scale of production increases, leading to lower costs per unit. Larger firms can achieve this through bulk buying, better technology, or more efficient production techniques.

7. Dynamic Efficiency:

Refers to a firm’s ability to improve its production processes and products over time through innovation, research and development, and investment in new technologies.

8. Barriers to Entry:

Obstacles that make it difficult for new firms to enter a market. These can include high startup costs, access to technology, regulatory requirements, or established brand loyalty.

9. Glass Ceiling:

An invisible barrier that prevents certain groups, particularly women and minorities, from advancing to higher positions in the workplace, regardless of qualifications or achievements.

10. Labour Productivity:

The amount of output produced per unit of labor. Higher productivity leads to greater economic efficiency and can result in higher wages and profits.

11. Marginal Tax Rate:

The rate of tax applied to an additional unit of income. Progressive tax systems increase the marginal tax rate as income rises, while regressive tax systems reduce the rate.

12. Monopsony Power:

A market situation where there is only one buyer for a product or service, giving the buyer substantial control over the price they pay to suppliers.

13. Multiplier Effect:

A process in which an initial injection of spending into the economy leads to a more than proportionate increase in overall economic activity. It reflects how one sector's spending becomes another sector's income.

14. Protectionism:

The economic policy of restricting imports from other countries through methods such as tariffs, quotas, or subsidies to protect domestic industries from foreign competition.

15. Exchange Rate:

The value of one currency in terms of another. Exchange rate fluctuations affect the competitiveness of a country’s exports and imports.

16. Managed Exchange Rate:

A type of exchange rate system where a currency’s value is largely determined by market forces but with periodic government intervention to prevent excessive volatility.

17. Foreign Direct Investment (FDI):

Investment made by a company or individual in one country into business interests located in another country. FDI typically involves ownership or control of a foreign business.

18. Interest Rate:

The cost of borrowing or the reward for saving, usually expressed as a percentage of the amount borrowed or saved. Higher interest rates tend to reduce investment and consumption, while lower rates encourage them.

19. Comparative Advantage:

An economic principle that states a country should specialize in producing goods for which it has a lower opportunity cost than other countries, leading to more efficient global trade.

20. Trade Diversion:

A situation where trade is redirected from a more efficient exporter to a less efficient one because of the formation of a trade agreement, which creates preferential treatment for the latter.

21. Trade Creation:

Occurs when a trade agreement allows for goods to be produced more efficiently within a trading bloc, replacing less efficient domestic production or imports from non-member countries.

22. Cost-Push Inflation:

Inflation caused by an increase in the costs of production, such as rising wages or raw material prices, which leads to firms raising prices to maintain profit margins.

23. Aggregate Demand (AD):

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

24. Aggregate Supply (AS):

The total supply of goods and services that firms in a national economy plan to sell during a specific time period. It is affected by factors such as labor force size, productivity, and production costs.

25. Structural Unemployment:

Unemployment that results from changes in the economy, such as technological advances or shifts in consumer demand, that create a mismatch between the skills workers have and the skills needed for available jobs.

26. Monopoly Power:

The ability of a firm to control market prices and exclude competitors, typically by dominating a market. Monopolies can reduce consumer welfare by charging higher prices and offering lower output.

27. Consumer Surplus:

The difference between what consumers are willing to pay for a good or service and what they actually pay. It represents the extra benefit consumers receive from paying less than the maximum price they are willing to pay.

28. Supply-Side Policies:

Economic policies aimed at increasing productivity and shifting aggregate supply to the right, such as tax cuts, deregulation, and investment in education and infrastructure.

29. Trade Blocs:

A group of countries that have entered into trade agreements to reduce or eliminate tariffs, quotas, and other trade barriers between them, fostering closer economic integration.

30. Fiscal Drag:

A situation where inflation or wage growth pushes taxpayers into higher income tax brackets, increasing their tax burden without an actual increase in real income.