GCSE OCR Economics 6 markers (for mocks)

Externalities - Tax

Method of intervention

Explanation: Price increases, quantity demanded falls

Costs:

> Can lead to unofficial markets (black market)

> Creates an opportunity costs, as gov is spending money policing on black markets

> Can be disproportionate for the lower income, disparity in wealth

Benefits:

> Reduces negative externalities eg smoking, alcohol, sugar

> Government receives revenue

> Money spent of policing black market

Counter argument:

- Other measures may be more effective

- Depends on the elasticity of the demand, if its inelastic the tax would not be very effective. Examples: petrol, necessities, addictives

- Depends on size/scale/magnitude of tax

- Producers may absorb the tax therefore the price stays the same and the quantity does not go down

Externalities - Subsidies

Method of intervention

Explanation: Price falls, quantity demanded increases

Costs:

> Significant opportunity cost

Benefit:

> Increase in consumption of good with positive externalities

Counter Argument:

- Subsidies will have less success when goods have an elastic demand

- other measures may be more effective

- Depends on size of subsidy

Externalities - State Provision

Method of intervention

Explanation: When gov provide services free of charge to benefit the economy. Examples: schools, healthcare

Costs:

> When gov spends on one area, opportunity cost

> May not be enough to satisfy demand

> Demand may rise at a faster rate

Benefit:

> Benefits the whole society, standard of living goes up

> Free healthcare means workforce is healthy and output would not be affected

Counter Argument:

- Regional Differences - amount of money spend in one area will only benefit that area and its surroundings

Externalities - Legislation and regulation

Method of intervention

Explanation: Gov use laws to reduce or eliminate negative externalities. Some legislations aim to eliminate the market entirely, others aim to reduce

Costs:

> Illegal products will still be avaliable due to legal markets

> Regulations need effective policing - expensive and opp cost.

Benefits:

> Very effective at reducing negative externalities

> Changes people's attitudes

Externalities - Information provision

Method of intervention

Explanation: gov may try to inform or educate the public about the harmful effects of some products (through advertisement and marketing). Gov may encourage consumption of goods with positive externalities

Costs:

> Difficult to judge effectiveness

> Difficult to change consumer's preferences

> Less effective than other methods

> Consumers may not notice the change

Benefits:

> Cheaper than other methods

Economic Growth - a rise in material living standards

Explanation:

>Everyone on average has more available output to consume than before. It relies on GDP increasing faster than the population, therefore GDP per capita increases

Counter argument:

- It relies on GDP growing at a faster rate than the population. If population rises faster than GDP, living standards will fall despite the rise in GDP

benefit

Economic Growth - A reduction in poverty

Explanation:

> As output and incomes rise, the government will receive more tax revenue from income tax and spending therefore the government has more to spend on raising living standards for those with low incomes

Counter Argument:

- Depends if government spending on benefits increases enough to truly move people out of poverty

- Is there an opportunity cost? - could money be better spent on other things e.g. if poverty is caused by low paid jobs would additional education and training be more effective?

benefit

Economic Growth - A rise in the welfare of the population

Explanation:

> As output and incomes rise, the government will receive more tax revenue from income tax and spending therefore the government has more to spend on services such as health and education. As the population becomes more educated and healthy it can help the economy to achieve more economic growth in the future

Counter Argument:

- There needs to be a significant rise in GDP for the rise in welfare to happen or else gov wont get their tax revenue if people don't have high incomes.

- Time lag - takes time for it to be in place

- Depends on where they are built, regional differences can occur

benefit

Economic Growth - A rise in employment

Explanation:

> More workers will be required to produce the extra output bought about by economic growth

Counter Argument:

- Depends on the use of capitals instead of using people for labour i.e. machinery, leads to low unemployment

- Not occur if achieved by using capital

- Depends if the worker has the right education and skills

benefit

Economic Growth - Environmental costs

Explanation:

> Increased production and consumption can lead to more pollution. (i.e. increased pollution from cars)

Counter Argument:

- Consumers may use renewable, green energy such as electric cars as they are more aware of the impact they are creating to the environment and realise that they want to make as little impact as possible.

cost

Economic Growth - Air pollution

Explanation:

> Rapid economic growth and reliance on fossil fuels (eg. coal) can create air pollution

Counter Argument:

- Depends if we are using renewable, green energy

cost

Economic Growth - Global Warming

Explanation:

> Some argue pollution from economic growth has led to global warming. Creates issues such as rising sea levels, extreme weather etc.

Counter Argument:

- Depends how economic growth is achieved - currently through lots of polluting industries. COP26 should move towards economic growth through green energy thus less environmental damage.

cost

Economic Growth - Congestion

Explanation:

> Economic growth is often concentrated in certain regions. Usually urban areas. Urban areas become overcrowded and congested. More pressure on services such as schools and hospitals. More traffic congestion and pollution. Overcrowded public transport. Quality of life may fall.

Counter Argument:

- Gov may build new roads or limit the number of vehicles on the road

- Place charges in urban area e.g. London for using petrol cars, green tax

- Many large cities now have very good public transport networks which are not overcrowded

- Encouraging the use of bikes - bike lanes

cost

Economic Growth - Loss of non-renewable resources (finite resources)

Explanation:

> Economic growth uses up non-renewable resources and damages natural environment.

Counter Argument

- Use renewable resources

- Gov spend more on conservation

cost

Economic Growth - A lower quality of life

Explanation:

> People may be materially better off but quality of life may decrease as they have more stressful jobs, exercise less, have repetitive jobs, move from countryside to congested cities. Diets might worsen as people witch to fast/unhealthy food and develop associated conditions.

Counter Argument:

- Gov can intervene to redistribute income and wealth but this depends on the levels of taxes and spending

cost

Economic Growth - Inflation

Explanation:

> Economic growth may lead to an increase in the price level.

Counter Argument:

- High inflation may only be short term

- Wages may rise to keep up inflation

- Limited impact

What causes shifts in the demand curve? (Analyse)

All are non-price, a shift in the demand curve occurs when the quantity of a good demanded changes even though the price remains the same:

Factors:

> Income: If income rises, then consumers are able to buy more goods and services at every price. If income becomes more unevenly distributed then there will be an increase in demand for luxury goods and services as the rich become wealthier. If poverty increases, then the demand for basic and cheap products is likely to rise.

> Substitutes and Complements: Substitutes are goods and services that can be used in place of another good or service. If the price of one product rises then people will change to buying the other one.

Products that are substitutes for each other could be tea and coffee, Coca-Cola and Pepsi, honey and jam, or Barclays and HSBC banks.

> Government policies: Governments can affect the demand for a product either by imposing taxes or by giving subsidies. Taxes take money out of firm's and individuals' pockets, which then goes to the government. These taxes include income tax and value-added tax (VAT). By increasing VAT on a product, the government aims to reduce demand. That is why there are high taxes on products like alcohol, motor fuel and tobacco.

Subsidies put money into firms and individuals through - for example - benefits. By giving a subsidy, the government hopes to increase demand. At present the UK government is giving subsidies for electric-powered cars to persuade more people to buy them.

What are the consequences of shifts of the demand curve?

A consequence of a shift of the demand curve will lead, for nearly all products, to move the price and quantity of the good and service in the same direction. If the demand increases then both price and quantity will rise. If the demand decreases then both the price and quantity will fall.

Possible issues:

> If the price rises, but income rises faster, consumers will demand more despite the rice rise (e.g. petrol)

> Demand for substitute products will fall if people prefer other goods and services

> The increase in demand may allow producers to gain greater economies of scale. This could allow them to either cut the price, which means movement down the demand curve, or to enjoy higher profits

> If demand falls, producers may go out of business if they can no longer make a profit (e.g. BHS in 2016)

What causes movement along the demand curve?

A movement along the demand curve is showing by either moving up the curve, causing the quantity of demand to contract (decrease), or by moving down the curve, causing the quantity demanded to expand (increase). Movement along the demand curve is caused solely by a change in price.

What are the consequences of movements along the demand curve?

The price and quantity move in opposite directions. If the price rises then quantity demanded falls. Similarly, if the price falls then quantity demanded rises. All according to the Law of Demand.

Consumers: If a consumer's income does not change then a movement up the demand curve will mean they can buy fewer goods and services, thus reducing their standard of living. Alternatively, they will be forced to look for cheaper substitutes. The reverse will be true if the movement is down the demand curve.

Producers: Producers will find that rising prices and falling demand will lower their sales and profits. This may mean they have to reduce output, make workers unemployed or even close down. A move down the demand curve may allow producers to increase their market, or even their market share, leading to higher profits and possibly forcing their competitors out of the market.

Evaluating the importance of price elasticity of demand for consumers

Consumers:

While most consumers do not have the mean to calculate PED, this does not mean it has no effect on them.

Consumers who purchased goods with inelastic demands are affected because governments could impose high levels of taxation on these good and services. This is because they know that they can raise tax revenue on goods and services that consumers need, as consumers will pay the higher prices. Among the good with very high levels of tax, and an inelastic demand, are alcohol, motor fuel and tobacco.

Equally, consumers who have to travel at peak times on the railway are willing to pay far more for their journey than someone who can choose a cheaper time. In June 2016, it cost £140 for a single ticket from Manchester to London on the 07.55 train, but only £80 on the 10.35. Those travelling earlier have a more inelastic demand, so the rail company knows it can charge more.

In the case of some products, the elasticity changes depending on the time of the year. For example in the winter, the demand for ice-cream for consumers may be more elastic so that they would buy much more if the price falls, but a lot less if the price rises. In the summer, however, demand may be inelastic for consumers as ice cream becomes more desirable. This means the consumer would probably pay more to get an ice cream in the summer than in the winter.

Evaluating the importance of price elasticity of demand for producers

Producers can use their knowledge of the price elasticity of demand for their products to increase their total revenue. (TR = PxQ)

Knowing the value of elasticity, the producer would be able to calculate the effect of quantity of a change in price. If the product had an elastic demand then cutting the price would lead to a larger percentage rise in quantity so total revenue would increase. If the product had an inelastic demand then cutting the price would lead to a lower rise in quantity so total revenue would decrease.

Producers may also be able to change different prices to different parts of their market.

Evaluating the costs and benefits of specialisation and exchange for producers

+ Higher output: total production of goods and services is increased. In some areas, it is possible to use automated systems or specialist equipment.

+ Higher productivity: workers who specialise in one task become as skilled as they possibly can in that area, which increases productivity

+ Higher quality: the best and most suitable factors of production can be employed to produce the output. Producers can buy the best components from specialists instead of having to make them

+ Can gain economies of scale by larger output

- As output increases, costs may eventually rise. This is because resources may become shorter in supply or it takes more people to organise the workforce etc.

- Dependency: production of goods and services depends on all parts working well. Problems such as a technical failure or a strike can lead to the whole process stopping.

- Failure of exchange: exchange can fall if it is not possible to buy the scarce resources or components needed to produce, or if the supplier greatly increases the price or restricts production.

Evaluate the costs and benefits of specialisation and exchange for workers

+ Increased skill: by specialising, workers become more skilful in and knowledgeable about their work. This can result in them earning more money.

+ Natural strengths: workers are able to do what they are best at and don't have to do work they're not so good at. This should allow them to earn more money.

+ Increased job satisfaction: allowing more workers to do what they're good at is likely to improve their motivation and satisfaction at work.

+ Increased standard of livings: by earning more money, workers can buy more goods to satisfy not only their needs, but some of their wants.

- Boredom: doing the same job everyday may become boring and lead to demotivation

- Deskilling: by specialising, workers lose their skills to do other types of work and less able to respond to changes in demand

- Unemployment: if there is a fall in demand for a particular product, workers may find it difficult to get another job because they do not have the necessary skills or experience. This may also occur because machines can replace their work.

Evaluate the costs and benefits of specialisation and exchange for regions

+ Efficient use of resources: a region could specialise in a particular industry due to availability of resources, so it will be easier to use the resources efficiently

+ Creates jobs for residents: the development of an industry in a particular region helps the resident of that area, since they can find work near to their homes.

+ Infrastructure development: a region that specialises in a particular industry will develop both infrastructure and supply industries to support the industry. This will lead to further regional development.

- Risk of fall in demand: if demand falls due to changes in taste and fashion, then the industry will collapse or shrink, leading to a resource wastage

- Resource exhaustion: if the raw materials are no longer available then those employed in the industry will become unemployed (e.g. coal mining in the North East)

- Loss of advantage: another region or country may become better at producing the good, leading to the problems of resource wastage and unemployment

Evaluate the costs and benefits of specialisation and exchange to countries

+ Economies of scale and efficiency: countries will specialise in what they do best, leading to greater efficiency and economies of scale. This increases the country's output.

+ More jobs: this increased output may result in more investment and job creation. In developed countries such as the UK, these jobs needs skilled labour, leading to higher incomes

+ International trade: if a country specialises then it will no longer produce some goods that are wanted, but will have a surplus of its specialist products. This leads to international trade and a greater choice of goods and services for its people.

+ Government revenue: increase in output, income and trade will lead to greater revenue from taxes for the government, which can lead to improved living standards as more of better schools, hospitals etc. are provided.

- Unemployment: specialisation not only creates jobs but also destroys them. As specialisation changes, workers in the declining industry may not be able to find new jobs, as they lack the necessary skills.

- Over-dependence: countries can over-specialise and become dependent on one or a very small number of products. If world demand changes then these industries, and the country's economy may collapse.

- Over-exploitations of resources: output may be increased by over-exploiting resources, leading to unsustainable development.

- Negative externalities: over-exploitation of resources and/or production can lead to serious environmental damage