Economics iGCSE Pearson Edexcel

Definition of the PPC.

The Production Possibility Curve (PPC) is an economic model (simplified version of reality) that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services

diagram analysis

The use of PPC to depict the maximum productive potential of an economy

The curve demonstrates the possible combinations of the maximum output this economy can produce using all of its resources (factors of production)

At A, its resources are used to produce only consumer goods (300)

At B, its resources are used to produce only capital goods (200)

Points C and D both represent full (efficient) use of an economy's resources, as these points fall on the curve. At C, 150 capital goods and 120 consumer goods are produced

Definition off opportunity cost

-Opportunity cost is the loss of the next best alternative when making a decision

- Due to the problem of scarcity, choices have to be made about how to best allocate limited resources amongst competing wants and needs

- There is an opportunity cost in the allocation of resources, if you buy one thing you may not be able to purchase another thing.

Examiner def.

Opportunity cost is about the loss of the next best alternative. It is not a monetary amount. Money may well be a factor, but opportunity cost is about the loss of the next best choice when making a decision.

Macroeconomic objectives

the goals a government is aiming to achieve for the overall economic performance of a country as well as the quality of life of its citizens.

- economic growth

- low and stable rate of inflation

- low unemployment

- stable current account balance of payments

-environmental protection

-equity in distribution of income

macroeconomic policies

fiscal, monetary, supply-side, exchange rate policies.

Economic Growth

annual increase in level of national output measured by the GDP

what is the gdp

the total value of all goods and services produced within a country in a year

Developed nations have an annual target rate of 2-3% this is

- considered to be sustainable growth

- growth at this rate is less likely to cause excessive demand pull inflation (rapid growth of aggregate demand)

economic growth has positive impacts on

confidence, consumption, investment, employment, incomes, living standards and government budgets

strong economic growth means

higher incomes, lower unemployment rates and better government budgets

sustainable

meeting the needs of the present without compromising the ability to meet the needs of the future

limitations of using GDP to measure growth

- Lack of information on inequality

- Quality of goods and services

- Does not include unpaid/voluntary work

-Differences in hours worked

-Environmental factors

What is a better measure of economic growth

GDP Per Capita

Recession

- Usually occurs when an economy experiences negative GDP growth for 2 consecutive quarters (6 months)

- incomes and consumer demand fall

- Consumer and business confidence tend to be low

- Business profits fall and unemployment rises

- Deflation may set in

slump

- extended period of negative growth after recession.

- unemployment likely to be high of high levels of business failure

- significant declines in household incomes and business profits

- increased government spending on welfare benefits and infrastructure may benefit some businesses.

Growth

- disposable income levels rise and lead to increased demand for products

- inflation usually rises

- drives an increase in production levels, leads to employment levels

boom

A period of increase rates of GDP growth

- consumer incomes and business profits are high

- inflation is also high due to higher demand for goods & services

- unemployment levels are low

- wages are high due to shortage of skilled workers

Inflation

sustained increase in the average price level of good/services in an economy

Impact on economic growth on

- Employment - leads to higher rates of employment

- Standard of living - Households able afford better goods & services, government receives more tax and may spend it on improving health, education, hospitals.

- tax revenue may be used to redistribute income reducing inequality

- poverty reduces

- productive potential increases - more consumer goods and more capital goods can now be produced using all of the available resources.

- demand-pull inflation starts to rise

- environmental damaged caused by negative externalities of production, resources are used more quickly. there may be improvements in the quality and quantity of environmentally friendly technologies

inflation is important because

- allows firms to confidently plan for future investments

- offers price stability to consumers

Deflation

occurs when average prices level of goods fall, only occurs when % change falls below 0.

Disinflation

average price level is rising, but at a lower rate than before

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer, used to measure inflation

CPI formula

(cost of basket in current year/cost of basket in base year) x 100

demand-pull inflation

increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand

cost-push inflation

caused by increases in costs of production in an economy

impacts of inflation

- Purchasing power decreases

- Wages demanded to increase

- Exports decrease

- Unemployment

when inflation increases unemployment decreases and vice versa

- Menu costs: businesses paying additional cost of updating menus or price cards

- Shoe leather costs

waste of resources during periods of high inflation

- Business and consumer confidence drops

- Investments - drops and uncertainty emerges

unemployment

occurs when a person is not working but actively seeking work.

unemployment is measured by

ILO survey

Types of unemployment

Cyclical - caused by fall of aggregate demand in the economy. Usually happens in downturn or recession

- Structural - Occurs when there is a mismatch between jobs and skills in economy, usually happens as structure of an economy changes, unless workers receive help to retrain they are often left unemployed or underemployed.

- Seasonal when certain seasons come to an end and labour is not required till the next season.

- Voluntary occurs when workers choose ti be unemployed

- Frictional occurs when workers are between jobs, usually short-term. Workers have voluntarily left their previous job to search for another.

Impact of Unemployment

- National output

Reduced consumer incomes as a result, demand for goods and services falls. in response firms reduce level of output produced.

- Scarce resources

As the economy contracts, there is a more inefficient use of available resources

Poverty

Levels of poverty rise as unemployment rises and incomes fall

Some workers may struggle to afford afford the basic necessities, such as food, shelter and clothing

- Government Government's receive less tax revenue and have higher expenditures in the form of welfare payments

- Consumer and business confidence

The level of optimism that consumers and businesses have regarding their expected financial situation falls

- Society

Inequalities rise as some individuals in society struggle to access healthcare and education

There may be increased societal problems, such as an increase in crime rates

Balance of Payments (BOP)

record of a country's financial transactions with it and the rest of the world

Current account

focuses mainly on financial transactions related to exports and imports of goods and services, often considered to be the most important account in the balance of payments. Records the net income that an economy gains from international transactions

net income

income transfers by citizens and corporations

Current account deficit occurs

when the outflows is greater than the inflows

-> Imports more than exports

Current account surplus occurs

when the value of inflows is greater than the value of outflows

-> Exports more than imports

Goods

visible exports/imports

services

invisible exports/imports

Reasons for deficits on the current account

- Quality of domestic goods, countries look for better substitutes abroad.

- Quality of foreign goods if foreign goods are higher quality compared to domestic goods , consumers may favor foreign goods leading to a current account deficit.

- Price of domestic goods, exporting firms may find themselves at a price and cost disadvantage in overseas markets.

- Price of foreign goods, can lead to trade deficits

- Exchange rates, makes one currency stronger whilst making the other one weaker.

Reasons for surpluses on the current account

Quality of domestic goods, exports rise as foreign buyers increase demand

Quality of foreign goods , foreign goods may be lower quality than domestic goods, consumers may favour domestic goods more.

Price of domestic goods competitively priced stimulating exports.

Price of foreign goods

priced higher than domestic goods can lead to decreased imports.

Echange rates

Any fall in the value of currency makes exports more attractive to foreign buyers

impact of - Appreciation on the current account

- Exports fall

- Imports rise

impact of a depreciation on current account

Exports rise

Imports fall

impact of a current account deficit

- leakages from the economy

- inflation

- low demand for exports

- funding the deficit

- increasing unemployment

- slowing down economic growth

- lower standards of living

- increased levels of borrowing

- depreciating exchange rate

Business activity and the environment

Business activity can create external costs of production when providing a good or service:

types of pollution that create external costs include visual, air, noise and water pollution.

visual polution

- eyesore

- litter, mine dumps or release of chimney smoke

noise pollution

- loud machinery

- factories

- traffic

- bars & restaurants

air pollution

- greenhouse gases

- factories, transportation, agricultural activities cause air pollution

water pollution

contamination of rivers, lakes and oceans with harmful substances. can occur because of agriculture, mining or industrial activities. pesticides, fertilisers or chemicals end up in water.

government provision of parks

to protect the environment

equality

situations where economic outcomes are similar for different people or different social groups

Income Inequality

everyone, irrespective of their job is paid the same

Absolute poverty

a situation where individuals cannot afford to acquire the basic necessities for a healthy and safe existence

relative poverty

a situation where household income is a certain percentage less than the median household income in the economy.

Reasons to reduce poverty & inequality

Meet basic needs

All individuals should have access to basic needs such as food and shelter

Raise living standards

Creates less opportunities for poorer households in the future, increases people's job opportunities, higher incomes, reducing inequality and overall increase in standard of living.

Ethical reasons

Individuals may be more concerned with more equitable outcomes for society than their own self-interest. Governments may use a progressive tax system so that lower income earners pay a lower tax rate than higher income earners.

Government aim to reduce inequality and poverty through

- progressive taxation

- using benefit payments

- investing in education and healthcare

progressive tax system

redistributes income from those with higher income to those with lower income

As income rises, a larger % of income is paid in tax, called the marginal tax rate

Benefits of a good progressive tax system

are sometimes lost to society because the high number (regressive) indirect taxes worsen income inequality

Advantages of progressive taxes

- reduces income inequality

- increases revenue for public services

- fairness perception

Disadvantages of progressive taxes

- potential disincentive to work

- complexity and compliance costs

- tax avoidance and evasion

-impact on investments

benefit payments

- usually given to the poorest and most vulnerable in society

Advantages of benefit payments

- reduce inequality and poverty

- allow households with low incomes to afford basic necessities such as food and shelter

- child benefit payments can empower mothers to re-enter the workforce

disadvantages of benefit payments

- disincentive to work for consumers

- high opportunity cost for governments

- unfair for some consumer

- high burden of taxation for governments

Advantages of investing in education and healthcare

- increased human capital and greater productivity

- higher output,

-higher levels of income

- higher level of education facilitate greater occupational mobility

-individuals can break the poverty cycle and contribute to economic growth

disadvantages of investing in education and healthcare

- high opportunity cost

- time lag involved between investment and seeing benefits

-a blend of policies may be the most effective way to tackle poverty and inequality

What is a monopoly

A monopoly is a market structure in which a single seller dominates the market

Characteristics of a monopoly

-A single producer

-No close substitutes, unique product

-Barriers to entry such as legal & patents, start-up costs

-Market power

What do governments define a monopoly as being?

A firm having more than 25% market share.

Advantages of a monopoly

- economies of scale, can be efficient and lower prices

- may result in better quality products

Disadvantages of a monopoly

- no incentive to be cost efficient

- inefficient allocation of resources

- consumers have limited choice

- likely to result in higher prices if no substitute goods are available

- risk of diseconomies of scale

- no product innovation, may result in lower quality

- customer service may be limited.

An oligopoly market structure is

where a small number of large firms dominate the industry

Oligopolies have

significant market power, a large market share

High Barriers to Entry & exit

Due to:

- Existing dominance

- Start-up costs high

- Exit barriers high due to sunk costs (investments not being possible to recober)

High concentration ratio

A concentration ratio calculates the percentage of total market share a specific number of firms serve.

- The higher the ratio is the more concentrated the market power is.

Interdependence of firms

- Highly interdependent in their actions

- Strong incentive to collude (cooperating in privacy)

- No incentives to compete on price

Product Differentiation

a positioning strategy that some firms use to distinguish their products from those of competitors

non-price competition

a way to develop brand loyalty and to convince consumers their product differs from competiton

Price Competition

A type of rivalry between or among businesses that focuses on the use of price to attract scarce customer dollars.

Limit pricing

reducing the price of a good temporarily often below the cost of production. Prices are set at levels which are likely to make it unprofitable for potential entrants who might consider coming into the market

predatory pricing

the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market. this action is illegal and firms will be fined if caught.

Advantages of an oligopoly market structure

- Lower costs

- Economies of scale

- Supernormal profits, which may be reinvested to create more innovate goods/services for consumers

- Incentives to Improve quality of goods and services

disadvantages of an oligopoly market structure

- High barriers to entry

- Low innovation levels

- High spending on branding and advertising

- Few firms control prices or output

- Limited choices for consumers

- Price wars

Labour costs often represent

one of the most significant business costs

Labour costs can be lowered by

increase productivity of workers, reducing wages and salaries

Quality of labour

Skill level and expertise of the workforce

Quantity of Labour

Number of workers available to the business

Education

occurs in schools and universities and may be funded by the government or may be run by private educational firms

Training

undertaken by firms and can shape the skills and knowledge of human capital and quality of labour. More skilled workers can drive innovation.

Demand for labour is

derived demand, This means the level of labour demand depends on the demand for goods and services

- labour market is composed of sellers of labour (households) and buyers of labour (firms)

Workers supply their labour, and firms demand labour to produce an output

As wages rise

the quantity demanded of labour falls

Factors affecting demand for labour

- price of product being produced

- demand for final product

- ability to substitute capital (machinery) for labour

- productivity of labour

supply curve for labour

there is a positive relationship between supply of labour and wage rate.

Factors influencing supply of labour

- population size

- age distribution of population

- migration

- participation rate

- school-leaving age

- skills and qualifications

-mobility of labour

-retirement age

Labour market equilibrium occurs when

the demand for labour (DL) is equal to the supply of labour (SL)

a trade union

an organisation that represent the interests of its workers in negotiations with a firm's management or owners.

the interests of the worker include

-wage & non-wage benefits of employment

- health and safety in the work environment

- reduction of discrimination and worker exploitation

Trade unions are usually formed by members of

specific industries