Key Evaluation Points for A-Level Economics

Price Elasticity of Demand (PED)

The effect of a tax depends on the price elasticity of demand for the good being taxed.

Inelastic Demand

If the demand is price-inelastic, then the tax will lead only to a small fall in quantity and a larger rise in price.

Effectiveness of Sugar Tax

Sugar can be addictive and so is likely to have an inelastic PED, so the quantity of sugar consumed falls very little.

Monopoly Power

This depends on the objectives of the monopoly firm.

Profit Maximization

The previous paragraph assumed firms maximised profits.

Social Welfare

If the monopoly firm is looking to maximise social welfare, the price set may be lower than p.

Satisficing Objective

A firm may have a satisficing objective looking to achieve an acceptable level of profit.

Diseconomies of Scale

If the firm grows too large there could be diseconomies of scale in some industries.

Monitoring Employees

Larger output could mean more difficulty monitoring employees.

Coordination Difficulties

Higher long-run average costs could arise from difficulties in coordinating between different workers within the firm.

Externality Argument

Any externality argument leading to intervention includes taxes, subsidies, max/min prices, regulations, and state provision.

Socially Optimal Level of Healthcare

This depends on the government identifying the socially optimal level of healthcare correctly.

Estimating Externalities

In practice, it is difficult to estimate the size of externalities.

Market Structure Essays

Most market structure essays can utilize the effect of a tax, subsidy, maximum price, or minimum price.

Tax Analysis

To read more: Tax analysis and evaluation points.

Monopoly Power Analysis

To read more: Monopoly power analysis and evaluation.

Economies of Scale

Can be used in most market structure essays.

Quality of Service

Having one large firm could mean the quality of service is worse.

Higher Prices

Higher costs could be passed on to consumers in the form of higher prices.

Regulations

Regulations can be a form of intervention in response to externalities.

State Provision

State provision can be a response to externalities.

Cost-benefit analysis

A method used by the Government to evaluate the size of externalities and the value of productivity and human life.

Government failure

When government intervention leads to a misallocation of resources.

Externalities

Costs or benefits incurred by a third party who did not choose to incur that cost or benefit.

Welfare loss

The loss of economic efficiency that can occur when equilibrium for a good or service is not achieved.

Firm costs

The expenses incurred by a company in the course of its business operations.

Energy dependence

The extent to which a firm's costs are affected by energy prices.

Consumer surplus

The difference between what consumers are willing to pay for a good or service and what they actually pay.

Minimum wage

The lowest legal wage that can be paid to workers.

Trade unions

Organizations that represent the collective interests of workers.

Bargaining power

The ability of a party to influence the terms of a negotiation.

Dynamic efficiency

The ability of an economy to improve its production processes and innovate over time.

Price cap

A regulatory limit on the price that can be charged for a product or service.

Regulatory capture

A situation where regulators are influenced by the industries they are supposed to regulate.

Elasticities

Measures of how much the quantity demanded or supplied of a good responds to changes in price.

Price elasticity of demand (PED)

A measure of how much the quantity demanded of a good responds to a change in price.

Inelastic demand

Demand that does not change significantly with price changes.

Substitutes

Goods that can be used in place of each other.

Short run vs Long run

The distinction between periods where some factors are fixed (short run) and all factors can be varied (long run).

Satisficing

A decision-making strategy that aims for a satisfactory or adequate result, rather than the optimal solution.

Public sector

The part of the economy that is controlled by the government.

Private sector

The part of the economy that is run by private individuals and companies.

Dividends

Payments made to shareholders from a company's profits.

Proportion of firms / consumers affected

The extent to which a policy change or price change impacts the number of firms or consumers.

Market failure prevention

The ability of market solutions to address the reasons why market failure exists.

Government revenue use

What the government does with the revenue raised from a tax or whether it provides further support to mitigate the negatives of a policy.

Assumptions in economics

The validity of specific assumptions, such as those related to price discrimination and consumer rationality.

AD shifts

Any discussion related to shifts in Aggregate Demand (AD) and the tradeoff between economic growth and inflation.

Keynesian LRAS curve

A representation of the long-run aggregate supply curve that indicates the level of spare capacity in the economy.

Unemployment rate

The percentage of the labor force that is unemployed, which was 4.2% in the UK in the three months to October 2021.

Fiscal policy

Government policy regarding taxation and spending to influence the economy.

Monetary policy

The process by which a central bank manages the money supply and interest rates to control inflation and stabilize currency.

Interest rates on government debt

The cost of borrowing for the government, which affects the opportunity cost of borrowing and future tax requirements.

Bank Rate

The interest rate set by the Bank of England, which was 5.25% as of March 2024.

Opportunity cost of borrowing

The potential economic growth or benefits that are foregone when borrowing funds.

Effects of lower interest rates

The impact of reduced interest rates on consumption and investment in the economy.

Covid-19 pandemic interest rates

The Bank of England's interest rate fell to 0.1% during the Covid-19 pandemic.

Zero lower bound

The theoretical limit to how low interest rates can go, preventing rates from falling significantly below zero.

High street banks

Traditional banks that could fail if savers withdraw funds to avoid negative interest rates.

Monetary policy effectiveness

The ability of monetary policy to stimulate the economy when interest rates are already low.

Fiscal policy - effects of tax changes

The consequences of changes in taxation on the economy.

Laffer curve

A theoretical representation of the relationship between tax rates and tax revenue.

Corporation tax rise

An increase in the tax rate imposed on the profits of corporations.

Tax base

The total amount of assets or income that can be taxed by the government.

AD shift

A change in aggregate demand, which can be influenced by various factors including tax rates.

Consumption

The largest component of aggregate demand, making up roughly 60% of AD.

Investment

Expenditure on capital goods that will be used for future production.

Marshall-Lerner condition

States that the sum of the price elasticity of demand for exports and imports must be greater than 1 for devaluation to improve net exports.

Inelastic demand

A situation where the quantity demanded does not change significantly with a change in price.

Multiplier

A factor that quantifies the change in economic output resulting from an initial change in spending, calculated as 1/(1-MPC).

Marginal propensity to consume (MPC)

The proportion of additional income that a household consumes rather than saves.

Marginal income tax rate

The rate at which the last dollar of income is taxed, which is 45% for those earning above £125,140 per year in the UK.

Marginal propensity to tax (MPT)

The proportion of additional income that is paid in taxes.

Economic shocks

Unexpected events that can cause significant disruptions to the economy, such as cost rises or reduced aggregate demand.

Government intervention

Actions taken by the government to influence economic activity, especially in response to economic problems.

Productivity growth

An increase in the efficiency of production, often measured by output per worker.

Long-run aggregate supply (LRAS)

The total supply of goods and services that an economy can produce when both capital and labor are fully employed.

Infrastructure spending

Government expenditure on physical systems such as transportation, utilities, and public facilities.

Education and training for workers

Programs aimed at improving the skills and knowledge of the workforce to enhance productivity.

UK productivity weakness

A situation where the productivity growth in the UK has been persistently low, indicating insufficient government intervention.

Depreciation

A reduction in the value of an asset over time, often due to wear and tear.

Tariff

A tax imposed on imported goods to protect domestic industries.

Globalisation

The process by which businesses develop international influence or operate on an international scale.

Short run

A period in which at least one factor of production is fixed, affecting the ability to adjust output.

Long run

A period in which all factors of production can be varied, allowing full adjustment of output.

J-curve

A graphical representation showing that a country's trade balance may initially worsen following a devaluation before improving.

Supply-side policies

Strategies aimed at increasing productivity and shifting aggregate supply to the right.

Current account deficit

A situation where a country's total imports of goods, services, and transfers exceed its total exports.

Financial account surplus

A situation where a country receives more capital inflows than outflows in a given period.

Consumer confidence

The degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.

Marginal propensity to consume

The increase in consumer spending that occurs with an increase in disposable income.

Business confidence

The level of optimism that business leaders feel about the prospects for their companies and the economy.

Aggregate demand

The total demand for goods and services within a particular market.

Inflation

The rate at which the general level of prices for goods and services is rising.

Deflation

A decrease in the general price level of goods and services.

Economic growth

An increase in the production of goods and services in an economy over a period of time.

Productivity growth

An increase in the efficiency of production, often measured as output per labor hour.

Marginal revenue product of labour

The additional revenue generated from employing one more unit of labor.

UK productivity in 2022

As of 2022, the UK's productivity was about 16% below that of the US and Germany.

Time lag in education

The delay between government spending on education and the observable increase in worker productivity, which can take 15-20 years.