microeconomics alevel

merit good

goods deemed more beneficial to consumers than they realise

demerit good

goods deemed more harmful to consumers than they realise

positive externalities in production

MSC is less than MPC

positive externalities in consumption

MSB is greater than MPB

negative externalities in consumption

MSB is less than MPB

negative externalities in production

MSC is greater than MPC

public goods

goods that are non-excludable and non-rival, such as street lights

private goods

goods that have rivalry and excludability and rejectability in their consumption, such as, a shop owner selling clothes

common access resources

natural resources over which no private ownership has been established

fiscal policy

changes to government spending and taxation in order to influence AD

national output (O)

the value of the flow of goods and services from firms to households

National expenditure (E)

The value of spending by households on goods and services

National income (Y)

the value of income paid by firms to households in return for land, labour and capital

Investment (I)

Spending by firms on new capital equipment like factories, offices and machinery. It is also spending on stocks of goods which are used in the production process.

Government spending (G)

spending by central and local government as well as other government agencies

Exports (X)

spending by foreigners on goods and services made in the UK.

Taxes (T)

paid to the government and take money from both households and firms

Savings (S)

… by households which is not spent by them. Equally, firms do not spend all of their money on wages and distributing profits, but may save some of it.

Spending on imports (M)

… from abroad are bought both by households and firms. the money paid out to foreign firms does not flow back round the circular flow

the multiplier effect

is the concept that an increase in spending leads to a greater overall increase in economic activity. This occurs as initial spending creates income for others, which is then spent again, further stimulating the economy.

• strong and sustainable economic growth

• low unemployment

• low and stable inflation

• equilibrium on the current account of the balance of payments

the governments 4 macroeconomic objectives:

• reducing the budget deficit

• reducing income inequality

• protecting the environment

additional government macroeconimic objectives

GDP

Gross domestic product - the main measure of national income - includes output of foreign firms operating in the country.

GNP

Gross national product - the total value of goods and services produced by a country's residents, including income earned abroad. concerned with the income generated by UK owned factors of production regardless of wether they are UK or overseas

the trade cycle

The economy experiences regular cycles, which can be tracked using

annual and quarterly movements in real output (GDP). The turning points in the cycle are

known as peaks and troughs.

recession

this refers to falling output and is defined as at least two successive quarters

of negative growth. Recovery – this is the period between the trough of the trade cycle

and the next peak.

advantages of economic growth

• increase in living standards

• reduce unemployment

• reducing public sector debt

disadvantages of economic growth

• danger of inflation

• possible environmental degradation,

• increased income inequality,

• depletion of natural resources and over exploitation of scarce finite resources

Inflation

the persistent rise the general price level and an associated fall in the value of money - measured by the Consumer Price Index (CPI)

2% + or - 1% measured by the CPI

The governments symetrical inflation target

Demand- pull inflation

the demand for the country’s goods and services exeeds its ability to supply the products resulting in rising prices.

cost push inflation

price rise due to factors such as rising wages or costs of raw materials and components

factors affected by high rates of inflation

• firms may have lower profit margins or to raise prices (higher wages and raw material costs)

• shoe leather costs (firms spending time and money to find out which supplier has the cheapest prices)

• overseas firms may gain a competitive advantage

• demand falls - unemployment could rise

structural unemployment

A form of unemployment resulting from changes in the economy or labour market, where workers' skills do not match available jobs, often due to technological advancements or shifts in consumer demand. more long term , e.g coal miners

frictional unemployment

A temporary form of unemployment that occurs when individuals are between jobs or are entering the labour market for the first time.

cyclical unemployment

A type of unemployment that rises and falls with the business cycle, often increasing during recessions and decreasing during economic expansions due to insufficient demand for goods and services. this is when workers are made redundant such as, in the recession of 2023

seasonal unemployment

A form of unemployment that occurs at certain times of the year when demand for workers is lower, such as in agriculture, tourism, or retail industries. e.g farmers, ice cream stall worker

demand deficient unemployment

if demand for a product falls, some workers may be made redundant. this could be for structural, cyclical or seasonal reasons or because the product becomes less popular or obsolete

a trade deficit occurs …

imports exceed exports

high interest rate (consumers) =

• less spending by borrowers

• more saving by savers

• more spending by pensioners who have a higher discretionary income

high interest rate (firms) =

• fewer sales for firms selling ‘wants’ and those selling items normally bought on credit

• no real change in sales for firms selling ‘needs’

• higher overheads for firms

• fewer exports

• more imports

rise in interest rate (affect on exchange rate)

the UK becomes a more attractive location for foreign investors - foreign investors purchase pounds to invest in UK banks - demand for pounds increases raising the price (exchange rate appreciates)

fall in interest rate (affect on exchange rates)

the UK becomes a less attractive location for foreign investors - foreign investors sell pounds to invest elsewhere - supply of pounds increases and demand for pounds decreases lowering the price (exchange rate depreciates)

rise in the value of the pound (rise in exchange rate)(affect on exports)

A rise in the value of the pound makes UK exports more expensive for foreign buyers, leading to a potential decrease in export sales as overseas demand declines.

rise in the value of the pound (rise in exchange rate)(affect on imports)

A rise in the value of the pound makes imports cheaper for UK consumers, encouraging increased importation of foreign goods and potentially widening the trade deficit.

the wealth effect

is the change in consumer spending that results from perceived changes in wealth, typically influenced by asset prices or property values. e.g As asset prices rise, consumers tend to spend more due to enhanced financial confidence.

the government imposes taxes to:

• raise revenue to provide merit and public goods

• reduce the budget deficit and pubic sector debt

• correct market failure (air passenger duty, london congestion charge)

• manipulate aggregate demand to affect GDP

• reduce the consumption of demerit goods (alcohol,tobacco)

• reduce imports through tariffs

• reduce income and wealth inequalities

VAT

this is paid by consumers on the goods and services they buy e.g the standard rate is 20%

duty tax

this is paid by consumers on goods such as petrol, alcohol and tobacco in addition to VAT

Import tax

this is paid on good brought into the UK from abroad with a value greater than £135. There are different rates for different goods, depending on their country of origin and what they are made for

indirect taxes

paid on goods and services purchased and on properties rather than on income. Examples include VAT and excise duties.

direct taxes

are taxes paid directly to the government by the taxpayer, typically based on income or profits, such as income tax and corporation tax.

proportional taxation

is a tax system where the tax rate remains constant regardless of the amount of income or profit earned, meaning everyone pays the same percentage.

progressive taxation

is a tax system where the tax rate increases as the taxable amount increases, meaning higher earners pay a larger percentage of their income in taxes compared to lower earners. the higher the income, the higher the proportion of income paid in tax e.g income tax

regressive taxation

is a tax system where the tax rate decreases as the taxable amount increases, meaning lower earners pay a larger percentage of their income in taxes compared to higher earners. is the same for everyone, resulting in a higher burden on those with lower incomes. e.g VAT

• land

• labour

• capital

• enterprise

the 4 factors of production

command (or planned) economy

An economic system where the government makes all decisions regarding the production and distribution of goods and services through a planing process.

free market economy

a market in which there is no government interference. all resources are allocated by supply and demand.

mixed economy

An economic system that blends elements of both command and free market economies, where some industries are state-controlled while others operate privately. there is both a public sector and a private sector

primary sector

The part of the economy that involves the extraction and harvesting of natural resources, such as agriculture, mining, and fishing. employment for 2% of the labour force and 2% of the UK’s GDP

secondary sector

The segment of the economy that processes, manufactures, and constructs goods, encompassing industries such as manufacturing, construction, and textiles. produce 18% of GDP and 18% of the labour force

tertiary sector

The part of the economy that provides services rather than goods, including healthcare, education, finance, and hospitality, contributing significantly to GDP and employment. - 80% of labour and GDP

Marginal cost

the cost of producing an additional unit of output

marginal utility

the extra satisfaction derived from the consumption of one or more unit of a good or service

law of diminishing marginal utility

an individual gains less additional utility from consuming a product, the more of it that is consumed

economic goods

goods which are scarce because their use has an opportunity cost, such as a building

free goods

goods that are plentiful and have no opportunity cost, such as air or sunlight.

consumer goods

physical items bought for imminent use by ordinary individuals

capital goods

used to produce consumer goods in the future, such as machinery and factories

production possibility frontier

graphs that illustrate the maximum output combinations of two goods that can be produced using available resources and technology.

what can cause a outwards shift of the PPF

• increase in QQEFS

• quality, quantity, efficiency, flexibility, state of tech sp

specialisation

the process where individuals or firms focus on a narrow range of goods or services to gain greater efficiency.

the division of labour

is a specific form of specialization in which the production process is broken down into distinct tasks, each performed by different workers or groups to improve efficiency and productivity.

production

transferring resources into goods and services

productivity

the measure of efficiency in production, often expressed as output per unit of input employed over a specific period.

a competitive market

one in which there are many buyers and sellers

rational behaviour

the decision-making process aimed at maximising utility or profit based on available information and resources. the one chosen will provide the optimum amount of benefit

the law of demand

a higher quantity will be demanded at a lower price assuming all other factors remain constant

the demand curve is downwards sloping because…

• there is an inverse relationship between price and quantity demanded.

• the substitution effect

• the income effect

the income effect

a fall in price increases the consumer’s purchasing power and may encourage them to buy more of this product. Conversely, a rise in price decreases purchasing power, potentially reducing quantity demanded.

the substitution effect

refers to the change in quantity demanded of a good when its price changes, as consumers switch to other alternatives that are now relatively cheaper or more expensive.

substitute goods

goods that can be used as an alternative to another good, e.g bus and rail services. as the demand for one increases, demand for a … may fall

complementary goods

goods that are used/consumed together, where an increase in demand for one leads to an increase in demand for the other, e.g., cars and fuel. lamb and mint sauce

composite demand

refers to the demand for a good that has multiple uses, where an increase in demand for one use can decrease the availability for another, such as water for drinking vs irrigation. e.g land for shops, houses or factory

joint demand

is the demand for two or more complementary goods that are consumed together, where an increase in demand for one good causes an increase in demand for the other, like printers and ink. lamb and mint sauce

derived demand

is the demand for a good or service that arises from the demand for another good or service, such as the demand for labour being derived from the demand for the final products that labour helps to produce.

a normal good

a rise in income leads to a rise in demand, conversely, a fall in income leads to a fall in demand (it has a negative income elasticity)

an inferior good

a rise in income leads to a fall in demand. a fall in income leads to a rise in demand (it has a negative income elasticity)

the law of diminishing marginal returns

states that as more units of a variable input (labour) are added to a fixed input (equipment), the additional output produced by each new unit will eventually decrease.