A-Level Economis-Micro Year 12

Economics

The study of how individuals, firms, and governments allocate scarce resources to meet unlimited wants.

Scarcity

The limitation of resources, such as labour, land, capital, and entrepreneurship, which forces choices and trade-offs.

Opportunity Cost

The value of the next best alternative foregone when making a decision.

Trade-offs

The choices made between different options, often illustrated with a table showing benefits and opportunity costs.

Efficiency

The optimal use of resources to achieve the best possible outcome.

Equity

The fairness of the distribution of resources and opportunities within an economy.

PPF (Production Possibility Frontier)

The maximum combination of two goods or services that an economy can produce when all resources are fully and efficiently employed.

Outward Shift of PPF

Occurs due to economic growth via technological progress or resource increase.

Inward Shift of PPF

Occurs due to economic decline from disasters, pandemics, or resource depletion.

Real-World Example of PPF

The UK experienced supply chain disruptions between 2020-2023, shifting some sectors' PPF inward temporarily.

Static Models

Models like the PPF that assume full employment and no changes in technology within the short run.

Mini Case Study - UK Public Spending 2022-2025

The UK government allocated increased spending to the NHS post-COVID, illustrating a trade-off with capital infrastructure projects.

Short-term Benefit

Improved public health from increased NHS spending.

Long-term Opportunity Cost

Slower infrastructure development due to increased NHS spending affecting productivity.

Increasing Opportunity Costs

As production of one good increases, resources less suited to that good must be used, raising the cost of additional output.

Points on PPF

Points inside the curve indicate under-utilised resources, on the curve indicate productive efficiency, and outside is unattainable given current resources.

Essay Tip

When writing essays, always define scarcity and opportunity cost, provide a contemporary example, and link the analysis to welfare or efficiency impacts.

Text-Based Diagram Description of PPF

Axes: Good A on X-axis, Good B on Y-axis. Curve bows outward. Point X inside curve = inefficient. Point Y on curve = efficient. Point Z outside curve = currently unattainable.

Mini Case Study - UK Manufacturing vs Healthcare

Increasing investment in healthcare staff post-pandemic increased output in healthcare but slowed expansion in manufacturing, illustrating opportunity costs and resource trade-offs.

Specialisation

Occurs when workers, firms, or countries focus on producing a limited range of goods, increasing productivity and efficiency.

Division of Labour

Breaks down production into smaller tasks assigned to individuals, enhancing skill and speed.

Adam Smith's pin factory

Example where ten workers producing pins separately could produce exponentially more pins than if each worker made a pin from start to finish.

Benefits of Specialisation

Higher productivity and output.

Drawbacks of Specialisation

Monotony and worker dissatisfaction.

UK automotive industry

Specialised roles in engine design, assembly, and marketing increased efficiency but required reliance on global supply chains for parts.

Evaluation of Specialisation

Maximises productivity, but over-specialisation increases economic vulnerability.

Text-Based Diagram Description

Visualise a flowchart: Task divided into stages, each worker assigned a stage. Output per worker multiplied to show productivity gain.

Mini Case Study - NHS Staff Specialisation

During COVID-19, specialist ICU staff were redeployed, showing productivity gains in critical care but a trade-off with other hospital services.

Demand

The quantity of a good or service that consumers are willing and able to purchase at different prices, ceteris paribus.

Supply

The quantity producers are willing and able to sell at different prices, ceteris paribus.

Law of Demand

As price rises, quantity demanded falls (income and substitution effects).

Law of Supply

As price rises, quantity supplied rises (profit incentive and resource allocation).

Movements vs Shifts

Movement along curves is due to price changes; shifts occur due to non-price factors (e.g., consumer income, production costs, preferences, number of suppliers).

UK housing market 2023

Saw rising demand due to population growth and low interest rates; supply was constrained by planning restrictions, making supply relatively inelastic.

Text-Based Diagram Explanation

Axes: Price (vertical), Quantity (horizontal). Downward-sloping Demand (D), upward-sloping Supply (S). Intersection = equilibrium price (Pe) and quantity (Qe).

Stepwise Reasoning Chain

Because demand increased → quantity demanded exceeded quantity supplied → excess demand → market pressures raised price → quantity supplied rises and quantity demanded falls until new equilibrium is reached.

Evaluation of Price Mechanism

Price mechanism is efficient in theory but fails under monopoly power, externalities, or government distortions.

Mini Case Study: UK energy prices 2022-2023

Surged due to global supply constraints and post-pandemic demand recovery; market allocation was efficient but equity concerns demonstrate market failure.

Elasticities

Measure responsiveness of one variable to changes in another.

Price Elasticity of Demand (PED)

% change in quantity demanded / % change in price. Elastic >1, Inelastic <1.

Income Elasticity of Demand (YED)

% change in quantity demanded / % change in income. Normal goods positive, inferior goods negative.

Cross-Price Elasticity (XED)

% change in demand for A / % change in price of B. Substitutes positive, complements negative.

Price Elasticity of Supply (PES)

% change in quantity supplied / % change in price. Influenced by production flexibility and time horizon.

Negative externalities

A firm's production imposes costs on third parties. Example: UK power generation producing CO₂ emissions.

Positive externalities

Benefits accrue to third parties. Example: vaccinations.

Public goods

Non-excludable and non-rivalrous (e.g., street lighting).

Information asymmetry

Buyers or sellers lack full information (e.g., second-hand car market), causing market inefficiency.

Market failure

Occurs when free markets do not allocate resources efficiently, resulting in a net welfare loss.

Perfect Competition

Many firms, identical products, price takers. Firms earn normal profit in the long run.

Monopoly

A market structure where a single firm dominates the market.

Monopolistic Competition

A market structure with many firms selling similar but not identical products.

Oligopoly

A market structure characterized by a small number of firms that have significant market power.

Tax shifts supply

Tax shifts supply to align Marginal Private Cost (MPC) with Marginal Social Cost (MSC).

Socially optimal quantity

The quantity of goods that maximizes social welfare.

Marginal Private Cost (MPC)

The cost incurred by producers for producing one additional unit of a good.

Marginal Social Cost (MSC)

The total cost to society of producing one additional unit of a good.

Demand curve

Represents the relationship between the price of a good and the quantity demanded.

Short-term vs long-term impact

Interventions may be costly initially but yield net welfare gains over time.

UK sugary drinks tax 2018

Demand reduced slightly for taxed items, influencing public health policy evaluation.

UK carbon pricing 2022-2025

Carbon taxes and emissions trading schemes incentivized firms to reduce emissions.

UK Supermarkets (Oligopoly)

Tesco, Sainsbury's, Asda compete with price-matching and loyalty schemes. Short-term collusion concerns raised by CMA.

National Grid (Monopoly)

Operates under price regulation to protect consumers while allowing profit.

Labour Markets

Labour markets involve interaction between firms (demand) and workers (supply) to determine wages and employment. Factors include skills, mobility, bargaining power, and government policy.

Equilibrium Wage

Intersection of labour supply and demand.

Minimum Wage

Horizontal line above equilibrium → creates surplus (potential unemployment).

UK National Minimum Wage 2022

Increased low-skilled incomes. Short-term small unemployment in hospitality; long-term productivity gains from better retention and training.

Behavioural Economics

Classical models assume rational behaviour, but behavioural economics recognises cognitive limitations, heuristics, biases, and nudges.

Bounded Rationality

Consumers make satisficing, not optimal, decisions.

Heuristics

Mental shortcuts; e.g., anchoring, availability bias.

Nudges

Policy interventions that influence behaviour without restricting choice (e.g., automatic enrolment in pension schemes).

Biases

Overconfidence, loss aversion, status quo bias.

UK Energy Efficiency Schemes

Automatic opt-in smart meters increased adoption, reducing energy use. Shows policy can leverage behavioural insights.

25-Mark Essay Scaffold Example

Define negative externality and market failure. Explain carbon tax mechanism. Apply UK 2022-2025 data. Analyse stepwise chain of effects. Evaluate effectiveness, limitations, and alternatives. Conclude with reasoned judgment linking theory, evidence, and policy implications.