Econmics IGCSE Microeconomics (paper 1)

1.1 The economic problem

Unlimited wants, limited resources

1.1 Opportunity cost

The benefit lost when choosing the next best alternative

1.1 Causes of economic growth

(4)

1. Education and Training

   • become more efficient

2. New technology

   • increase productivity

3. More efficient

   • productivity

4. New resources

   • increase output potential

1.1 PPC

Productive possibility curve: measure of the potential output of two goods in a country when employing all resources

1.1 Causes of negative economic growth

(4)

1. Run out of resources

2. Natural disaster/weather/war

3. Worker emigration out of country

1.2 Economic assumptions

(2)

• Consumers always aim to maximise their benefits

• Firms always aim to maximise their profits

1.2 Reasons why consumers act irrationally

(3)

1. Habit/addiction

2. Herd behaviour/influence

3. Calculation errors/inability to calculate best option

1.2 Reasons why businesses don’t maximise profits

(3)

1. Aim different: to complete charitable work/caring for consumers

2. Unable to: nature of market/competition requires low prices to remain competitive

3. Managers that focus on sales or revenue instead

1.3 Demand definition

The quantity of a good/service willing and able to be bought at a given price at a given time

1.3 supply definition

The quantity of a good/service provided by supplier willing and able to be sold at a given price at a given time

1.3 factors affecting demand

(6)

1. Trend/tastes

2. Demographic (changes)

3. Income

4. Advertising

5. Price of substitutes

6. Price of compliments

1.3 factors affecting supply

(4)

1. Natural factors

2. Indirect taxes—profitability

3. Subsidies —profitability

4. (New) technology

1.4 PES definition

The responsiveness of supply to a change in prices

1.4 PED definition

The responsiveness of demand to a change in prices

1.4 factors affecting PES

(4)

1. Storage capacity —space

2. Time — time taken to produce

3. Availability of stock

4. Factors of production; raw mats, labour, machinery access

1.4 factors affecting PED

(4)

1. Proportion of income

2. Time—able to look for substitutes if longer time

3. Degree of necessity

4. availability of substitutes

PES/PED = 1

Unitary elastic

PES/PED>1

Elastic

PES/PED<1

Inelastic

PES/PED= 0

Perfectly inelastic (Only exists with supply)

PES/PED= ∞

Perfectly elastic

1.5 definition of mixed economy

Economy with both private sector and public sector providing goods and services

1.5 public sector definition

Goods and services provided by the government, all have access to the goods/services + run by the gov

1.5 private sector definition

Goods and services provided by firms run by individuals

1.5 aims of public sector

(2)

1. Improve quality of services

2. Minimise costs and be efficient

1.5 aims of private sector

(2)

1. Profit maximisation

2. (Growth)

1.5 benefits of public sector

(2)

1. Provide public goods

2. Provide goods that benefit society

1.5 drawbacks of public sector

(2)

1. Opp cost for gov

2. Not as efficient and less choice, don’t focus on profits

3. [Free rider problem]

1.5 definition of free rider problem

Consumer (rational) will wait until someone has payed for public good, then all can benefit from it, not profitable so market failure can occur

1.5 definition of public good

A good that is non-excludable (once produced can be used by anyone) and non-rivalrous (doesn’t reduce availability for one if used by another)

1.5 benefits of private sector

(3)

1. Efficient use of resources, as focus on profit maximisation

2. Innovation, quality choice to satisfy consumer demands

3. High competition encourages lower prices, innovation, quality and choice

1.5 drawbacks of private sector

(3)

1. Does not consider negative externalities

2. May lead to monopolies

3. Not all necessary (public) goods will be provided if run by mainly (or only) priv., as private firms don’t produce public goods

1.5(.5) market failure definition

Inefficient allocation of resources

1.5(.5) causes of market failure

(4)also reasons for no completely free markets

1. Lack of profit motive: result of lack of competition

2. Externalities after over production

3. Missing markets: public goods aren’t provided by free markets

4. Lack of info: result in the wrong goods being produced/purchased—need for gov intervention

Privatisation definition

Transfer of public resources/firms into the private sector

Impact of privatisation on workers

Priv firms aim to maximise profits so may make redundant

Impact of privatisation on businesses

(2)

1. Change in motives: become focused on profits and may less focus on quality, but also might have more competition

2. Often diversify into new areas

3. Customer wants

4. Investors/gov fund difference

Impact of privatisation on the government

(3)1 drawback, 2 good

1. Revenue generated from sale of business

2. Opp cost, can focus/spend on other areas

3. Advertising the business can be an opp cost, also used tax revenue

Impact of privatisation on consumers

(2) 1 good 1 bad

1. Risk of monopoly—higher prices

2. Profit maximisation: more efficient, lower prices passed on

1.6 external costs

The negative spillover effects on 3rd parties as a result of production/consumption (of a good/service)

1.6 external benefits

The positive spillover effects on 3rd parties as a result of production/consumption (of a good/service)

1.6 social costs

The costs of an economic activity to society as well as an individual/firm (private + external)

1.6 social benefits

The positive effects of an economic activity to society as well as an individual/firm (private + external)

1.6 Examples of external benefits

• Healthcare

• Education

• Vaccinations

1.6 Examples of external costs

• pollution

• Traffic

• Resource depletion

• Overcrowding

2.1 factors of production

(4)

1. Land

2. Labour

3. Capital

4. Enterprise

2.2 productivity definition

The amount of goods/services produced relative to the time and resources inputed

2.2 factors of productivity

(3)

1. Quality of land

2. Training and migration

3. New technology

2.2 Division of labour

when the production process is broken down into small parts with each worker allocated a specific task

2.2 DOL impacts on businesses

(2 drawbacks, 2 benefits)

1. Workers are more efficient, repeating one same task become skilled

2. Production time reduced—don’t waste time moving from one task to another

1. Repetitive, may become demotivated and less productivity, higher staff turnover

2. Less flexibility—production disrupted if one missing, others don’t have same skills

2.2 DOL impact on Employees

(2 drawbacks, 2 benefits)

1. More employable in same field jobs—more skilled

2. More job satisfaction if highly skilled at one task

1. Repetitive, boring, less satisfied

2. Struggle to find jobs in other fields —only able to do one task

2.3 (internal) economies of scale definition

As a firm grows in size it average costs fall

2.3 external economies of scale definition

When avg costs fall for individual firms as the entire industry grows

2.3 diff economies of scale

(6)

1. Risk bearing

   • Wider range of products so to not rely on one in case it fails

2. Financial

   • able to negotiate lower interest rates for large loans

3. Technical

   • able to buy better, specialist machines/technology, more efficient

4. Bulk-buying (purchasing)

   • negotiate discounts on large orders

5. Marketing

   • more units, ads cost same, decrease avg costs

6. Managerial

   • more efficient—more production same costs

2.3 external economies of scale

(4)

1. Skilled labour

   • buildup of skilled labour, less training needed so cheaper

2. Infrastructure

   • particular industry in a region may have railways, roads, buildings, etc., shaped to fit the industry’s needs

3. Shared costs

   • industry is specific area with many firms, can cooperate to share costs which will reduce overall

4. Access to suppliers

   • suppliers may locate in the area, reduces transport time

2.3 diseconomies of scale definition

Avg costs increase due to being too large

Causes of DEoS

(4)

1. Bureaucracy

   • Many departments, administration costs and paperwork, spend too much time on admin, not efficient and higher avg costs

2. Communication

   • many branches and overseas offices, lead to language barriers, cultural and time differences—not efficient

3. Distance between staff and floor

   • workers may feel alienated and demotivated from lack of regular communication

4. Lack of control

   • large businesses are difficult to control and coordinate, many employees and factories, need more supervisors and manager — higher costs

2.3 long run average cost diagram

2.4 local monopoly definition

When one business supplies and entire local market

2.4 natural monopoly definition

More efficient to only have one firm in the market

2.4 (pure) monopoly

One dominant firm in the market

2.4 features of a monopoly

(4)

1. Price maker

2. One large dominant firm

3. Unique product

4. High start up costs/barriers to entry

2.4 benefits of a monopoly

(3)

1. Might be more efficient with one firm running

2. Economies of scale, lower prices, competitive in foreign markets

3. Innovation: high profits from market domination, new products and technology

2.4 drawbacks of a monopoly

(4)

1. Less choice for consumers

2. Higher prices, price makers—can control and unfairly increase prices as there is no substitute

3. Less efficient, no competition or need for lower avg costs so not efficient: incur unnecessary costs/resources wasted

4. Lack of innovation—no incentive/competition

2.4 barriers to entry

(5)

1. Patents:

   • allowing production of a design/product, need to be bought or not allowed at all

2. Legal:

   • for certain firms, need to allowed legal entrance into market, gov descision for contract to supply certain services

3. Start-up costs:

   • high costs, eg: rolls Royce expensive jet engines, difficult for new firm to develop such products

4. Marketing budget:

   • monopolists/alr dominant firms will have strong brand image and large budgets, difficult to enter/make own image for new firms

5. Technology;

   • large firms can afford better more efficient technology and benefit from EOS; difficult to compete

2.5 competition definition

Rivalry between firms when trying to sell goods/services in a particular market

2.5 impacts of competition on consumers

(3 pos, 2 neg)

1. Lower prices (price wars)

2. More choice

3. More quality

1. Less profits may mean less innovation/quality sacrificed long term

2. Some firms shut down as unprofitable/inability to compete, inconvenience to loyal customers

2.5 features of competitive markets

(4)

1. Large amount of buyers and sellers

2. Low barriers to entry

3. Little control over prices

4. Products sold are close substitutes of eachother

2.5 impact of competition on firms

1. Encourage efficiency

2. Quality services—more customer satisfaction and sales

1. Lower profits; lower prices,

2. more innovation and

3. costs on quality goods needed to be competitive

2.5 competition impact on economy

Beneficial;

• encourages efficiency and allocation of resources,

• Innovation and quality, choice: better SOL

But

• firms may shut down due to inability to compete which may lead to unemployment

2.4 oligopoly definition

A few large firms dominate a market

2.4 oligopoly features

(6)

1. Collusion between firms

   • /price fixing, output restriction, etc,.

2. Few large firms dominate

3. Some barriers to entry

4. Non-price competition

5. Price competition

6. Product differentiation

2.4 oligopoly benefits

(4)

1. More choice

2. More quality

3. Lower prices

   • both EOS and price wars

4. Innovation

2.4 drawbacks of oligopoly

(2)

1. Collusion

2. Long term lower quality from price wars

2.5 Labour demand factors

(3)

1. Final product demand (derived demand)

2. Availability of substitutes (machines)

3. Productivity

2.5 Labour supply factors

(9)

1. Population size

2. Migration

3. Age distribution

4. Retirement age

5. School leaving age

6. Female participation

7. Skills/qualifications

8. Geographical mobility

9. Occupational mobility

2.6 Subsidies as gov intervention definition ton

Gov offer firms subsidies as incentive to reduce external costs

2.6 subsidies as gov intervention impacts

1. Increase output and decrease price of MERIT GOODS, more affordable and external benefits

1. But some firms may become too reliant on the subsidy and become Inefficient, only use subsidy to cover the cost of being inefficient instead of aim

2. Opp cost for gov, long run higher taxes to make up

2.6 fines as gov intervention

Imposed on those who cause negative externalities

2.6 impacts of fines as gov intervention

1. May not be effective if not high enough

1. Encourage not to damage environment

2. Money gained can be used to internalise externalities

2.6 pollution permits

Gov-issued document allowing firm to dispose of certain quantity of pollution into environment

(Can be traded and sold)

2.6 pollution permits impacts

1. Cost of buying permits as higher prices

2. Firms can just move countries to avoid the cost (also cause job losses)

1. Limits amount of pollution

2. Incentive for firms to invest in clean technology, then can sell permits as don’t need and profit

2.6 taxes regulation

Will increase production costs and decrease supply, or increase prices so decrease demand

2.6 effects of taxes

1. Decrease output+ consumption of demerit goods

2. Tax revenue internalisation externalities

1. Demand inelastic

2. regressive tax

3. Consequences: cross-border shopping illegal smuggling and affect police

2.6 gov intervention impacts

• Limits firms negative externalities

• Gov needs to monitor firms abiding; OPP cost and time

• Regulatory capture

2.6 labour market regulation (minimum wage) def

Legal entitlement minimum amount/hr a worker can be paid

2.6 labour market regulation (minimum wage) Effects

1. Increases equality and fairness amongst disadvantaged workers: higher SOL

2. More income tax

3. Motivation

1. Decrease demand for labour: USE GRAPH

2. Higher prices—higher labour costs firms

2.6 competition regulation methods

1. Promote competition: subsidise small firms , lower barriers to entry, anti-competitive legislation

2. Limit monopoly power: org set up to monitor monopolies

3. Protect consumer interests: consumer legislation ensures goods fit intended purpose

4. Control mergers/takeovers; gov monitors potential mergers or takeovers and can block

2.5 benefits and drawbacks of small firms

(4 good, 3 bad)

1. Flexibility: more customer satisfaction

2. Personal service: willing to pay higher prices

3. Lower wage costs: usually don’t belong to trade unions+ negotiating power weaker, also less workers overall

4. Better communication: less employees=more efficient

1. Higher costs: can’t benefit from EoS—also less competitive as a result

2. Lack of finance: usually have less funding

3. Hard to get high quality staff: may not be able to attract or afford or train

2.5 benefits and drawbacks of large firms

(1 bad, 3 good)

1. Diseconomies of scale if too large

1. Benefit from EoS—lower average costs, lower prices= more competitive

2. Able to win large scale contracts over small firms

3. Market domination: stronger brand image= able to charge higher prices

2.5 factors influencing the growth of firms—don’t confuse with staying small

(5)

1. Access to finance: may not be able to afford expansion

2. EoS: encourage growth to benefit from EoS

3. government regulation: prevent mergers/monopolies

4. Desire to spread risk: branch out to lower risk/ enter new markets

5. Desire to take over competition: removes competition and gains monopoly power

2.5 why firms stay small—dont confuse with growth

(4)

1. Aims of entrepreneur: may want to stay small—risk diseconomies

2. Nature of market: niche—wont benefit from growing as only small part of market

3. Size of market: some markets are too small to sustain large firms—lack of customers

4. No finance