Eedexel A level Economics Theme 1

Explain diminishing marginal utility

-the demand curve slopes downwards showing an inverse relationship between price and quantity

Total utility- the satisfaction gained from the overall consumption

Marginal utility- the added satisfaction that a consumer gets from having one more unit of a good or service.

the law of diminishing marginal utility- the added benefit of consuming more of a product or service declines as its consumption increases

Define economics

the allocation of scarce resources to provide for unlimited human wants

the process of developing models

-Economists develop models to explain how the economy works.

-There are too many variables which can change within an economic model so assumptions must be made

- it is difficult for economists to make scientific experiments due to these changing variables

-theories/models which gain universal acceptance are called laws

Economic models are developed by economists once a hypothesis has been repeatedly proven or rejected in different circumstances.

what is Cetirus Paribus?

means 'all other variables remain constant'

It allows economists to simplify and explain causes and effects, even if the explanation is somewhat limited by the assumptions

What are positive and normative statements?

positive statements are a 'value-free' (objective) statement

-this can be proven or disproven with factual evidence, so it can be rejected or accepted

-has words like 'will' , 'is'

normative statements are - concerned with value judgements (opinions)

-includes value laden words such as 'should', 'would', 'fair', 'unfair', 'better', 'worse'

-can't test and prove opinions as true or false

-positive statements can be used to back up normative ones

what is the The role of value judgements in influencing economic decision making and policy?

-Value judgements influence governments choices with regards to the economic policies they choose to adopt and spend money on

-Value judgements influence individuals choices in the economic decisions they make

what is the basic economic problem?

-arises from the problem of scarcity (there are finite resources compared to infinite human wants), so choices must be made on how to use these resources

renewable and non renewable resources

-renewable resource: whose stock level can be replenished naturally over a period of time. Assuming the rate of consumption of the resource is less than the rate of replenishment

-non-renewable resource: whose stock level decreases over time as it is consumed

what are the factors of production?

-Resources are split into the four factors of production:

Capital -man made resources used to produce goods in the future (e.g. machinery)

Enterprise -entrepreneurs that are willing to take risks

Land -natural resources (coal,water). Can also be physical space

Labour -human capital, the workforce

what is an opportunity cost?

- 'the cost of the next best alternative foregone when a choice is made'

-if the value of our opportunity cost is greater than the value of our current choice = bad decision and vice versa

What is the importance of opportunity costs to economic agents?

-consumers make choices on how to use limited income based on greatest level of satisfaction

-producers make choices on how to use limited income based on profit

-government make decisions on how to spend limited tax revenues based on what will maximise social welfare

What is a production possibility frontier?

-shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology

What are consumer goods and capital goods

-Consumer goods: a good that directly provides utility to consumers. It's wanted for the satisfaction it gives

-Capital goods: a good that is used to produce consumer goods and services e.g. machines

What are movements and shifts in the PPF?

-A movement along the curve indicates a change in the combination of goods produced ( e.g. more capital goods + less consumer goods, or vice versa)

- these resources resources can be used in varying proportions to produce different goods (if more resources are allocated to capital goods, then less resources are available for consumer goods)

-a shift indicates a change in the productive potential of the economy, more or less consumer and capital goods can be produced

what are some causes of an outwards shift?

-discovery/ extraction of new resources (e.g. land)

-Higher productivity/efficiency of factor inputs

-Better management of factor inputs

-Increase in the stock of capital goods and labour supply

-innovation/invention of new products and resources

what are some causes of an inward shift?

-Natural disasters

-war/political instability

-Outflow of labour or capital (brain drain) : A significant loss of -skilled labour due to emigration or a reduction in investment can diminish the economy's ability to produce goods and services.

-Depletion of natural resources

-Technological regression

What does a straight line PPF show?

an indication of perfect factor substitutability of resources ( meaning resources for consumer goods are as efficient to use for capital goods)

- in a production process, one factor of production (like labor) can be completely replaced by another factor (like capital) at a constant rate, with no change in the level of output,

-unrealistic to attain, as some resources may be better suited for one good than the other

-returns are constant and not diminishing

-opportunity costs are constant (for every unit of one good that is sacrificed, a fixed amount of the other good is gained)

why are constent opportunity costs good?

-resources can switch between the production of goods without any loss in efficiency

-predictability in trade offs reduces uncertainty, they allow for efficient resource allocation and make economic decision-making more predictable and manageable.

What is Specialisation?

the concentration of production on a narrow range of goods or services

What are the advantages of specialisation?

*Higher output and potentially higher quality, since production focusses on what people and businesses are best at.

*There could be a greater variety of goods and services produced.

*There are more opportunities for economies of scale, so the size of the market increases. --> leads to more competition as firms can reduce prices

*Greater allocative efficiency

*Higher productivity through better use of workers

What are the disadvantages of specialisation?

*By producing a lot of one type of good through specialisation, variety could in fact decrease for consumers.

*There could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly.

*Countries can become over dependent

On only one particular type of export, which can lead to a risk in the economy failing ( macro )

*Changes in fashion/taste

What is division of labour?

the specialisation of workers on specific tasks in the production process

What are the advantages of division of labour

*Workers are highly productive

*Specialist capital (machinery) for workers will maximise output even further

*less time is required to train workers for specific tasks

*Lower costs

What are the disadvantages of division of labour?

-Repetition of the same job creates job monotony which can lead to lower productivity. Work becomes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity. Workers could become dissatisfied.

-If one part of the production process is delayed, every other task must be stopped until the issue is resolved ( bottleneck)

*There could be more structural unemployment, since skills might not be transferable, especially because workers have focussed on one task for so

long. - macro point

What are the functions of money?

-A medium of exchange: can be used to buy and sell goods and services, it's acceptable everywhere

-A measure of value: can be used to compare goods and services (e.g. pen and watch) can also put value on labour

-A store of value: can keep it's value for a long time. Whereas barter goods ,e.g fruits, would go bad and lose value

-A method of deferred payment: money allows debts to be created

What is a free market economy?

Free Market -an economics system where Individuals are free to make their own choices and own the factors of production without government interference

-resources are allocated through price mechanism(e.g.when the demand for electric cars rises, price also rises therefore, manufacturers will allocate more resources to electric cars & vice versa)

what is a command economy

All factors of production, except for labour, are owned by government

-no private property

-resource allocation carried out by government , which reflects consumer needs but also expands certain areas of economy (e.g. weaponry)

-all workers receive the same wage, no matter their job

-many products are standardised - so little choice for consumers

what is a mixed economy?

-both free market mechanism and government planing is used for resource allocation

-government control usually 40-60%

what is The role of the state in a mixed economy?

1)creating a framework of rules:-passing consumer protection laws to protect them from bad quality and high prices of monopolies

-property rights and safety standards

2)supplements and modifies the price system: gov produces helpful services( e.g. transport) at low price and limits production of demerit goods,( demerit also higher prices )

3)redistributes income:using income tax to redistribute money from rich to poor

4) stabilises the economy: manages demand in the economy from not being to high or too low

Advantages of free market?

-system is automatic due to invisible hand

-consumers have freedom of choice allowing them to dictate how resources are allocated

--high productivity due to incentives and rewards

-high competition leads to lower price

Disadvantages of free market?

-high levels of inequality ( the rich own more factors of production, so can grow more)

-lack of merit goods, low control over demerit goods --> government would have to increasing funding

-if there's low competition firms can grow and become monopolies ( can charge high prices for low quality)

--resources may be wasted on advertising

what are standardised products?

a product that is consistent, using same materials, branding and packaging

Advantages of command economy?

-less inequality. No one is left extremely poor as state provides minimum standard of living

--less wastage of resources ( no competition so no advertising)

-long term planning means the industry doesn't keep changing. Resource allocation is consistent and reduces uncertainty for consumers and firms due to predictable economic outcomes

--standardised products ( a product that is consistent, using same materials, branding and packaging)

--merit good are encouraged

Disadvantages of command economy?

-not all decisions will be made correctly by the government, leading to under/over supply and wastage of resources

-slow decision making that could be affected by bribery and corruption

-low productivity and efficiency as everyone receives same wage

-consumers lose freedom

Adam smith

believed in free market and laissez-faire ( let ppl do as they choose) approach by governments. 'Invisible hand' ( people acting in their own-self interest can leas to efficient allocation of resources ). Sate should still provide things like law, roads which free market cant provide

Karl Marx

believed in command economy . a command economy reduces inequality in wealth. Instead of rich getting richer and poor getting poorer

Friedrich Hayek

also free market. Believed government control only made decisions for what a small group of people wanted, not the entire population

what do consumers and firms aim for when making economic decisions?

consumers- maximise their utility

utility- the total satisfaction received from consuming a good or service. The rational consumer is known as homo economicus

firms- maximise profits

Governments - aim to maximise social well being

What is demand

The ability and willingness to buy a product at a given price in a given moment of time

movements and shifts along a demand curve

A movement from A to B is caused by a change in price of the good. A shift in the demand curve from D1 to D2 is caused by a change in one of the factors of demand.

-An decrease in demand due to a change in price is known as contraction

-An increase in demand due to a change in price is known as an extension

What are the conditions of demand?

PIRATES

Population

Incomes

Related goods (complements/substitutes)

Advertising

Tastes

Expectations

Seasons

Government legislation

What is PED

Price elasticity of demand measures the responsiveness of demand to a change in price.

calculates by: %change in quantity demanded/ % change in price

Interpreting PED

PED = 1 : unitary elastic. quantity demanded changes by exactly the same percentage as price

PED>1 : Relatively elastic. Quantity demanded changes by a greater percentage then price. so demand is relatively responsive to price

PED<1 : relatively inelastic. quantity demanded changes by a smaller percentage than price. demand is relatively unresponsive to a change in price

PED= infinity : Perfectly elastic. a change in price means that quantity falls to 0. so demand is very responsive to price .

PED=0. Perfectly inelastic. a change in price has no effect on quantity demanded. demand is completely unresponsive to price.

What are the factors affecting PED?

Availability of substitutes: If a product has lots of substitutes people will switch to other products when prices go up. Therefore, PED will be elastic. If there are no substitutes, then the demand curve will be inelastic since even if prices go up, people will have to buy that good if they want it as there are no alternatives.

• Time: The longer the time, the easier it will be for a person to find an alternative product/supplier of the product so the more elastic the good is. In the short term, many goods are inelastic as people may not even notice the price difference.

•

Necessity: If you need something, the demand curve will be inelastic because even if the price goes up, you still need to buy it.

How large of a % of total expenditure: If a good/service represents a very small percentage of a person's expenditure, a significant increase in price will have a relatively small impact on how much they buy of that product so it will be inelastic e.g. matches.

Addictive: If a product is addictive, then the demand curve will be inelastic. No matter how high prices are, people will still buy the good to fulfil their addiction.

PED and revenue

⚫ For an elastic demand curve: A decrease in price leads to an increase in revenue and an increase in price leads to a decrease in revenue.

⚫ For an inelastic demand curve: A decrease in price leads to a decrease in revenue and an increase in price leads to an increase in revenue.

For a unitary elastic curve, a change in price does not affect total revenue.

What is YED

Income elasticity of demand - responsiveness of demand to a change in income

calculated by: % change in quantity demanded/ % change in income

Interpreting YED

An inferior good is when YED<0: a rise in income will lead to a fall in demand for the good.

A normal good is when YED>0: a rise in income will lead to a rise in demand for the good.

A luxury good is a type of normal good, when YED>1.

Goods can also be as elastic or inelastic in income. If the integer is bigger than one, the good is elastic. If the integer is smaller than one, the good is inelastic and this tends to be necessities.

What's the significance of YED

-to know when sales will be affected by changes in the income of the population

-impact the type of good the firm produces

What's XED

cross elasticity of demand. The responsiveness of demand for one product due the change in price of another product

calculated by: % change in quantity demanded of A / % change in price of B

Interpreting XED

Substitutes are where XED>0: an increase in the price of good B will increase demand for good A.

Complementary goods are where XED<0: an increase in the price of good B will decrease demand for good A. One example is DVDs and DVD players.

Unrelated goods are where XED=0: a change in the price of good B has no impact on good A.

• The size of the integer represents the strength of the relationship: the larger the number, the stronger the relationship between the two.

What is supply?

the ability and willingness to provide a good or service at a particular price at a given moment in time

Movements and shifts along the supply curve

-a movement along the supply curve, from A to B, is caused by a change in the price of a good. a shift from S1 to S2 is caused by a change in the factors affecting supply

What are the conditions of supply?

Cost of production,

price of other goods

weather

technology

goals of the supplier

government legislation

taxes and subsidies

producer cartels

What is PES?

-responsiveness of supply to a change in price of the good

%change in quantity supplied/ % change in price

interpreting PES

Unitary elastic PES is where PES = 1: quantity supplied changes by exactly the same percentage as price. This would be shown as a curve which starts in the origin, is steeper than an elastic curve but more sloping than an inelastic curve.

Relatively elastic PES is where PES > 1: quantity supplied changes by a larger percentage than price, so supply is relatively responsive to price. The curve will be more sloping, starting on the price axis.

Relatively inelastic PES is where PES < 1: quantity supplied changes by a smaller percentage than price, so supply is relatively unresponsive to price. The curve will be steep, starting on the quantity line axis.

Perfectly elastic PES is where PES = infinity: a change in prices means that quantity supplied falls to 0, and supply is very responsive to price. This would be shown by a horizontal line.

Perfectly inelastic PES is where PES = 0: a change in price has no effect on output, so demand is completely unresponsive to price. This would be shown by a vertical line.

What are he factors affecting PES?

Time

Stocks

Working below full capacity

availability of factors of production

ease of entry into the market

availability of substitutes

What allocates resources in a free market economy?

the price mechanism allocates resources. price is determined by demand and supply which determines how much is bought and sold and by whom

What's the equilibrium point?

there are no more forces bringing abut change

supply is equal to demand

also known as he market clearing price

What are the functions of price mechanism?

1) The rationing function- when price increases some people may not be able to afford the product and some may loose desire for the good. The limited resources can be rationed and allocated to the people who are able to afford them and value them most highly

2)The signalling function- price mechanism acts as a signal where resources should be used

3)The incentive function- acts as an incentive to work hard. Buyers realise he more money they have, they are able to buy more products. suppliers realise that the more they produce goods, the more they can make money.

What's consumer surplus?

the difference between the price the consumer is willing to pay and the price they actually pay

what's producer surplus?

the difference between the price the supplier is willing to produce at their product at and the price they actually produce at