AS level Economics

Scarcity

Limited resources and unlimited wants lead to choices and opportunity cost.

Opportunity cost

The next best alternative foregone when a choice is made.

Positive statements

Factual and testable (e.g., 'Raising taxes reduces consumption').

Normative statements

Value judgments (e.g., 'The government should reduce inequality').

Production possibility frontier (PPF)

A curve showing the maximum combinations of goods or services that can be produced with given resources and technology.

Shifts in the PPF

Outward: Improved technology, more resources; Inward: War, natural disasters, pandemics.

Price elasticity of demand (PED)

% change in quantity demanded ÷ % change in price.

Factors making demand more elastic

Many substitutes, luxury goods, long time period, high % of income.

Market failure

When the free market fails to allocate resources efficiently, leading to over or under-production.

Examples of market failure

Externalities (pollution), public goods (defense), information gaps, monopoly power.

Externalities

Spillover effects of production or consumption not reflected in the price.

GDP

The total value of goods and services produced in a country over a period of time.

Economic growth

An increase in real GDP over time.

Inflation

A sustained rise in the general price level.

Causes of inflation

Demand-pull: Too much demand; Cost-push: Higher production costs (e.g., wages, oil prices).

Unemployment

People able and willing to work who are not currently employed.

Types of unemployment

Structural, frictional, cyclical, seasonal.

Balance of payments

A record of a country's economic transactions with the rest of the world.

Fiscal policy

Use of government spending and taxation to influence the economy.

Monetary policy

Use of interest rates and money supply to influence economic activity.

Supply-side policies

Policies aimed at increasing productive potential (e.g., education, deregulation).

Reasons firms remain small

Limited market size, owner's preferences, lack of resources, high operational costs, and high competition.

Reasons firms grow

Economies of scale, market expansion, increased market power, access to more resources, and diversification of risk.

Divorce of ownership from control

The separation between the owners (shareholders) and the managers (who run the company), leading to potential conflicts of interest (Principal-Agent problem).

Principal-Agent problem

The conflict that arises when agents (managers) do not act in the best interest of the principals (shareholders).

Public sector organisations

Owned and operated by the government (services, not profit-driven).

Private sector organisations

Owned by private individuals or companies (profit-driven).

Profit organisations

Aim to maximize profits for owners/shareholders.

Not-for-profit organisations

Aim to fulfill social, charitable, or educational objectives rather than generate profits.

Organic growth

Growth from internal resources (e.g., increasing sales, new products).

Vertical integration

Expansion into different stages of production (forward or backward).

Horizontal integration

Merging with or acquiring competitors.

Conglomerate integration

Expansion into unrelated industries.

Advantages of organic growth

Less risky, better control, sustainable.

Disadvantages of organic growth

Slow growth, limited by market size.

Advantages of vertical integration

Control over supply chain, cost reductions, improved efficiency.

Disadvantages of vertical integration

High costs, loss of focus, risk of diseconomies of scale.

Advantages of horizontal integration

Market share growth, economies of scale, reduced competition.

Disadvantages of horizontal integration

Risk of anti-competitive behavior, integration challenges.

Advantages of conglomerate integration

Diversification of risk, entry into new markets.

Disadvantages of conglomerate integration

Lack of expertise, less focus on core business.

Constraints on business growth

Limited market size restricts growth potential.

Access to finance

Lack of funding can hinder expansion.

Owner objectives

Owners may not want to expand due to personal reasons.

Regulation

Government restrictions can limit growth.

Reasons for demergers

Focus on core business, reduce complexity, improve efficiency, enhance shareholder value, and address regulatory issues.

Impact of demergers on businesses

Can increase focus and efficiency but may incur costs and face organizational challenges.

Impact of demergers on workers

Potential job losses or relocations, but also new opportunities.

Impact of demergers on consumers

Can lead to more competition and innovation, but could also reduce product range.

Profit maximisation

Focus on increasing profits.

Revenue maximisation

Aim to maximize sales or revenue.

Sales maximisation

Increasing sales volume.

Satisficing

Achieving satisfactory levels of performance without necessarily maximizing profits.

How is profit maximisation illustrated?

Profit maximisation occurs where marginal cost (MC) equals marginal revenue (MR).

Formula for profit

Profit = Total Revenue - Total Costs.

Total revenue (TR)

TR = Price × Quantity sold.

Total revenue vs marginal revenue

As output increases, marginal revenue typically decreases in imperfect markets.

Total cost (TC) formula

Total cost (TC) = Total fixed cost (TFC) + Total variable cost (TVC).

Average cost (AC) formula

Average cost (AC) = Total cost (TC) ÷ Quantity.

Marginal cost (MC) formula

Marginal cost (MC) = Change in total cost ÷ Change in output.

Economies of scale

Reductions in costs from increasing the scale of production.

Internal economies

Reductions in costs from increasing the scale of production within the firm (e.g., bulk buying).

External economies

Reductions in costs that benefit all firms in an industry (e.g., improved infrastructure).

Private sector

Owned by private individuals or companies (profit-driven).

Public sector

Owned and operated by the government (services, not profit-driven).

Constraints on business growth

Size of the market, access to finance, owner objectives, regulation.

Different business objectives

Profit maximisation, revenue maximisation, sales maximisation, satisficing.

Profit maximisation illustration

Profit maximisation occurs where marginal cost (MC) equals marginal revenue (MR).

Relationship between total revenue and marginal revenue

Total revenue is the total income from sales; marginal revenue is the additional revenue from selling one more unit.

Economies of scale

Internal economies are reductions in costs from increasing the scale of production within the firm; external economies are reductions in costs that benefit all firms in an industry.