Paper 1 - Microeconomics

Normative statements

Express an opinion about what ought to be, they are subjective statements

Positive statements

Objective statements that can be tested or rejected by using evidence

Barter

The practice of exchanging one good or service for another without using money

Basic economic problem

There are infinite wants and needs

Managerial economies of scale

Bigger firms can afford to hire highly skilled specialist managers, increasing a firm’s productivity and decreasing their LR average costs

Example of managerial economies of scale

Amazon hire specialist accounting, software and marketing managers

Trade Union

A group of workers who collectively bargain to improve employee welfare

Inorganic growth

When a firm grows by merging with or acquiring another firm

An example of Inorganic growth

When google acquired YouTube

Tacit collusion

When there is an unspoken agreement between firms to limit competition

Where is X inefficiency most likely to exist?

Firms offering significant employee perks such as annual holidays to Mexico

Why can perfect competition be a good thing for consumers?

Perfectly competitive markets are allocatively efficient and so maximise consumer welfare

Workers objectives

Workers want higher wages, job security and improved working conditions

Monopsony

When there is only one dominant buyer in the marker

An example of a Monopsony

NHS is the only dominant buyer of doctors in the UK

Price mechanism

Interactionof supply and demand to determine the price in the market

Two limitations of organic growth

• very expensive

• Time period

Advantages of organic growth over horizontal integration

• Lack of synergies

• Regulation in horizontal integration

• Horizontal may not work

Factors influencing the supply of labour

• Non pecuniary benefits

• Employment level

• Tax rate

How is wage rate determined?

By supply and Demand

In perfect competition, what do we assume about wages

• Determined by solely by supply and demand

• All workers are paid the exact same amount

Sticky wages

Wages may be sticky due to forms of government intervention such as the minimum wage or due to the difficulties of announcing wage cuts to existing staff

If wages cannot fall when there is a fall in demand, what may firms do instead?

Fire people

Monopsony

only one buyer in the market

where may one find a labour monopsony?

In nationlised services such as the NHS

What are monopsony firms in labour markets?

Profit maximisers seeking to reduce their costs

What are the factors influencing the power of trade unions?

• Size

• Legislation

• Performance of the economy overall

• Militancy

• Firm profitability

2025 ongoing resident doctors strikes

resident doctors wanting to be paid more

What happens when trade unions demand higher pay, under the threat of striking or not working unless it is met

Results in a kink supply curve forming

What results in supply of labour being perfectly elastic?

Trade unions setting a minimum wage (kind of) that its members will accept of Wtu

What is the second method of securing higher wages in a trade union?

Lobby government to increase barriers to entry into a specific labour market

Bilateral monopoly

Where there can be both a monopsony and monopoly at the same time

Issues affecting the UK labour market

• Wage differentials

• migration

• unemployment

Why are there wage differentials?

• formal education

• Skills, qualifications and training

• Gender

• Other discrimination

On average, how much more do university graduates earn a year in comparison to non university graduates?

£10,000 more

As of April 2025, how much less was a woman’s hourly pay for full time employment

6.9% less than men

Ad Valorem Tax

An indirect tax based on a percentage of the sales price of a good or service

What does an increase in Ad Valorem Tax do?

Inward shift in the supply curve

Direct tax

A tax on income and wealth e.g. income tax

Excise tax

Indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol

Incidence of a tax

How the final burden of a tax is shared out. If demand for a good is price elastic, and a tax is imposed, then the tax may fall mainly on the producer as they will be unable to put prices up without losing a lot of demand

Indirect tax

Imposed on producers by the government

Specific tax

a set tac per unit imposed by the government

Subsidy

payments by the government to suppliers that reduce their costs

What is the effect of a subsidy

To increase supply and therefore reduce the market equilibrium price

Tax incidence

The manner in which the burden of an indirect tax is shared between participants in the market

Unit tax

A specific tax per unit sold

Computational weakness

Irrationality arises when consumers decisions are dominated by computational weakness. This occurs when consumers find it difficult to calculate the probability of something happening when they make purchasing decisions.

Habitual consumption

Habitual behaviour occurs when people have strong default choices

Herd behaviour

When individuals in a group act collectively without centralised direction

Externalities

Third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid

Information gaps

Exist when either the buyer or seller