5O concise pages covering all of year 1 and year 2 microeconomic content for edexcel as/a level economics. Enough detail for A*
Written by two students:
Student 1- 10 9's at GCSE and 5 predicted A*'s in maths, further maths, economics, chemistry and EPQ
Student 2- 10 A*'s, 4 achieved A* in mat...
-MICROECONOMICS-
Scarcity and Choice
Economic good – a good that requires scarce resources to make, thus production has an
opportunity cost. They are scarce so have value, thus consumers will pay for them
Free good – has no opportunity cost since it doesn’t require scarce resources to make
Positive statement – capable of being verified/argued against through the use of facts. Can be
proven to be true or false using evidence. They are objective
Normative statement – is based on value judgements, subjective and based more on opinion
than actual fact as they can’t be refuted/verified. Influence economic decision as can take
different conclusions based on same statistics, for example the rate of inflation can give rise to
different conclusions
Basic economic problem
Consumers have unlimited wants yet there are limited resources – scarcity (shortage of
resources in relation to the quantity of human wants)
Forces economic agents to make a choice when allocating scarce resources between competing
uses
Every choice has a range of alternatives and a rational economic agent will choose the best one,
but then all the other choices will have to be given up. The value of the next best alternative
forgone when making an economic decision (opp. cost)
Needs – the minimum that is necessary to survive as a human being
Wants – desires for the consumption of goods and services, above out needs
Factors of production
Inputs into the production process
Factor type Description Reward
Land The land itself including the natural resources on, above and below Rent
the ground, in the sea
Labour Workforce of the economy, the human capital Wages
Capital Man-made goods used to produce other goods e.g. machinery Interest
Enterprise The risk bearing aspect in order to seek out profitability opportunities. Profit
Organises other economic resources
Economic agents
Governments – assumed to act on behalf of consumers and maximise the welfare of society.
They can intervene in economies to different extents, in order to decide how consumers/firms
interact. Can also produce g/s
Firms – assumed to aim to maximise profits (reward for taking risks and making investments).
Some may have different objectives like maximising social welfare. They combine factors of
production to produce g/s. Decide what to produce and how much to sell for
Households – provide the factors of production for firms. Make decisions on how to spend their
limited resources, assumed to maximise their utility. Decide what to buy and how much to buy
it for
Sustainability
Meeting the needs of the present generation without compromising the needs of any future
generations.
The environment is a scarce resource. Made up of renewable vs non-renewable
Non-renewable resources – if we use them today then they cannot be replaced on a human
timescale e.g. coal. Choices have to be made for where these scarce resources are best used
Renewable resources – can be used and replaced e.g. solar power. Only stay renewable when
the rate of consumption is less than rate of replenishment
Sustainable resource are a type of renewable resource. Can be economically exploited and will
not run out over time
Market Economy
Market economy is where all resources are privately owned and all resources are allocated by
the market forces of supply and demand. Economic decisions are made by firms and consumers,
and there is no gov. intervention
Motivator: self interest
Allocator: price determines who has access to g/s
Regulator: perfect competition
Advantages
Achieve allocative efficiency. Because resources are allocated through demand and supply, so
output is determined by where supply meets demand. This means all consumers willing and
able to consume the g/s at the market price are able to. Producer/consumer surplus are
maximised (firms maximise profits, consumers maximise utility)
There is an incentive of profit and wanting to profit maximise. Means firms are technically
efficient to make the best use of scarce resources to maximise profits. May reinvest profits for
innovation leading to profit maximisation. Innovate because firms are in competition, which
raises quality of g/s and choice, so consumers have higher utility from consumption and firms
from profit.
-but could give rise to monopolies if they can manipulate the market e.g. through advertising.
Fewer firms mean less innovation as less profit motive.
Can result in higher levels of worker efficiency as more there is more incentive to work hard,
since more goods available and want to be able to afford these. Can increase growth
-but can lead to inequality when not everyone has access to these goods
Disadvantages
Can miss markets, especially public goods. Because some goods being non-rival and non-
excludable. Means no consumer can be prevented from consuming good once its produced and
one’s consumption does not affect another’s consumption. Means once good is produced then
no consumer is willing to pay for that good. Means producers have no incentive to produce
good as it is not profitable. Means public goods may not be provided for, leading to allocative
inefficiency
Overconsumption of demerit goods. Consumers may not act rationally to maximise utility or
have perfect information. Occurs when they discount private costs if only experienced in future
or are underestimated. Means demand with perfect info is higher, so output is greater than
what is socially desirable. Same happens for underprovision of merit goods. Means gov. may
allocate resources allocatively efficiently, via state provision.
-this increased choice can mean more volatility for firms as consumer preferences change
quickly
Role of government
Step in when merit goods are underprovided
Price can be manipulated by gov. policy e.g. subsidy so more resources are allocated here, but if
demand is still low then can’t completely control provision
Correct market failure e.g. regulate monopolies
Concept of the Margin
The concept thinking about the effect of an additional action, how a change in one variable
affects another variable
Allows consumers to think ahead, preventing them from thinking about economic decisions in
the past and instead focus on ones in the future
Can increase productivity since actions that maximise utility are the ones prioritised
Rationality
Assumes all economic agents seek to maximise utility. To do this they must act rationally.
Nothing else will affect their decision
Different agents have different ways of maximising their utility (limitation)
Incentives are what agents respond to, which can allocate resources to provide highest utility to
each agent. If incentives not allocated properly then resources are misallocated
Consumers – consume a good until MU = P. If MU falls with extra consumption then price willing
to pay falls (diminishing marginal utility). Explains why the demand curves slopes downwards
Usefulness
For employers in a competitive market they will employ workers up to where MC = wage
Consumers consume a good up to where MU = price
For governments the social optimum level of consumption/production is where MSC = MSB
Opportunity Cost
Opportunity cost – every choice has a range of alternatives and a rational economic agent will
choose the best one, but then all the other choices will have to be given up. The value of the
next best alternative forgone when making an economic decision. Occurs because of finite
resources
Trade off – when one thing is lost to gain something else
Production Possibility Frontiers
PPF – a graphical representation of opportunity cost of using scarce resources, showing the
maximum productive potential of an economy, with two goods. Assumes there is a fixed
amount of resources used and a constant state of technology.
A – productively efficient because resources are being
used to their full productive potential. To produce
more of one good then the other must be foregone
D – productively inefficient.
E – impossible combination of resources
Economic growth is shown on PPF (shift outwards).
Occurs when there is an increase in the quantity and
quality of resources.
Moving along occurs when resources are diverted to produce different goods, incurring an
opportunity cost.
Why does it occur?
Capital is better at producing some things over others
Land has changing quality
Labour has varying levels of human capital
Factors of production have different properties
Usefulness of concept of opportunity cost
Useful in ensuring an efficient allocation of resources, but…
Not all alternatives are known/may not have any alternatives
Some factors e.g. land can be hard to switch to alternative uses
Opp. cost can relate to future events, which are hard to put a monetary value on. Or may be
hard to quantify some alternatives
Specialisation and Trade
Specialisation – when an individual/firm/country focuses it factor endowment (stock of
resources or factors of production) on producing a certain g/s. Can only occur when there is a
system of trading
When this is done by individuals it is known as the division of labour
Advantages
Increase output/quality since production focuses on what workers are best at producing. Same
amount of effort means increased labour productivity. Occurs because workers gain more skills
in a narrow range of tasks meaning they become more productive at this
Less time spent between switching tasks
Achieve economies of scale so size of the market is increased
Lower prices for consumers as lower unit costs due to increased productivity
Increased output creates economic growth
Disadvantages
Work is repetitive which could lower the motivation of workers, harming productivity and
quality
Could create structural unemployment since skills may be untransferable as they’ve been
focused on one task for so long. Vulnerable to changes in demand
Size of the market limits division of labour
Countries become less self-sufficient as rely on others for trade
How it encourages trade
Regions specialise where they have absolute advantage meaning increased output in this sector
Everywhere has a comparative advantage in something so when all produce in this way it is
more efficient so global output increases
Specialisation means some countries don’t produce some goods so trade out of necessity
Money facilitates trade since people know what they’ll get from selling their g/s
Barter systems are inefficient
-double coincidence of wants
-no set value so increased time on reaching agreement
-no guaranteed store of value
Functions of money
Medium of exchange – no double coincidence of wants so people know they can use money for
future exchanges
Unit of account – is a measure of value, show relative values of g/s
Store of value – money holds its value and won’t expire. Yet the quantity of g/s that can be
bought with money fluctuates due to the forces of demand/supply
Means of deferred payment – allows for debts to be created. Relies on it keeping its value
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