These notes, are the entirety of the Microeconomics part of the A level WJEC Economics. I achieved an A* in my A level in 2020 using these notes and now I attend Oxford University studying PPE. These notes really have absolutely everything you could need to know! I wrote them alongside the specimen...
Scarcity and choice
Economics
Scarcity = limited amount of resources meaning we have to allocate resources in
order to create the most profit
What affects the choice that is made?
- Benefits vs costs = does the benefit outweigh the cost?
- Diminishing marginal utility = the more you have of something the less value the
next unit of it becomes
- Marginal analysis = weighing up what to do next at the end of a decision, each
animal has a marginal benefits
- Opportunity cost = opportunity lost, basically what benefit is lost, e.g. the
opportunity cost of studying economics is not being able to study history
- Social benefits versus individual benefits = e.g. pollution from burning coal
makes money but effects the environment
Homework questions
What is meant by opportunity cost?
Opportunity cost measures the cost of any choice in terms of the next best
alternative foregone.
What is the difference between Command and Free market systems in terms of
resource allocation?
Command market is controlled by the government whereas free market is not
interfered with, it is based solely on supply and demand. In a command
economy resource allocation is based on macroeconomics and politics;
whereas, in a free market, resource allocation is determined by an
individual’s/company’s personal profits and losses.
What is the invisible hand, and how does the price mechanism allocate resources?
The invisible hand is a term created by Adam Smith which describes when an
individual carries out self-interested actions and ends up unintentionally have
positive social benefits. This means that most of the time resources are
allocated in the best interests of the public.
The rationing function of the price mechanism is when there is a shortage of a
product, price will rise and deter people from buying the product, this means
the demand can decrease to match the supply.
The signaling function is when farmers and producers communicate in order to keep
supply and demand at an equal, this prevents crashes in prices and
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production.
What are the benefits and limitations of allocating resources using the price
mechanism?
A benefit of allocating resources by the price mechanism is that competition is
increased, this is a good thing for the consumer as product quality increases
as prices decrease with more competitors.
A disadvantage can be that companies begin to mechanize, this can mean that
workers are no longer needed as machines can replace them, unemployment
can then rise, creating threats to the economy. Another disadvantage is that in
companies such as those who sell oil, the creation of the business is very
expensive, this means that there are not many competitors and therefore,
prices can soar high if there is no government intervention.
Opportunity cost
The fundamental economic problem:
Limited resources with people who have unlimited needs and wants, this problem is
known as scarcity.
Factor inputs:
Our resources must be organized, we do this by categorizing our resources into
three factors of production:
- Land
- Labour
- Entrepreneurs can be classed as a separate factor
- Capital (man made things)
Implications of scarcity
Choices need to be made- this is when opportunity cost comes into play.
OPPORTUNITY COST IS THE BENEFIT OF THE NEXT BEST ALTERNATIVE
FORGONE.
Production Possibility Frontier
If he is inside the curve
(before the frontier of possibility)
then it is an inefficient use of resources.
,Abbie Leaver
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PPFs
An ideal PPF would have a straight line as a frontier; however, the frontier is curved. This is
because there is very rarely a simple situation demonstrated by a straight line.
The reason that there is usually a curve is because opportunity cost is usually irregular.
Opportunity cost is irregular as there is not perfect factor substitutability, this means
that not all factors of production are equally suited to producing each good. One place
may be better at producing a certain type of good. The reason that the curve has not
got an equal gradient is because the marginal return diminishes as production
continues.
An example of this can be seen in the handout of “Case study: Econ-land”.
Vocabulary:
Perfect factor substitutability: This describes the extent to which a factor of production can
be substituted for another factor of production. If factor substitutability is perfect this
means that each factor of production will be equally useful in producing either type of good.
Diminishing marginal returns: Describes how the extra marginal gain that you get from
increasing production decreases as you increase production levels. This means that the
curve has a varying gradient.
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