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Economics A* Notes
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Lecture notes of 19 pages for the course Unit 1 ECON1 - Economics: Markets and Market Failure at AQA (Economics A* Notes)
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1Unit 1: How the market works
Unit 1: How the market works 1
Economic principles 1
Competitive markets and how they work 2
Elasticities 8
Market failure 12
Government solutions to market failure 14
Economic principles
● Define and explain the basic economic problem
● Define and give examples of the different factors of production
● Define specialisation and explain benefits and potential costs
● Explain different types of market systems
● Define opportunity cost
● Use PPF’s to show efficient/inefficient use of resources and to demonstrate opportunity cost
KEY WORDS
1. Scarcity – The problem arising from infinite human wants with limited resources to fulfil
those wants.
2. The basic economic problem – How to allocate scarce resources among alternative uses.
3. Factor of production – A resource used in the production of goods and services.
4. Capital – Man-made, physical resources used in production.
5. Labour – The human workforce used in production.
6. Land – The land, sea and everything they contain
- Common mistake: things that are taken from the earth (iron ore, coal) count as land
but if they are processed (transformed by man in some way) it becomes capital. E.g.
iron ore is land but when it is smelted into iron metal it becomes capital.
7. Entrepreneurship – Efforts made to organise the other three factors of production, as well as
the ability to take risks in providing new goods and services.
SPECIALISATION
Specialisation – the concentration by a worker, firm, or whole economy on a narrow range of goods
and services.
Benefits whole economies specialising
● More efficient resource allocation between countries
● Lower prices and more choice for consumers
● Can allow some countries to achieve rapid economic growth through export markets
Risks of whole economies specialising
● Natural resources may be used up more quickly
● May cause some sectors of economy to decline
● Countries are more interdependent and problems with one economy can spread to other
economies in the region
,2
DIVISION OF LABOUR
Division of labour: The specialisation of workers into different stages of production
Benefits of workers specialising
● They become more skilled at their role leading to higher productivity and lower average costs
for the firm
● It means capital is used more efficiently as it avoids workers switching between different
machinery/equipment
Risks of workers specialising
● Workers may become demotivated leading to lower productivity and higher average costs
● If one stage of production is slowed down it will have a ‘bottleneck effect’ and slow down all
subsequent stages of production.
TYPES OF ECONOMIC SYSTEMS
Economic system: the way in which production is organised in a country
Free market economy: an economic system where resources are allocated through the market forces
of supply and demand. The price mechanism provides an incentive for private firms to combine
factors of production into finished goods and services.
Command/planned economy: an economic system in which resources are state owned and allocated
by the government
Mixed economy: an economic system where resources are allocated through a mixture of market
forces and government decisions
Common mistake: most economies are mixed economies because the government will tend to
allocate some resources itself (e.g. healthcare, police, schooling) but allow other resources to be
allocated by private firms.
Opportunity cost: the benefit lost from the next best alternative foregone when a choice is made
Common mistake: remember opportunity cost has to be the next best alternative, not just
*any* alternative.
Production possibility curve (PPC): Diagram showing all the combinations of two goods that can be
produced if resources are used efficiently
A: Efficient use of resources
B: Efficient use of resources
C: Inefficient use of resources
Note labelling of axes: it needs to be two different
goods/services
Effect of gaining more resources / better technology - > PPC
shifts out
Opportunity cost with PPC’s:
Remember, opportunity cost is what you must give up in order to gain something. So…
, 3
If we move from point A to B we produce 3 moreunits of services but lose4 units of goods. We can
say the opportunity cost of producing 3 more units of services (when we move from A to B) is 4
units of goods.
Practice questions:
1. Sugar cane can be used to make biofuel or can be processed into sugar for cooking. Use a
PPC and the illustrate how firms that process sugar cane face an opportunity cost. (6 marks)
2. Show how the ‘economic problem’ can be applied to a family deciding whether to take a
holiday in the Maldives. (4 marks)
3. State two factors of production that can be used to produce tea and give an example of each.
(4 marks)
4. Draw a PPC to show the effect of a country moving resources away from producing rice to
producing tea instead. (4 marks)
Competitive markets and how they work
Can you:
● Explain what a competitive market is and how it helps allocate resources
● Explain demand and factors affecting demand
● Explain supply and factors affecting supply
● Explain how demand and supply reach equilibrium
● Explain consumer and producer surplus
● Explain allocative efficiency
Stuff to learn:
Market: When buyers and sellers meet to trade or exchange products
Demand: The quantity of a product that consumers are willing and able to purchase at various prices
in a given period of time
Effective demand: The willingness and ability to buy a product
Shift of demand (due to non-price factors) Movement along demand curve (due to price)
Determinants of demand:
● Income - When there is an increase in people’s wages or a decrease in taxation. This
increases their disposable income. For normal goods (goods with a positive YED), consumers
will take advantage of higher disposable income to purchase a larger quantity. For inferior
goods (goods with a negative YED), consumers will purchase a smaller quantity as their
incomes increase.
● Advertising and trends
● Population and demographics - As population grows, there will be a greater number of
consumers and therefore more demand for individual goods and services. The average ageof
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