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notes Unit 1 - Introduction to markets and market failure
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detailed unit 1 notes for edexcel economics A
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microeconomics notes1.1 nature of economics
Economics :
- The allocation of scarce resources to provide for unlimited human wants.
Ceteris paribus:
- All other things remain equal or constant, so nothing else changes.
Positive:
- Statements based on facts which can be tested as true or false and are value-free.
- “Raising taxes will lead to an increase in tax revenue.”
Normative:
- Based on value judgements, which can’t be tested as true or false.
- “The free market is the best way to allocate resources.”
Value judgements :
- Opinions, influence economic decision making and policy, different economists make different judgements from same
stats.
Scarcity :
- Finite resources compared to infinite human wants, so choices must be made about how to use those resources.
- Gives rise to opportunity cost – value of the next best alternative forgone.
- Same resources can’t be used to produce different goods at the same time.
Renewable:
- Stock level can be replenished naturally over a period.
Non-renewable:
- Can’t be replenished, used at faster rate than its being produced. Stock level decreases over time as its consumed.
Marginal analysis:
- The effects of producing or consuming one extra unit of a good or service.
Factors of production:
- Land – natural resources, physical space. Rent.
- Capital – goods used in the production process, machines, buildings, finished or semi-finished consumer goods. Interest
from investment.
- Labour – human capital. Wages.
- Entrepreneurship – someone who takes risks. Profit – an incentive to take risks.
PPF:
- Maximum combination of two goods that can be produced in an economy if all resources are fully and efficiently
utilised.
- Curved – not all resources are as efficient as other resources in the production of both goods.
- Linear – as efficient as each other.
A + D – efficient allocation.
B – inefficient allocation.
C – unobtainable at this moment in time.
A-D – movement along, change in combination of goods produced, so opportunity
cost.
Shifts – changes in a country’s productive potential.
Outward – increases, economic growth.
- Increase in quantity or quality of resources, investment, new technology, education + training
schemes.
Inward – decreases, economy is declining.
- War, natural disasters, decreased productivity.
Consumer goods:
- Directly provides utility to consumers.
Capital goods:
- Used to produce consumer goods or services.
, Specialisation:
- When an individual, firm, region, or country concentrates on the production of a limited range of goods and services.
Advantages Disadvantages
- Increases productivity. - Demand falls for a good, increased structural unemployment.
- Increases living standards. - Resource depletion if specialise in production and export of
- Higher level of global output -> increased living minerals + non-renewable resources.
standards. - Developing countries face unfavourable rate of exchange, they sell
- Theory of comparative advantages – specialised in their commodities at low price compared to what they purchase
goods where they have lower opportunity cost and from overseas.
so best at producing, help boost economy + greater - Higher interdependence, problems of trade due to war.
output globally. - More competition to cut costs so wages may fall.
Division of Labour:
- The specialisation of workers on individual tasks in the production process to increase efficiency.
- Adam Smith – pin factory, 18 tasks, 2,000% increase.
Advantages Disadvantages
- Increased labour productivity, skilled due to repetition. - Repetition creates monotony + boredom -> high turnover of
- Increased efficiency of resources, reducing cost per unit. staff -> increased recruitment + selection costs.
Equipment continuously used; no time wasted moving - Replace workers with machines -> structural unemployment.
between tasks. Less time needed to train workers. - Interdependence in production, one group strikes, affects
- Increased quality as workers specialises. whole industry.
Money :
- Anything that is generally acceptable in the payment of a good or service, or of a debt.
- Enables specialisation + trade to grow.
- Confidence else lose general acceptability for transaction. Too much printed -> hyperinflation (Venezuela, inflation rate
exceeded 2 million %, so worthless + no longer acceptable.
Functions of money:
- Medium of exchange:
- Enables buying and selling of products, making exchange easier, eliminates need for barter.
- Measure of value:
- Enables value to be placed on products so they can be bought and sold with ease. Creates unit of measure that
enables comparisons between the relative values of products.
- Store of value:
- Convenient way of storing wealth so it can be spent at later date, holds value in short term if inflation remains
low.
- Method of deferred payment:
- Enables borrowing and lending so someone can buy a product rather than waiting till enough funds have been
saved.
Free market:
- All resources privately owned and allocated via the price mechanism, minimal government intervention.
- Adam Smith + Friedrich Hayek.
- Smith – invisible hand of self-interest as guiding supply and demand in markets.
- Believed consumers and producers acting in their own self-interest would lead to best outcome for all in
society.
- USA.
Advantages Disadvantages
- Economic efficiency + lower prices due to competition, - Monopolies may form, as result of competition so rivals go
productive efficiency (keep production costs down to sell at out of business.
competitive prices) + allocative efficiency (produce what - Unequal distribution of income and wealth, lack of welfare
consumers demand). So price mechanism will equate support -> people living in absolute poverty.
consumer demand with producer supply. - External costs + benefits from production/consumption
- Quality – competition so continuously try to improve sometimes ignored.
quality to gain advantages over rivals. Considerable - Information gaps, lack of regulations + tax to protect
consumer sovereignty (consumer power in market). consumers, excessive amount of demerit goods.
- Greater choice – wide selection of goods + jobs. - Insufficient quantity of public + merit goods.
- Financial incentives – entrepreneurs’ incentive to invest + - Erratic swings in business cycle -> high inflation during
take risks for profit, labour incentive to work hard to earn economic boom + high unemployment during economic
more. slump.
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