Lecture notes
notes Unit 1 - Introduction to markets and market failure
- Institution
- PEARSON (PEARSON)
detailed unit 1 notes for edexcel economics A
[Show more]
Seller
Follow
Content preview
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.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller al109. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £8.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
76669 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now
