Pearson Edexcel AS/ A Level Unit 1 Introduction to Markets and Market Failure Full Detailed Notes covering all chapters of the unit. Graphs, key terms, and detailed explanations included
Unit 1: Introduction to
Markets and Market Failure
Chapters 1-3
Why is Economics not a science?
In science its verifiable facts, phenoma and occurances – You can get
repeatable results in lab conditions.
Ceteris Paribus
All things being equal. The assumption that, whilst the effects of a change in
one variable are being investigated, all other variables are kept constant.
E.G If there is a hot summer more people buy ice-cream so the price
increases.
Positive Statements
A positive statement is one which is verifiable or testable using data. They
can be proven true or false and can be supported or refuted by evidence.
E.G Football is the most popular sport
E.G The price of oil more than tripled between 2004 and 2008
Normative Statements
Linked with personal opinions. They contain a valued judgement and cannot
be tested. They often include phrases such as ‘should’ and ‘the best is’.
E.G Smoking is anti-social and polluting
E.G Taxes should be raised to help pay for social welfare
The Basic Economic Problem
,The basic economic problem states that wants and needs are unlimited and
resources are limited. The resources are scarce but wants are infinite. They
have to allocate their scarce resources between competing uses.
How does this generate scarcity?
This is as people want things but they can’t always get it. Resources run out
before all the wants are satisfied.
How does this generate choice?
Choose who gets the resources and choose what to buy
Opportunity Cost
The next best benefits of alternative forgone when making a choice. It can
be time related or cost related.
E.G I had £1 to spend of either getting a red bull or fanta. I chose the red bull
as it gave me more energy however the fanta tastes nicer.
E.G I had homework to do however also had the chance to go to a friend’s
house. I went to my friend’s house however lost the time the next day by
having to homework.
Index Numbers
Year Price Index
2000 10p 100
2005 10p 100
2010 17p 170
2015 25p 250
2018 30p 300
Base Year = 2000
E.G
Price – Base Price = Answer
Answer / Base Price = New Answer
New Answer x 100 = Number
100 + number = index
E.G
25-10 = 15
= 1.5
1.5 X 100 = 150
100+150 = 250
Market Failure
,Market failure is a situation in which the allocation of goods and services by
a free market is not efficient, often leading to a net social welfare loss.
E.G when prices cannot achieve equilibrium because of market distortions
such as minimum wage requirements or price limits on specific goods and
services that restrict economic output.
Chapter 4
Production Possibility Frontiers
• A production possibility frontier shows the maximum potential
output of an economy.
• Growth in the economy will shift the PPF outwards whilst a shift
inwards of the PPF shows that the productive potential of an economy
has declined.
• Consuming more in the present at the expense of producing capital
goods can lead to lower growth of the potential output of an economy
in the future.
• Production at a point inside the PPF indicates an underuse or an
inefficient use of resources.
• The PPF shows only what could be produced but not what should be
produced.
, The Problem of Scarcity
Over time, resources are scarce and so only a finite amount can be produced.
An economy might have enough resources at its disposal to be able to
produce manufactured and non-manufactured goods. The more
manufactured goods that are produced, the less non-manufactured goods
that can be produced. The PPF shows the different combinations of
economic goods which an economy is able to produce if all resources in the
economy are fully and efficiently employed.
Opportunity Cost
The production possibility frontier can illustrate the principle of opportunity
cost. A PPF shows all the possible combinations of two goods, or two options
available at one point in time. The concept of margin can also be used. The
margin is a point of possible change. The economy could produce more
manufactured goods but at the cost of giving up non-manufactured goods.
Economic Growth or Decline
This is where the economy cannot produce at any point outside its existing
PPF. This is because the PPF shows the maximum potential output of an
economy. An increase in the productive potential of an economy is shown by
a shift outwards of the PPF.
Growth in the economy can happen if`:
• The quantity of resources available for production increases.
• There is an increase in the quality of resources, education will make
workers more productive whilst technical progress will allow
machines and production processes to produce more with the same
amount of resources.
PPF’s can shift inwards as well as outwards. The productive potential of an
economy can fall. Many economies experience high levels of unemployment
of workers. Production then occurs within the boundary and not on the
boundary. If resources became fully employed, the economy could move
from inside the boundary to a point on the boundary.
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