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EDEXCEL A LEVEL ECONOMICS (A)

THEME 1INTRODUCTION TO MARKETS & MARKET FAILURE

REVISION FLASHCARDS............................................................... ..........

FACTORSOFPRODUCTION

Land Labour

Capital Enterprise

2THEME1.1– NATUREOFECONOMICS

RATIONINGSCARCERESOURCES

ByMarketPrice ByConsumerIncome

ByAssessmentofPeople’sNeed

ByHouseholdPostcode

ByEducationLevel

ByAge ByGender ByNationality

7THEME1.1– NATUREOFECONOMICS

PPFANDOPPORTUNITYCOSTOutputof

Wheat

OutputofCotton

200

160

300 400

A

B

Theopportunitycostofemployingmoreresourcesintocottonproductionisexpressedintermsoftheoutputofwheatgivenup

Onehundredextratonnesofcottoninvolvessacrificing 40tonnesofwheat– theopportunitycostis4/10thsofatonneofwheatforeachextratonneofcotton

ExaminersarekeenthatyouunderstandtheconceptofopportunitycostinrelationtothePPF

10THEME1.1– NATUREOFECONOMICS

RESOURCEDEPLETION&DEPRECIATION

Machinery SkillsAtrophy

Buildings BasicInfrastructure

Resourcedepreciation:Whentheproductivity/efficiencyofresourcesdiminisheswithageandalsowithrepeateduse.

THEME1.1– NATUREOFECONOMICS

KEYADVANTAGESFROMSPECIALISATION

Higherlabourproductivityandrisingbusinessprofits• Learningbydoingincreasesoutputperhourworked• Higherproductivitylowerstheunitcostofsupply• Increasedproductivityleadstohigherprofitsforbusinesses

Specialisationcreatesasurplusoutputofgoodsandservicesthatcanbetradedinternationally• Thetheoryofcomparativeadvantageiskeytothis• Businesses/countriesspecializeinareasofrelativeadvantage

LowerpricescausehigherrealincomesandGDPgrowth• Lowerpricesgivesconsumersgreaterrealpurchasingpower• Higherproductivityallowsbusinessestopayincreaseswages• Successfulspecializationisoneofthekeycausesofgrowth

THEME1.1– NATUREOFECONOMICS

CALCUATINGPERCENTAGESINMICRO

Globalpriceofpalmoil,2008-2017,U.S.Dollars($)perMetricTonne

0

200

400

600

800

1000

1200

1400

01/01/20

08

01/08/20

08

01/03/20

09

01/10/20

09

01/05/20

10

01/12/20

10

01/07/20

11

01/02/20

12

01/09/20

12

01/04/20

13

01/11/20

13

01/06/20

14

01/01/20

15

01/08/20

15

01/03/20

16

01/10/20

16

01/05/20

17

Globalpriceofpalmoil(US$s)

Jan2011:Price=$1238

Aug2015:Price=$484

Accordingtothechart,calculatethepercentagefallintheworldpriceofpalmbetweenJanuary2011andAugust2015.Showyourworkings.

Jan2011figureis$1238

August2015figureis£484

%fall=(1238-484)1238x100

Thereforethefallinpriceofpalmoil=-60.9%

28THEME1.1– NATUREOFECONOMICS

SHIFTSINTHEDEMANDCURVEPriceofCoffee

Quantitydemandedofcoffee

D1

P1

Q1 Q2

D2D3

Q3

D1toD3isaninwardshiftofdemand– lessisdemandedateachmarketprice

D1toD2isanoutwardshiftofdemand– moreisdemandedateachmarketprice

Factorsotherthanpricecauseashiftindemand

31THEME1.2- HOWMARKETSWORK

EXCESSSUPPLYINAMARKET

PriceofWheat

QuantityofWheat

MarketSupply

Pe

Qe

IfthecurrentmarketpricewasP2,therewouldbeanexcesssupply– ofQ2– Q3,thiswillputdownwardpressureonprice

MarketDemand

P2

Q2 Q3

Excesssupply

45THEME1.2- HOWMARKETSWORK

FACTORSAFFECTINGPED

Availabilityofsubstitutes

Costofswitchingsuppliers

Breadthofdefinition

Degreeofnecessity

Timeframewhenmakingachoice

Brandloyalty Percentageofincomespent

Habitualdemand

49THEME1.2- HOWMARKETSWORK

PRICEELASTICITYOFDEMANDANDREVENUE

Ifdemandforaproductispriceelastic,asuppliergainsextrarevenueiftheylowertheirprices.Consideranexample:

Afirmsells200unitsatapriceof£10(TR=£2000)Reducingpriceby10%to£9causesdemandtoexpandto250units(a25%increaseindemand)(TRthereforerisesto£2250)CoefficientofPed=(-)2.5i.e.anelasticdemand

Price

Qty

P2

P1

Q1 Q2

Demand

Gaininrevenuefromsellingmoreatalowerprice

Lostrevenuefromsellingatalowerprice

50THEME1.2- HOWMARKETSWORK

INTER-RELATEDMARKETS

Priceofbricks

Qty(bricks)

P2

D1

P1

S1Price

ofnew

homes

Qty(housing)

S1

D2 D1

P1

Howandecreaseindemandinonemarketmayimpactuponothermarkets

P2

D2

Q1Q2

Fallingdemandfornewhomes

Leadstoaninwardshiftofdemandfor

bricks– asbrickshaveaderived

demand

Q2 Q1

THEME1.2- HOWMARKETSWORK

SOCIALCOSTS&BENEFITS– WINDFARMS

PrivateCostsCostofland+

planningpermission

Costofmanufacturingthewindturbines

Installationcosts

Labourcosts

ExternalCostsVisualandnoisepollutionforsome

people

Installationandtransportcongestion

Fallingpropertypricesinaffected

areas

PrivateBenefitsCheaperelectricityinthelongrunifeconomiesofscaleandnewwindfarmtechnologycanbe

used

Lessimpactonpersonalhealththan

fossilfuels

ExternalBenefitsFewerharmfulgases

emitted

Employmentcreated

Technologyusedcanbeexportedoverseas

Lowertaxpayersubsidiesrequiredin

thelongrun

THEME1.3– MARKETFAILURE

PURPOSEOFGOVERNMENTINTERVENTION

Taxes&Subsidies Maximum&MinimumPrices

RegulatingtheMarket

StateOwnership/StateFunding&

Provision

Governmentintervention

THEME1.4– GOVERNMENTINTERVENTION 95

SUBSIDIES

Biofuelsubsidiesforfarmers

SolarPanel“Feed-InTariffs”

ApprenticeshipSchemes

Aidtobusinessesmakinglosses

Subsidiesforwindfarminvestment

Food/fuelsubsidiesforconsumers

ChildCareforworkingfamilies

Subsidiestotherailindustry

100THEME1.4– GOVERNMENTINTERVENTION

MINIMUMPRICESANDEXTERNALITIES

Argumentsforminimumalcohol price• Reducessomeexternalitiesfrom

pre-loadingofalcoholathome• Pubsmaybenefitfromhigher

minimum pricesinsupermarkets• Can target cheaper,high strength

drinksused byyoungerdrinkers

Argumentsagainst a minimumprice• Minimumprice isataxon

responsibledrinkers- inequitable• Producers canagreevoluntary

policiesonalcoholprice/strength• Bettertoraisealcoholduties which

willraiseextrataxrevenues

36.2% 32.6%

21.8%

7.4%

2.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Beer Wine Spirits Cider RTDs

Percen

tagesh

areofco

nsum

ption

AlcoholconsumptioninUKin2015

THEME1.4– GOVERNMENTINTERVENTION