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