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Understand the advantages and disadvantages of specialisation and the division of labour.
Production is the process of turning factors of production into final output
Specialisation is when individuals, households, firms or countries concentrate in producing certain goods and
services and trading surpluses with each other
Division of labour is specialisation by workers on one particular part of production process
Increase labour productivity – output per worker
Suits a modern economy as it encourages exchange
Workers can specialise to tasks they are best suited to
X If divided up too much, work becomes tedious, demotivation, less productivity
X Over specialisation – when industries close down, unemployment becomes very high
Use production possibility frontiers to depict opportunity cost, economic growth and the efficient allocation of
resources. Distinguish between movements along and shifts in production possibility frontiers.
PPF – all maximum possible combinations of 2 goods that a country can produce within a specified time period. All
goods either capital or consumer
Demonstrated limited resources, and opportunity cost of how we choose resources
Y – Consumer goods, X – Capital goods
Inside curve – productive inefficiency
On curve – productive efficiency
Outside curve – unattainable
Movement of curve – economic growth
Opportunity cost – highest valued alternative that had to be sacrificed for option
chosen:
Total given up/ Total gained – e.g. 2 goods given up for 1 = 2:1
PPF bowed outwards due to increasing opportunity costs – as nation concentrates
more on one good, has to start using resources which are less suitable and would
have been better suited to producing other goods. If OC constant, PPF straight line.
Why PPF moves:
Investment in capital goods – more goods produced in long term
Immigration – more labour
Discovery of raw materials
Technological innovation – better productivity
Training-education
pg. 1
Mustafa Ramji Unit 1 AS Economics
Understand the advantages and disadvantages of a free market economy and why there are mixed economies.
Free market – will allocate resources without need for government intervention. All economic decisions taken by
firms and households.
Mixed economy – where resources partly allocated government, part free market, e.g. taxes, prices, public goods
Command economy – government decides how resources are allocated
Free market evaluation:
Works automatically without government decisions – supply/demand allow firms/ households maximise value
for money
No expensive central planning
People work hard as they have incentives for better pay, profits etc
Competition between firms leads to lowering of prices, less wastage, more consumer welfare
X More inequality
X Immoral/ socially undesirable decisions by firms
X Underproduction of goods such as public goods
X Overproduction of socially undesirable goods such as cigarettes
X Few firms dominate a market
X Ethical objection – system encourages greed, materialism and self interest
Understand the rationing, incentive and signalling functions of the price mechanism for allocating scarce resources.
Rationing function – resources are finite, so not everyone can buy. When demand > supply, mechanism moves
price up, so those who can afford to pay can buy
Signalling function – allows suppliers to understand what to produce (where supply is low)
Incentive function – help change behaviour of consumers, e.g. if cigarettes more expensive, less will smoke
Understand factors which may cause a shift in the demand curve, for example, changes in the price of substitutes or
complementary goods; changes in real income and tastes.
Price of substitutes increases, demand increases, people less willing to buy substitutes: Competitive demand
Price of complements increases, demand falls as complement required to consume good: Joint demand
As income rises, more people can afford so demand rises
Speculation: If prices will be higher in future, more will buy in present, so demand increases
Due to advertising or fashion, tastes will may be more favourable to a good, increasing demand
Understand how a change in price causes a movement along the supply curve.
Supply is willingness and ability of producers to produce a quantity of a good at a given price level
Incentive of profits – higher the price, more profits so supply increases
Costs – higher price, producers with high costs can enter market, as high price covers the costs
Understand the factors which may cause a shift in the supply curve, for example, changes in the costs of production,
the introduction of new technology, indirect taxes and government subsidies.
As costs such as wages or raw materials, or taxes, increase, supply will shift left
New technology improves efficiency, lowering costs and increasing supply
If alternative products become more profitable, supply will fall
Joint supply – e.g. cows (beef and leather) as beef supply increases, so does leather
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Mustafa Ramji Unit 1 AS Economics
Composite demand – e.g. milk used for yoghurt and cheese; if demand for yoghurt increases, cheese will fall
Random shocks such as earthquakes reduce factors of production
Speculation of future price changes – if price likely to rise in future, will hold onto stock in short term
Explain equilibrium price and quantity and how they are determined. Understand how the operation of market forces
eliminates excess demand and excess supply. Apply the price mechanism in markets, such as goods, services,
commodities or labour.
At the point where supply and demand curves meet, equilibrium price and quantity are determined
Excess demand/shortage – when demand > supply, difference is called ED. Price is too low, so price will rise
Excess supply/surplus – when supply > demand, difference is called ES. Price is too high, so price will fall
Distinguish between consumer and producer surplus. Illustrate consumer and producer surplus on a demand and
supply diagram.
Consumer surplus – difference between what consumer is willing to pay and actual market price.
Calculation – area of triangle between price at lowest Qd, market equilibrium and (lowest Qd, market price)
Producer surplus – difference between what producer is willing to sell at and actual market price.
Calculation – area of triangle between price at lowest Qs, market equilibrium and (lowest Qs, market price)
Explain price, income and cross elasticities of demand. Understand factors that influence elasticities of demand and
their significance to firms and government.
PED is responsiveness of demand to change in price % Change in Qd
% Change in P
PED = 0-1 price inelastic
PED > 1 price elastic
PED = 1 unitary
Changes in PED due to number and closeness of substitutes, habit forming, proportion of income spent, easier to
postpone purchase of good and time period (longer time = more elastic)
XED is responsiveness of quantity demand of a good to change in change in price of another good
% Change in Qd Good A
% Change in P Good B
XED < 0 compliments. XED = 0- -1 weak compliments, XED < 1 strong compliments
XED > 0 substitutes XED = 0- 1 weak substitutes, XED > 1 strong substitutes
XED = 0 unrelated, independent
Understand the relationship between price elasticity of demand and total revenue.
Type of good Prices Prices
Demand is elastic Revenue Revenue
Demand is inelastic Revenue Revenue
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Mustafa Ramji Unit 1 AS Economics
Explain price elasticity of supply; understand factors that influence price elasticity of supply. Distinguish between the
short run and long run in economics and understand its significance to price elasticity of supply.
PES is responsiveness of supply to change in price % Change in Qs
% Change in P
PES > 1 price elastic
PES < 1 inelastic
Changes in PES due to availability, flexibility and mobility of resources, storability (easily stored = elastic),
production time and time period
Use supply and demand analysis to demonstrate the impact and incidence of taxes and subsidies on consumers,
producers and the government.
Indirect tax is a tax on expenditure. Ad valorem tax is percentage of selling price. Flat rate/ specific tax id where
tax is a fixed amount
Subsidy reduces cost of production and paid for by government
Understand the factors which influence the demand and supply of labour. Recognise that demand for labour is
derived from the demand for the final product it makes (derived demand). Understand that factors influencing the
supply of labour include population migration, income tax and benefits, government regulations (for example,
national minimum wage) and trade unions.
Households supply labour, businesses demand labour
Demand for labour is derived demand. As more goods demanded, businesses require more workers
Factors affecting supply of labour include an increase in the working population, changes in non-monetary
rewards (e.g. working conditions), benefits, income tax, immigration and the demographic of the population (e.g.
ageing of population)
National Minimum Wage is minimum amount paid to a worker per hour by employer
Helps alleviate poverty, reduce inequality
Increases incentive to work, reduces unemployment trap
Boost morale of workers
X Could lead to unemployment, as excess supply of labour
X Decisions based pay differentials, so workers will ask for more
X Does not take into account regional differences in cost of living
Labour immobility – due to lack of skills, or unable to move geographically, unemployment of labour resources
Instability in commodity markets – producers unsure of how to plan, large shortages/ surpluses of goods.
Government intervention is desirable to stabilise prices
Government failure – can lead to further misallocation
Illustrate external costs and external benefits using marginal analysis, distinguishing between the market and social
optimum positions. The welfare loss or gain areas are required. Understand the impact of externalities and
government intervention in various markets, for example, transport, health care, education, environment, waste
disposal and recycling.
Externalities not reflected in price, spill over effect on third party of an economic activity
Private cost – direct cost of an activity imposed on consumer, firm or government
Social cost – total cost to society of economic activity = Private cost + externality
Welfare gain
Evaluation:
Imperfect knowledge – based on assumptions
Quantifying externalities – hard to put a monetary value on externalities
Size of welfare loss/gain
Consider external costs if positive, external benefit if negative
Explain why public goods may not be provided by the market. Distinguish between public and private goods.
Public good – underprovided or not provided in free market.
- Non-rivalry – one person’s consumption does not reduce ability of another to consume product
- Non – excludability – no one can be prevented from consuming
Private good – excludable and rivalrous
If either non-rivalrous/ non-excludable, it is quasi-public good
Free rider problem – as no one can be prevented from using them, firms have no profit incentive
Distinguish between symmetric and asymmetric information. Understand how imperfect market information may
lead to a misallocation of resources, for example, health care, education, pensions, tobacco and alcohol.
Symmetric information – when buyers and sellers have access to same amount of information about products
Asymmetric information – buyers/sellers have different amounts of information
Caused by uncertainty about costs and benefits, like merit goods, or inaccurate/ misleading information
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Mustafa Ramji Unit 1 AS Economics
Understand geographical and occupational immobility of labour may result in structural unemployment. Assess
government measures to reduce factor immobility such as training programmes and relocation subsidies.
Labour immobility is the failure resulting in inability of workers to move easily between jobs
Geographical immobility – could be due to high house prices, social reasons or home ownership
Occupational immobility – lack the skills/ training for jobs available.
Structural unemployment when unemployed do not have skills/ training to take up jobs
Government policies:
Geographical immobility – housing subsidies, but expensive (opportunity cost) and time lag
Occupational immobility – training and education
– Apprenticeship schemes, but expensive, time-lag and exploitation of cheap labour
Understand the causes and effects of fluctuating commodity prices on consumers and producers. Assess the impact of
government intervention in the form of minimum prices and buffer stocks. Use diagrammatic analysis for minimum
prices and buffer stocks.
Commodity market instability caused by unpredictable supply, which is inelastic as supply of wheat cannot be
instantly changed. Also, farmers base decisions on previous year prices for the future; if demand changes,
producers cannot respond.
Increase in commodity prices leads to increase in prices of goods derived from commodities e.g. bread.
Minimum prices (floor prices) can be above equilibrium prices prevents prices falling further - excess supply. No
impact if below equilibrium price.
Prevents extreme downward price fluctuations
Encourages farmers to stay in market
Scheme can be self-financed if combined with buffer stock
X Could hold price artificially high, leading to fall in consumer demand
X Government must buy up excess supply – expensive
X Can create mountains of unwanted stock, dumping stock on LEDCs, where local farmers suffer
X Government may pay producers to produce less
Buffer stocks buy up excess supply, sells when there is a shortage. Supply released when shortage, lowering price.
Buy up surplus, increasing price.
Stabilise prices for consumers and producers
Could be profitable
X Will not work for perishable goods, e.g. milk
X Expensive at first
X Difficulty of knowing where to set price band
X Persistent dumping on LEDCs
Understand the different measures of government intervention to correct market failure, for example, indirect
taxation, subsidies, buffer stocks, tradable pollution permits, extension of property rights, state provision and
regulation. Apply, analyse and assess the effectiveness of each method of government intervention for correcting
market failure.
Taxation – internalises externality, emitting negative externality. Polluter pays principle.
X Level of tax hard to decide on
pg. 6
Mustafa Ramji Unit 1 AS Economics
Subsidise increases supply and therefore consumption of goods with external benefits by reducing costs of
productions.
X Can be expensive for government
X Hard to measure external benefit, hard to decide level of subsidy, may affect effectiveness
X Producers may take subsidy and not increase supply
Extending property rights, e.g. local people own air, so if polluted by company, company pays
X Difficult to allocate
X Compensation difficult to assess
X Expensive, time consuming
Define and explain different types of government failure, for example, undesirable outcomes from agricultural
stabilisation policies; environmental policies; transport, housing and the national minimum wage.
Government failure occurs when government intervention leads to further misallocation of resources and a net
welfare loss.
Public choice/ interest theory, whether free market allocates resources efficiently and if intervention is required.
Cost Benefit Analysis by government helps assess total costs and benefits of intervention and if investment should
go ahead.
X Difficult to measure external costs and benefits
- Monetary value on health
X Administrative costs and delays
- Terminal 5 Heathrow
X Future costs and benefits difficult to measure
- Allowing for inflation
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