Microeconomics and Business

Economics Notes

Paper 1

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What is the basic economic problem?

• It is the allocation of a nation’s scarce resources between competing uses that represent infinite
wants

What is opportunity cost?

• It is the cost of the next best alternative given up when making a choice

How to draw the PPC and its interpretation? *Check book

What are the different economic assumptions?

Consumers aim to maximize their benefit. (Explain why)

Businesses aim to maximize their profit. (Explain why)

What are the reasons why consumers may not maximize their benefit?

• Consumers are not always good at calculating their benefits

• Consumers have habits that are hard to give up

What are the reasons why producers may not maximize their profit?

• Producers may have managers that have other motives

• Producers may complete charitable work

What is the definition of demand?

• Demand is the amount of a good that will be bought at give prices over a period of time
• Effective demand is the amount of a good people are willing to buy at given prices over a given
period of time supported by the ability to pay

What are the factors that may cause a shift in the demand curve? (check straight line demand curve)

• Advertising Check the difference

• Income between movement
• Fashion and tastes along a curve and a
• Demographic changes shift

What is the definition of supply? (check interpretation of supply curve)

• Amount of a good that producers are willing to offer for sale at different prices in a given period
of time

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What are the factors that may shift the supply curve?

• Costs of production
• Changes in technology
• Indirect taxes
What is equilibrium price, alongside market clearing price? (check interpretation of diagram)

• The price at which supply and demand are equal

• Price at which the amount supplied in market matches exactly the amount demanded

What is excess demand?

• Where demand is greater than supply and there are shortages in market, vice versa for supply

What is price elasticity of demand and how do we calculate it?

• The responsiveness of demand to a change in price

%Δ∈quantity demanded
• Price elasticity of demand =
%Δ∈ price change

What are the different points in the value of price elasticity?

PED Value Elasticity

1<, Less than 1 When the value of PED is less than 1 demand is said to be inelastic
1>, Greater than 1 When the value of PED is greater than 1 demand is said to be
elastic
0 When the value of PED is zero demand is said to be perfectly
inelastic
∞ Demand is said to be perfectly elastic
1 Demand is said to be unitary elastic

What are the factors influencing PED?

• Availability of substitutes
• Degree of necessity
• Proportion of income spent on a production
• Time

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What is the relationship between total revenue and PED?

Price Elasticity Value of Elasticity Price Change Effect on Total Revenue

Inelastic <1 Decrease Fall
Inelastic <1 Increase Rise
Elastic >1 Decrease Rise
Elastic >1 Increase Fall
What is price elasticity of suppy and how do we calculate it?

• The responsiveness of supply to a change in price

%Δ∈quantity supplied
• PES=
%Δ∈ price change

What are the different points in the value of price elasticity?

PED Value Elasticity

1<, Less than 1 When the value of PES is less than 1, supply is said to be inelastic
1>, Greater than 1 When the value of PES is greater than 1 supply is said to be elastic
0 When the value of PES is zero supply is said to be perfectly
inelastic
∞ Supply is said to be perfectly elastic
1 Supply is said to be unitary elastic

What are the factors influencing PES?

• Factors of production
• Availability of stocks
• Spare capacity
• Time

What is the difference between the PES for manufactured and primary goods? (check book)

What is income elasticity of demand?

• The responsiveness of demand to change in income

What is the formula for calculating income elasticity of demand?

%Δ∈quantity supplied
• IED =
%Δ∈income

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What are the different points according to the values of IED?

IED value Type of good

Greater than 1 or less than -1 Luxury Goods
Positive, 0 > Normal Good
Negative, 0 < Inferior Good
Between + 1 and -1 Necessities
What is the relationship between price elasticity and businesses? (check book)
What is the relationship between income elasticity and businesses? (check book)

What is the relationship between price elasticity and the government?

• The government puts indirect taxes on products that have inelastic demand as a change in price
won’t affect the overall demand by much but it will give the government massive revenue.

• Subsidies are aimed at goods that are price inelastic as if it is price elastic the subsidy won’t
have a desired change to the price.

What is the difference between public sector and price?

• In the private sector, individuals or groups of individuals are free to set up businesses and
supply goods and services to anyone who wants to buy them.

• In the public sector, a range of organisations, such as government departments, public

ccorporations and other agencies, provide services that are often supplied inefficiently by the
private sector.

Describe two features of private sector organisations.

• Ownership and control

➢ Sole traders: where the business is owned and controlled by one person (retailers, plumbers)
➢ Partnerships: where the business is owned and controlled by two ore more people working
together.
➢ Companies: where shareholders own the business. They elect a board of directors to run the
business on their behalf. These vary in size and can be found in a number of different
business sectors such as manufacturing, construction, oil and gas, etc

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What are the aims of a private sector organisation?

• Survival
• Profit Maximization
• Growth
• Social responsibility

Describe two features of public sector organisations.

• Ownership and control

➢ Central government departments
➢ Public corporations or SOEs: are owned by the government. This means the government
selects the people who run the organisation, often a board of directors (check book for more)
➢ Local authority services
➢ Other public sector organisations (check book)

What are the aims of a public sector organisation?

• Improving the quality of services

• Minimising costs
• Allow for social costs and benefits
• Profit

What are the different types of economies?

• A market or free enterprise economy

• A command or planned economy
• A mixed economy

What is the mixed economy?

• Economy where goods and services are provided by both the private and the public sectors
• What to produce?
• How to produce?
• For whom to produce?

What is market failure and why does the government need to intervene?

• Market failure is where markets lead to inefficiency

• Externalities
• Lack of competition
• Missing markets
• Lack of information
• Factor of production immobility

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What is the role of the private and public sectors in the productino of goods and services?

• Non-excudability
• Non-rivalry

What is privatisation?

• The sale of nationalised industries

• Contracting out
• The sale of land and property

Why does privatisation take place?

• To generate income
• Public sector organisations were inefficient
• To reduce political interference

What are the effects of privatisation?

• Consumers
• Workers
• Businesses
• Government

What are external costs of production?

• Negative spillover effects of consumption or production – they affect third parties in a negative
way
• Examples of external costs include; noise pollution, air pollution, resource depletion, etc

What are external benefits of consumption?

• Positive spillover effects of consumption or production – they bring benefits to third parties
• Education
• Healthcare
• Vaccinations

What is social cost?

• Social cost = Private costs + External costs (negative externalities)

• Private costs are costs of an economic activity to individuals and firms

What is social benefit?

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
 • Social benefits = Private benefits + External benefits (positive externalities)
• Private benefits are rewards to third parties of an economic activity, such as consumption or
production

What policies does the government use to deal with externalities?

• Taxation
• Subisides
• Fines
• Government Regulation
• Pollution Permits

What is production?

• Production is the process that involves converting resources ino goods or services

What are the factors of production? (read textbook)

• Land
• Labour
• Capital
• Enterprise

What is the difference between labour and capital intensive production?

• Labour- intensive heavily uses manual labour, whereas capital intensive is the heavy use of machinery

What are the differences between the primary sector, secondary sector and the tertiary sector?

• The primary sector is the production involving extraction of raw materials from Earth (Agriculture,
Fishing, Forestry, Mining and quarrying)
• The secondary sector is business activity involving the converrsion of raw materials into finished or
semi-finished goods, all of manufacturing, processing and construction lie within this sector (assembly
plants)
• The tertiary sector provides essential services to both industries, it is comprised of companies that
provide services, such as retailers and financial organisations, the tertiary sector provides services to
businesses and consumers by selling the goods that are manufactured by companies in the secondary
sector

What are the changes in the employment of different sectors between developed and developing countries?

• In devloped countries people may prefer to spend more of their income on services than manufactured
goods
• There is fierce competition in the production of manufactured goods from developing countries such as
Brazil.

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What is productivity?

• The rate at which goods are produced, and the amount produced in relation to the work, time,
and money needed to produce them.

What are the factors affecting productivity?

• Land

➢ Fertilizers and pesticides

➢ Drainage
➢ Irrigation
➢ Reclamation
➢ GM Crops

• Labour

➢ Training
➢ Improved motivation
➢ Improved working practices
➢ Migration

• Capital

➢ Primary sector
➢ Secondary Sector
➢ Tertiary sector

What is the division of labour?

• The simplification of production processes into small parts with each worker allocated to a
specific task in which they specialise

What are the advantages and disadvantages of the division of labour for workers?

• Focusing on the same taks allows the worker to become more skilled
• Main problem with specialisation is that repititive work becomes boring

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What are the advantages and disadvantages of the division of labour for businesses?

• Efficiency is improved
• A greater use of specialist tools, machinery and equipment
• Production line
• Boring work
• Loss of flexibility

What are economies of scale?

• The fall of average costs due to expansion

What are the internal economies of scale? (cost benefits that an individual firm can enjoy when it expands)

• Purchasing Economies
• Marketing Economies
• Technical Economies
• Financial Economies
• Manegerial Economies
• Risk- Bearing Economies

What are the external economies of scale? (cost benefits that all firms in an industry can enjoy when an
industry expands)

• Skilled labour
• Infrastructure
• Access to suppliers
• Similar businesses in the area

What are diseconomies of scale? (rising average costs due to too much expansion)

• Beaureaucracy
• Communication problems
• Lack of control
• Distance between senior staff and shop floor workers

What are the features of a competitive market?

• There is a large number of buyers and sellers

• The products sold by eachh firm are close substitutes of each other
• Low barriers to entry
• No control over price charged
• Free flow of information

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What is the relation between competition and firms? (Competition and the firm)

• Firms have to operate efficiently by keeping costs as low as possible

• Providing good quality products with high levels of customer service
• Charing prices that are acceptable to customers
• Innovating by constantly reviewing and improving the product (product differentiation)

What is the relation between competition and consumers? (Conmpetition and the consumer)

• Lower prices
• More choice
• Better Quality

• Market Uncertainty
• Lack of innovation

What is the relation between competition and the economy?

How is the size of a firm measured?

• Turnover
• Number of employees
• Balance sheet total

What are the advantages and disadvantages of small firms?

• Flexibility
• Personal service
• Lower wage costs
• Better communication
• Innovation

• Higher costs
• Lack of finance
• Difficultry attracting quality staff
• Vulnerability

What are the advantages and disadvantages of large firms?

• Economies of scale
• Market domination
• Large-scale contracts

• Too beaureaucratic
• Coordination and control

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What are the factors influencing the growth of firms?

• Government regulation
• Access to finance
• Economies of scale
• The desire to spread risk
• The desire to take over competitors

What are the reasons why firms stay small?

• Size of the market

• Nature of the market
• Lack of finance
• Aim of the entrepreneur
• Diseconomies of scale

What is the difference between a monopoly and a pure monopoly

• If a firm has 25% market share it is a monopolist whereas a pure monopoly is where one
producer supplies a market.

What are the features of a monopoly

• One business dominates the market

• Unique product
• Price-maker
• Barriers to entry
• Legal Barriers
➢ Patent
➢ Marketing budgets
➢ Technology
➢ High start-up costs

What are the advantages and disadvantages of a monopoly?

• Efficiency
• Innovation
• Economies of scale

• Higher prices
• Restricted choice
• Lack of innovation
• Inefficiency

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
What is oligopoly?

• A market dominated by a few large firms

What are the features of oligopoly?

• Few firms
• Large firms dominate
• Different products
• Barriers to entry
• Collusion
• Non-price competition
• Price competition

What are the advantages and disadvantages of oligopoly?

• Choice
• Quality
• Economies of scale
• Innovation
• Price wars

• Collusion (cartel)

Interpret the demand curve for labour.

• The price of labour is the wage rate, the demand curve for labour is downward sloping

What are the factors affecting the demand for labour?

• Demand for the product

• Availability of substitutes
• Productivity of labour
• Other employment costs

Interpret the supply curve for labour.

• The supply curve for labour slopes upwards

What are the factors affecting the supply of labour?

• Population size
• Migration
• Age distribution of the population
• Retirement age

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
 • School leaving age
• Female participation
• Skills and qualification
• Labour mobility

How is wage determined?

What is the importance of the quantity and qiality of labour to businesses?

• When a business is considering locations for its operations, it is not just the cost of labour that is
important, it is also the quantity and quality of human capital.

What is the importance of education and training on the quality of human capital?

What are changes in the demand of labour?

What are changes in the supply of labour?

What are trade unions?

• Organisations that exist to protect the interests of workers, the main aim of trade unions are to
➢ negotiate pay and working conditions
➢ provide leggal protection for members, such as representation in court if an employee is
fighting a case against an employer (discrimination in the workplace, for example)
➢ put pressure on the government to pass legislation that improves the rights of workers
➢ provide financial benefits, such as strike pay

How did the power of trade unions decine?

• New amendments in the legislature by the government required trade unions to have a secret
ballot before a strike; a strike could only go ahead if the majoriy of members voted in favour
• Allowed businesses to sue for compensation if trade unions did not obey the law
• Banned secondary picketing
• Made closed shops illegal

What is the effect of trade union on wages and employment?

Why is there a need for government intervention?

• Without government intervention, some businesses might neglect the needs of certain
stakeholders

How does the government intervene to deal with externalities?

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.
How does the government regulate competition?

• Promoting competition
➢ Encourage the growth of small firms
➢ Lower barriers to entry
➢ Introduce anti-competitive legislatures
▪ eliminate practices that reduce competition
▪ promote and sustain competition in markets
▪ protect the interests of consumers
▪ ensure freedom of trade
• Limit monopoly power
• Protect consumer interests
➢ increasing prices to higher levels than they would be in a competitive market
➢ price fixing
➢ restricting consumer choice by market sharing
➢ raising barriers to entry by spending huge amounts of money on advertising
• Control mergers and takeovers

How does the government intervene in the labour market?

• The government may pass legislature for minimum wage

What are the reasons for a minimum wage?

• To raise the incomes of low paid workers

• Benefit disadvantaged workers
• Better motivation for workers
• Many workers on low incomes are entitled to claim welfare benefits from the state, however, if
their incomes are increased by the minimum wage, the amount they are entitled to claim will
fall, this will save the government money, as incomes rise, workers may pay more in ta

What is the impact of a minimum wage on wages and employment?

• Minimum wages generally cause a decrease in employment

Do minimum wages cause job losses?

• Some have argued that minimum wages do not reduce the level of employmenti n the economy.
There is some evidence to support this view. For example, since the introductino of the
minimum wage in the UK in 1999, the number of people employed hhas actually risen. This
actually has some level of correlation with the global financial crisies

**The main purpose of this note is to provide an overview for the POINTS. If there are any problems
with the concepts, there is no better resource than the textbook. The questions are aimed to raise
awareness within the concepts incase something is missing.