Notesale: Turn your study into money

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2020 Edition

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A-LEVEL ECONOMICS

REVISION FLASH CARDS
Edexcel A

MICRO

PAPER 1

THEME 1 :

Introduction to Markets and Market
Failures
THEME 1
...


THEME 1
...

• Any point outside the curve such as ‘B’ is unattainable; the country does not have enough resources
to achieve that lebel of production
...
1 NATURE OF ECONOMICS

SPECIALISATION OF LABOUR
Specialisation is the production of a limited range of products or services by a firm
...

Notable economists: Adam Smith

Specialisation in Goods and
Services Produced

Advantages

Advantages

Disadvantages

Disadvantages

Specialisation of Labour

Command
Economies
Mixed Economies

• No government involvement - no
regulation, legislation, intervention
or monitoring
• Consumers and producers make
own choices
• Notable economists: - Adam Smith
(“invisible hand”), Friedrich Hayek
• Government has full control
• Everything is done by the state
(government)
• Notable economists: Karl Marx
(“common ownership”)

Advantages
• Freedom of choice - consumers
have sovereignty over their
decisions
• High motivation - because people
are rewarded according to their
efforts
• Productive efficiency competition forces firms to use
least costly methods in production

• Access to merit goods - since
government prioritises well-being
of merit goods
• Guaranteed standard of living minimum standard is provided
• A mixture of the free and command
...
Create framework on:
• Rewards hard work
• trade
• Balances the benefits of both
• consumer rights
capitalism and socialism
• employment rights
• property rights
2
...
Stabilise economy through
monetary and fiscal policy

Disadvantages
• Lack of merit goods - since
profit is the main goal, it means
goods such as healthcare are not
produced
• Generates externalities
• Resources wasted e
...
on
activities such as advertising
• Could lead to monopolies,
resulting in higher prices
• Wastage of resources due to
incorrect decision making
• Bribery and corruption
• Loss of choice
• Less motivation and efficiency
• Taxes
• Can leave the less competitive
parts of society without support
• Does not eliminate the possibility
of monopolies
• Insufficient regulation of the
market
• High taxation

MARKETS: 3 TYPES OF MARKETS

Free Market

Definition

THEME 1
...
2 HOW MARKETS WORK

Durability
Addictiveness
Peak vs off-peak
Type of good (necessary, luxury)

PES

• Time (e
...
supply is finite in the short term as
a FoP is fixed ∴ PES = 0
...
2 HOW MARKETS WORK

PRICE MECHANISM
Price mechanism looks at how
interactions between demand and
supply determine price, specifically
the equilibrium market price (where
‘demand = supply’)

Rationing

Incentive

Signalling

3 WAYS TO DETERMINE PRICE

THEME 1
...

• It is always the area between the demand curve
'D' and equlibrium market price Pe XY
...

• However, the total benefit of the good to
consumers is 0QeXY
...

• Consumer surplus decreases with quantity due
to the law of diminishing returns
...

• It is always the area between the equilibrium
market price and supply curve, OPeX
...


THEME 1
...
e
...

Examples of such goods
include: sugar, tobacco,
alcohol, and highly polluting
cars which has led to the
introduction of the ULEZ
charge in London

TYPES

EFFECTS
- SHORT RUN

EFFECTS
- LONG RUN

Total Rax Revenue: AB * Q2

INDIRECT TAX: SPECIFIC

Total Rax Revenue: AB * Q2

With a specific tax, ‘S2’ is a straighter line (compared to VAT), so the gap between S1 and S2 decreases
...
It looks at how the tax affects the
average person on the street (the taxpayer) and who ends up paying the tax

WHO pays
the tax?

• If demand is inelastic and/or supply is elastic - PED < 1/PES > 1
→→→ the consumer pays
• If demand is elastic and/or supply is inelastic - PED > 1/PES < 1
→→→ producer pays
Generally, as demand becomes more elastic, the less likely the consumer will pay the tax, meaning the producer has to pay
...
2 HOW MARKETS WORK

SUBSIDIES
Payment from the government to a firm/supplier
...


SUBSIDY

EFFECTS

• Increased output (shifts the supply
curve to the right)
• Lower prices → more spending →
more demand
• More demand → Increased
employment rate
• Reduced inequality
• Controls inflation

LONG
RUN

• Increase LRAS if subsidy targeted at
capital projects (NB
...
2 HOW MARKETS WORK

CONSUMER BEHAVIOUR THEORY
Consumers are NOT always rational
...


HABITUAL BEHAVIOUR

We are creatures of habit - spending money
on something we know we should give up
(e
...
addictions such as smoking)

CONSUMERS CAN’T DO
MATHS

For example, when we buy a multipack even
though it is not always cheaper; or buying the
smaller size of a drink, even though the cost
per m/l could be more than the larger bottle
...
3 MARKET FAILURE

EXTERNALITIES

These tend to involve information gaps, as people are unaware of the full implications of their actions
and decisions e
...
how their smoking will impact the NHS

NEGATIVE EXTERNALITIES OF
PRODUCTION

Consequences

• overprovision and underpricing
• deadweight loss (red triangle)
• inefficiency

Difference Between the Two Graphs

POSITIVE EXTERNALITIES OF
CONSUMPTION

Consequences

• underprovision of the good
• welfare gain (green triangle)

• Equilibrium output, Qe, is higher than the ideal amount under negative externalities
...


THEME 1
...


NON - RIVAL

NON-EXCLUDABLE

• “There’s nothing stopping me from using it” there’s nothing stopping me from driving through a
different neighbourhood and using the street lights
there

• “You using it doesn't stop me from using it” - a
person cannot stop me from driving through their
neighbourhood and using the street lights

Due to these properties, public goods are underprovided by the free market
...

• A person can use street lights in a neighbourhood where they do not live or pay council tax
...

• Since it is undervalued, firms will not provide the good
...

• The government has to step in and provide it through taxation
...
3 MARKET FAILURE

INFORMATION GAPS

• Symmetric information - consumers and producers have perfect information about each
other’s behaviour in order to make a rational decision
...

• This leads to asymmetric information - people have more knowledge and information
about themselves than others do e
...
the person selling their used car has more information
about its condition than the person buying it
...
g
...

• Solution: technology
...


THEME 1
...
The context will be
provided (either through the
wording of the question or the
related extract)
...


There are 5 main categories of regulation:

1
...


ADVANTAGES

• Increases output and leads to lower prices
for consumers
...

• Boosts employment in the industry it is
introduced
...

• Difficult to calculate the amount needed
due to the difficulty in estimating the size of
the externality
...


2
...


DISADVANTAGES

• Expensive to monitor and gather evidence on
market abuse due to asymmetric information
...


3
...


4
...


ADVANTAGES

• Taxes are a source of government revenue
...


DISADVANTAGES

• Taxes can be regressive and disproportionately
affect low-income earners
...

• Can be politically unpopular
...
g
...


ADVANTAGES

• Reduces pollution since number of permits is
capped
...

• Firms can generate additional revenue if they
don’t use their entire permit allocation
...


DISADVANTAGES

• Expensive to monitor and administer due to
asymmetric information
...

• Difficult to calculate right quantity of permits to
allow
...


5
...


Minimum Pricing

• Used on goods with negative externalities (tobacco, alcohol), ensuring
their price is sufficiently high in order to discourage their consumption
...

• Helps to reduce poverty and inequality:
minimum prices ensure that producers get a
fair price, whilst maximum prices ensures goods
remain affordable for consumers
...


DISADVANTAGES

• Can lead to excess supply/waste, resulting in a
misallocation of resources and potential government failure
...

• Can result in the creation of black markets
...

• May discourage firms from entering the market as
less profit incentive
...


The regulation(s) you use to answer the question should be the most appropriate to the question
...
See Solutions Guide for worked examples
...

These can take the form of maximum or minimum pricing
...
4 GOVERNMENT INTERVENTION

Regulation

Provision of
Information

Provision of
Public Goods

OTHER MEASURES
The government can become the producer of the good (health, social services, flood defense systems
etc) and fund it through taxation
...

• Improves economic growth e
...
providing a
health service can mean a healthier and more
productive workforce
...

• High opportunity cost also means government
fiscal potential is diminished
...


The government can provide information, since some externalities are associated with information
gaps e
...
leaflets on Brexit, or TV campaigns on the health risks of excessive drinking and smoking
...


DISADVANTAGES

• Expensive and may not be successful
...


The government can limit consumption of goods with negative externalities e
...
through ban on
smoking in public places and TV advertising of cigarettes
...


DISADVANTAGES

• Requires enforcing, which is expensive
...

• Firms may also pass on the cost of compliance to
consumers through higher prices
...


THEME 1
...

Intervention can lead to
government failure due to
these four factors:

Market
Distortions

Information
Gaps

Administrative
Costs

Conflicting Policy
Objectives

• Subsidies encourage firms to be inefficient (moral hazard) or
keep those who are inefficient in business
...

• Taxes can make workers supply less labour than the ideal
amount
...

• Costs and benefit analysis do not capture all possible
variables, and are also being expensive and time-consuming
...

• Furthermore, intervention requires policing, which is
expensive
...

• Government intervention may solve one issue, but make
another one worse
...


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