Notesale: Turn your study into money

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b) The use of the ceteris paribus assumption in building models
Certeris paribus means ‘all other things remain equal’ and is used to help scientists to simplify a
problem
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Nearly all economics is based on the study of groups of individuals as this is more predictable
that looking at people’s behaviours individually
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2 POSITIVE AND NORMATIVE ECONOMICS
a) Distinction between positive and normative economic statements
Positive statement → a statement that can be proven to be true or false (objective)
Normative statement → a statement which cannot be supported or refuted (Value
judgement/opinions)
b) The role of value judgements in influencing economic decision making and policy
Value judgements are assessments of how good or bad something is based on someone’s own opinion
and priorities
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➢ Economic goods are resources that are scarce
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Renewable resources are resources which can be used over and over again as they have the ability to
be replaced
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(e
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a forest is renewable but not sustainable as if its exploited through
logging it will not survive)
c) The importance of opportunity costs to economic agents (consumers, producers and government)
The basic economic problem means that economic agents need to choices on how to allocate their
resources
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Consumers → Opportunity cost is what is given up when deciding to spend on a particular item
Producers → Opportunity cost may be focused on what capital they invest in
Government → Opportunity cost may be which public service to invest in e
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NHS or police

[Free goods have no opportunity cost]
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4 PRODUCTION POSIBILITY FRONTEIRS
a) The use of production possibility frontiers to depict:
➢ the maximum productive potential of an economy
The PPF shows the different combinations of capital and
consumer goods that the economy can produce with the
current level of resources available
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➢ opportunity cost (through
marginal analysis)
When comparing A and B – the opportunity cost of producing 15 more
capital goods ( 75 – 60 ) is 20 consumer goods ( 70 – 50 )
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➢

➢
➢

Economic growth or decline
Economic growth means that the economy can produce more of both capital and consumer
goods, so the curve shifts outwards
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-Decline can occur because:
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Natural disasters
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Decreased quality/quantity of labour
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War
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Migration
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Poor education
Efficient or inefficient allocation of resources
Possible and unobtainable production

A → Efficient and possible production
B → Possible but inefficient – underusing resources
C → Unobtainable – not enough resources to produce
that amount

b) The distinction between movements along and shifts in production possibility curves, considering the
possible causes for such changes
Movement → Caused by a change in the combination of goods produced
Shift → Caused by change in productive potential of the economy
c) The distinction between capital and consumer goods
Capital goods → Used in the production of other goods
Consumer goods → Goods and services used by consumers in order to satisfy their wants and needs
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5 SPECIALISATION AND THE DIVISION OF LABOUR
a) Specialisation and the division of labour: reference to Adam Smith

The division of labour is a type of specialisation where production is split into different tasks and
specific people are given a task each which they become very efficient at carrying out, it
saves time from switching between multiple tasks
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Specialisation occurs when an individual/firm/country produces a narrow range of goods and
over time develops a cost advantage in producing these
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Adam smith wrote about the division of labour is ‘The wealth of Nations’ and focused on the
study of a pin factory
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This is due to workers acquiring greater skills when
focusing on one task
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No time wasted switching between tasks
Workers only need to be trained in that task

Disadvantages
Workers can get very bored due to the
repetition, so may lower the quality or become
less efficient
If one part of production is disrupted it can hold
up all of the following parts of production
Lack of flexibility if workers are only trained for
one task
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Creates a globally greater output if every
country focuses on what they’re best at

Disadvantages
Overdependence – e
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if only focusing on
farming and theirs a natural disaster or poor
whether it could severely damage the economy
High interdependence – so if there were conflicts
between countries then access to resources and
trade is disrupted

d) The functions of money
➢ As a medium of exchange
Money is used to buy and sell goods and services
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Therefore,
money is used as a medium of exchange
➢ A measure of value
Money acts as a unit of account and can compare the value of two goods
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➢ A store of value
Money can keep its value for a long time compared to items such as food in the barter system
which would go out of date
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➢ A method for deferred payment
Money allows for debts to be created, so if people don’t have the money at the point of
payment, they can pay for it later
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Mixed economies tend to have a better redistribution of income through welfare benefits
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Utility is the benefit derived from consuming a good
Due to resources being scarce, consumers have to make choices, so
have to make comparisons between the utility gained from
purchasing an extra unit of a product with its opportunity cost
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This allows them to keep shareholders happy
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a) The distinction between movements along a demand curve
and shifts of a demand curve
The demand curve shows the relationship between price and
quantity demanded
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➢ Changes in tastes and fashions
-If there is a new fashion trend demand for those products is likely to rise sharply
➢ Advertising and branding
-Helps to influence consumer choice and likely to increase demand
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-The value (utility) of consuming the final product bought falls as more units are consumed in a given
period of time
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3 PRICE, INCOME AND CROSS ELASTICITIES OF DEMAND
a) Understanding of price, income and cross elasticities of demand
PED (price elasticity of demand) measures the responsiveness of quantity demanded to change in
price
YED (Income elasticity of demand) measures the responsiveness of quantity demanded to a change in
income
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b) Use formulae to calculate price, income and cross elasticities of demand
PED = (% change in quantity demanded) / (% change in price)
YED = (% change in quantity demanded) / (% change in income)
XED = (% change in quantity demanded of good x) / (% change in price of good y)

c) Interpret numerical values of
➢ Price elasticity of demand:
Unitary elastic → -1
Perfectly elastic → infinity
Relatively elastic → -1 to infinity
Perfectly inelastic → 0
Relatively inelastic → 0 to -1
➢ Income elasticity of demand
Inferior → <0
Normal → >0
Luxury → >1
➢ Cross elasticity of demand
Substitutes → >0
Complementary goods → <0
Unrelated goods → 0
d) The factors influencing elasticities of demand
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Availability of substitutes
o More substitutes = more elastic
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Addictiveness of the product
o More addictive = more inelastic
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Price of the product as a proportion of income
o If it is a larger proportion of their income, it will be more elastic
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Whether the good is a necessity
o If it’s a necessity it will be inelastic
e) The significance of elasticities of demand to firms and government in terms of:
➢
The imposition of indirect taxes and subsidies
-When demand for a product is inelastic, most of the tax is passed onto the consumer because
they will continue buying the product even with the increased price from added taxes
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-In the case of subsidies on elastic goods a small fall in price will mean a larger rise in demand,
and therefore greater revenue for the seller
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a) The distinction between movements along a supply curve and shifts of a
supply curve
Movements along → due to change in price
Shifts → a change in one of the factors of supply
b) The factors that may cause a shift in the supply curve (the conditions of
supply)
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Changes in the costs of production
-increased costs cause them to push up prices so less is supplied at each price and the curve
shifts left
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Long run → As all factors can be varied firms can easily increase or decreased production in response
to price increases, therefore, making supply more elastic
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b) The use of supply and demand diagrams to depict excess supply and excess demand
c) The operation of market forces to eliminate excess demand and excess supply
Excess supply:
Excess supply occurs when the price is above the
equilibrium price, causing supply to be greater
then demand and there is excess supply
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Excess demand:
-Excess demand occurs when the price is below the equilibrium price, causing demand to be
greater then supply and there is excess demand
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7 PRICE MECHANISM
a) Functions of the price mechanism to allocate resources:
➢ Rationing
Scarcity means that not everyone is able to buy everything
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➢ Signalling
Higher prices help to signal to the market to allocate more resources there as it suggests that
demand for that good is higher
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Demand for food is high,
but supply is low, so prices rise to ration off the excess demand
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Global → Restricted oil supplies causing oil prices to shoot up, deterring customers who don’t value oil
highly from purchasing it
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Producer surplus → the difference between the amount producers are willing to sell a good for and the
price they actually receive
b) The use of supply and demand diagrams to illustrate consumer and producer surplus
Consumer surplus is the difference between the demand
curve and the market equilibrium price
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Producer surplus is the difference between the supply curve
and the market equilibrium price
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c) How changes in supply and demand might affect consumer and producer surplus
-An increase in demand will lead to an increase in both the consumer and producer’s surplus as both
output and price increase
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9 INDIRECT TAXES AND SUBSIDIES
a) Supply and demand analysis, elasticities, and:
➢ The impact of indirect taxes on consumers, producers and government
An indirect tax is a tax on expenditure such as VAT
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-They increase market prices, causing demand to fall
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Specific taxes → set tax per unit e
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, 50p per litre
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The impact of subsidies on consumers, producers and government
A subsidy is a grant given which lowers the price of a good
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Consumers → lowers price and increases consumer demand
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Government → Higher costs to government, but it helps to boost the economy
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Social norms are known as bias, and prevent people from
acting individually to maximise their own benefits
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They can prevent consumers from
considering alternative decisions
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-Supermarkets can exploit habitual behaviour by putting more profitable products at eyelevel
Consumer weakness at computation
Consumers wont always be able or willing to make price comparisons on the products they are
looking for
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-Some consumers may lack self-control and buy products that they don’t need
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3 MARKET FAILURE
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1 TYPES OF MARKET FAILURE
a) Understanding of market failure
➢ Market failure occurs when there is too little or too much of a good being produced or
consumed in comparison to the socially optimal level of output
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➢ Market failure can lead to a loss in social welfare
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Externalities lead to the overconsumption or underconsumption of goods, meaning that
resources haven’t been allocated efficiently
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-The free rider problem (individuals receiving benefits from the good without contributing
anything) means that these goods are underprovided
➢ Information gaps
-Consumers and firms are assumed to have perfect information in order for them to make
rational decisions, however, information is often imperfect potentially leading to wrong
decisions being made
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2 EXTERNALITIES
Externalities occur when private costs and benefits differ from the social costs and benefits
a) Distinction between private costs, external costs and social costs
Private costs → The costs that impact the economic agents directly involved in the transaction
(consumers and producers)
External costs → Negative externalities that impact a third party (not involved in the transaction)
Social costs → The total costs involved, calculated by adding together private and external costs
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c) d) Use of a diagram to illustrate:
➢ The external costs/benefits of production using marginal analysis
➢ The distinction between market equilibrium and social optimum position
➢ Identification of welfare loss/gain area
An externality occurs when the third party is
affected by a market transaction
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Positive
externalities occur when the marginal social
benefit is greater than the marginal social
cost
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This market is
underproducing this good causing a
deadweight loss (area of the triangle)
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Negative externalities occur when the MSC
is greater than the MSB
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Theres a
misallocation of economic resources which
is causing this deadweight loss to occur, this
market is overproducing this good
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MSB = Marginal social benefit
MSC = Marginal social cost
MPC = Marginal private cost
Q = Marget equilibrium quantity
Q1 = Social optimum quantity
Shaded triangle = welfare loss from overconsumption or underconsumption
e) The impact on economic agents of externalities and government intervention in various markets
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Indirect taxes – imposing a tax on something with is producing negative externalities should
result in a reduction in the production of that goes due to higher costs of production
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Trade pollution permits – these are a permission issued by the government to allow a fixed
amount of pollution to be created
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This has the
impact of reducing overall carbon emissions, and encourages firms to find more sustainable
production processes
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Private goods → A private good is rivalrous, consumption by one person, means it’s not available to be
consumed by anyone else
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b) Why public goods may not be provided by the private sector: the free rider problem

The free rider problem is where someone receives the benefit without paying for it
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Due to profits being uncertain, these public goods are
provided by the government and financed through taxes
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Asymmetric → where buyers and sellers have different amounts of information, usually the sellers have
more information
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Information gaps can lead to market failure as resources are misallocated as economic agents
aren’t able to make rational decisions
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GOVERNMENT INTERVENTION

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1 GOVERNMENT INTERVENTION IN MARKETS
a) Purpose of intervention with reference to market failure and using diagrams in various contexts:
➢ indirect taxation (ad valorem and specific)
Ad valorem tax is a percentage
Tax reduces supply, increasing price
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Ad valorem tax steepens the supply curve
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Advantages
Allows market to return to social equilibrium
position
Government gain revenue from taxes

➢

Subsidies
Subsidies increase supply, reducing the price,
which leads to more production and
consumption
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Advantages

Disadvantages

Allows market to
return to social
equilibrium position

Money
government
spends may have
a high opportunity
cost
May be inefficient

Can help smaller
businesses and
encourage exports
➢

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Disadvantages
Difficult to know what level to set the tax at
in order to reach equilibrium
Could encourage creation of black
markets to avoid taxes

Maximum and Minimum prices
Imposing maximum prices can make them more affordable, it helps to encourage
consumption of that good
Minimum prices can be used to discourage consumption
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A desired level of pollution is decided
upon by the government and a number of permits are released, which can be traded by
firms, meaning firms that don’t pollute as much can sell their permits for profits, so this acts as
an incentive to improve
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The free rider
problem prevents the private sector from providing these goods and services
Advantages
Disadvantages
Benefits of goods themselves
Expensive and has opportunity costs

Brings about equality as everyone has
access

➢

Government’s production process may
be inefficient as they don’t have any
competition

Provision of information
In order to correct information gaps, the government provides consumers with information so
that they can make more well-informed decisions and choices
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The government imposes rules for the production and consumption of particular goods and
services, if these rules aren’t followed people can be fined
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b) Causes of government failure:
Distortion of price signals
The free market mechanism can be distorted if the government intervene and change the
price signals, this means that resources are no longer efficiently allocated
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Excessive administration costs
The administrative cost may be so large that it outweighs the welfare benefit from correcting
the market failure
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