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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➢

➢
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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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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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It is used to discourage production and consumption of a
good that has negative externalities
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Specific tax is where a specific value is added
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It causes the supply curve to shift left
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This is used for goods with
positive externalities
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b) Other methods of government intervention
Trade pollution permits
These are used in order to tackle negative externalities
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Advantages
Disadvantages
Guarantees that pollution will fall

Expensive to monitor

Encourages more sustainable production

Raises costs for businesses

State provision of public goods
This is where the state provides a good or service with the use of tax revenue
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Advantages
Disadvantages
Helps consumer make rational decisions
Expensive
Consumers may chose not to take on
advice

Regulation
Regulation is used to lessen negative externalities
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Advantages
Disadvantages
Prevents customer exploitation
Firms may pass on high costs in form of higher
prices

➢

Helps overcome market failure

Expensive to monitor

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2 GOVERNMENT FAILURE
a) Understanding of government failure as intervention that results in a net welfare loss
Government failure occurs when they try to correct a market failure, but in fact cause a more
inefficient allocation of resources to occur, leading to a net welfare loss
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Unintended consequences
Producers and consumers may react differently to the way that the government had
forecasted, which means the policy won’t have the intended effect
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Information gaps
Governments rarely have perfect information to base a decision on, or the information
available may be misleading, leading to the wrong solution being made for the given market
problem

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