Economics AS Level Notes - StudyWise

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Economics AS Level NotesEconomics Definition – The study of how to allocate scarce resources in the most effective wayEconomic Problem Definition – How to allocate scarce resources among alternative usesHousehold Definition – A group of people whose spending decisions are connectedMicroeconomics Definition – The study of how households and firms make decisions in marketsMacroeconomics Definition – The study of issues that affect economies as a wholeThe Basic Economic ProblemThe fact that resources are scarce compared to the unlimited wants Choices having to bemadeGoods Definition – Tangible products, i.e. products that can be seen and touched, such as cars,food and washing machinesServices Definition – Intangible Products, i.e. products that cannot be seen or touched, such asbanking, beauty therapy and insuranceFactors of ProductionFactors of Production Definition – The resource inputs that are available in an economy for theproduction of goods and servicesThe Four Factors:Land – This is a natural resource. Things such as oil, coal, rivers and the land itself.Labour – This is the human resource that is available in any economy / The quantity and qualityof human resourcesSome economies (generally poor countries) have large populations but lack a skilled workforceand for other countries like Germany with declining populations, they depend on immigrantworkers to do both skilled and unskilled jobs. Quality of labour is essential for economicprogress.Capital - Man-made aids for production / Goods used to make other goodsIt is combined with Land and LabourMERC - Machines, Equipment, Robots and ComputersEntrepreneurship - The willingness of an entrepreneur to take risks and organise production.Entrepreneur Definition - Someone who bears the risks of businesses and who organisesproduction.

Some Extra DefinitionsThe world’s poorest countries tend to have few or poor Factor Endowments (vice versa).Factor Endowments Definition - The stock of factors of productionProduction Definition -The output of goods and servicesWant Definition - Anything you would like, irrespective of whether you have the resources topurchase itScarcity Definition - A situation where there are insufficient resources to meet all wantsChoice Definition - The selection of appropriate alternativesOpportunity Cost Definition - The cost of the (next) best alternative, which is forgone when achoice is made / The next best alternative forgoneSpecialisation Definition - The concentration by a worker or workers, firm, region or wholeeconomy on a narrow range of goods and servicesExchange Definition - The process by which goods and services are traded

International SpecialisationThe Advantages of International Specialisation (ORE): An increase in the output of goods and services - In comparison to what they couldachieve on their own A widening of the range of goods that are available in an economy Increased exchange between developed and developing economiesThe Disadvantages of International Specialisation (WIFT): Bad weather – It can wipe out a whole years cropsDe-industrialisation – Due to cheap imported goods displacing workersFinite Resources – If they run out trouble will ensue, unless the income gained from ithas been wisely invested in the futureTastes or needs of consumers may change – Hardship among those producing goodsthat are no longer wanted / needed is inevitableProductivity Definition – Output, or production of a good or service, per worker per period oftimeProduction Possibility CurveProduction Possibility Curve (Firm) – This shows the maximum quantities of differentcombinations of output of two products, given current resources and the state of technologyProduction Possibility Curve (Country) – This shows the maximum quantities of differentcombinations of output of capital and consumer goods, given current resources and the state oftechnologyDeveloped Economy – An economy with a high level income per headDeveloping Economy - An economy with a relatively low level of income per head

PPC Graph Information:Productive Efficiency – Any point on the lineAllocative Efficiency – Choosing between two points Eg. E AUnemployed Resources - Any point inside the curve Eg. XUnobtainable – Any point outside the curve Eg. YBliss Points – Where the curve starts or ends Eg. 6 Computers or 21 BicyclesEconomic Growth – Change in the productive potential of an economyProductive Potential – The maximum output that an economy is capable of producingPPC Shifters (Right):1. Changes in the quantity of resourceso The quantity of labour may increase as a result of net immigration of people ofworking age, a higher proportion of women entering the labour force or a rise in theretirement age.o The purchase of extra capital goods, referred to as net investment, increases thequantity of capital goods causing the PPC to increase (shift to the right).o The quantity of enterprise may be increased by a reduction in rules and regulationsplaced on firms, privatisations and government incentives to start up newbusinesses2. Changes in the quality of resourceso Improvements in education and training will improve the quality of labour and raiseproductivity causing the PPC to increase (shift to the right)o The quality of capital goods is raised by advances in technology causing the PPC toshift right.o The quality of enterprise may be raised by management training and improvededucation

NOTE – The fact that the line isn’t straight for any of the diagrams is because they are imperfectsubstitutesPPC Shifter Right (Graph):PPC Shifters (Left):-Natural Disaster (Less resources Less of each product can be produced)

PPC Stretches:-More resources / Capital (More of one product can be produced) Eg. WineAdvances in technology (More of one product can be produced) Eg. WineEconomics Systems and The Role Of The MarketEconomic System – The way in which production is organised in a country or group of countriesAn economic system - The term used to describe the means by which a country’s people,organisations and government make decisions with respect to(WHW): What goods and services are to be producedHow these goods and services are producedWho should receive these goods and servicesMarket Economy – An economic system whereby resources are allocated through the marketforces of demand and supplyPrice System – A method of allocating resources by the free movement of pricesCommand Economy – An economic system in which most resources are state owned and alsoallocated centrallyMixed Economy – An economic system in which resources are allocated through a mixture ofthe market and direct public sector involvement

The advantages of a free market economy / The disadvantages of command economies(CIGE): Choice – Firms will produce whatever consumers are prepared to buy and there is norestriction on what they produce in the FM. Planners are more concerned that thereare enough essentials goods to go around rather than allocating resources efficientlybetween all goodsInnovation – Firms will look to produce something new in order to be competitive.Because of property rights(intellectual property rights through patents) there areincentives for innovation and producing better quality products. Planners do not havethis incentive, they are happy just producing essentials.Higher Economic Growth Rates – Countries with economic systems closer to the freemarket tend to have higher economic growth.Efficiency – Free markets are very competitive. Most of their industries are assumed tobe perfectly competitive and so allocative and productive efficiency occur. This isbecause decisions about what to produce are made by the consumers rather than byplannersThe advantages of command economy / The disadvantages of free market economies(PmdIE): Public, Merit and Demerit Goods - Public goods cannot be provided in the privatesector. Merit goods are likely to be under consumed in the free market and demeritgoods over consumed. In a command economy demerit goods are likely to be bannedor heavily taxed and public goods and merit goods will be provided at high levels.Unequal Distribution of Income – Benefits will be low and health service and schoolunaffordable for a lot. Those who are poor are likely to fall to destitution. A commandeconomy may not allow the successful to make millions but it will at least try to makesure the poor are not left to destitution so the economy is fairerEnvironment – Free market economies are likely to produce more pollution. Commandeconomies will attempt to make sure that the level of output is the socially optimallevel of output through things such as taxes and pollution permits although pollutiondoes tend to still be high

Specialisation / Division of LabourDivision of Labour Definition – The specialisation of labour where the production process isbroken down into separate tasksNOTE – Some extra explanation of each of the mark scheme points will most likely be necessaryThe Advantages of Specialisation / Division of Labour to Firm (From Mark Scheme): Increased outputo With improvement in efficiency and use of machinery output is increasedMore innovationImproved qualityIncreased productivityo Specialised machinery can be used which further increases the productivity.Developing and maintaining a brand imageEconomies of scaleThe Disadvantages of Specialisation / Division of Labour to Firm (From Mark Scheme): Reliance on a narrow range of productsSpecialist factor inputs are more expensive per unitLimited market sizeReliance on one specialist resources / suppliers or factor immobilityReduced flexibilityBoredom of workers / demotivationExtraThe Advantages of Specialisation / Division of Labour – TO THE FIRM: Specialist workers become quicker at producing goodso Production becomes cheaper per good because of thiso Production levels are increasedEach worker can concentrate on what they are good at and build up their expertiseThe Advantages of Specialisation / Division of Labour – TO THE WORKER: Increased productivityHigher pay for specialised worko Improved skills at that jobThe Disadvantages of Specialisation / Division of Labour – TO THE FIRM: Greater cost of training workersQuality of products may suffer if workers become bored by the lack of variety in theirjobsThe Disadvantages of Specialisation / Division of Labour – TO THE WORKER: Boredom as they do the same jobTheir quality and skills may sufferMay eventually be replaced by machinery

Competitive Markets and How They WorkMarket – Where or when buyers and sellers meet to trade or exchange productsSub-Market – A recognised or distinguishable part of a market Also known as a market segmentCeteris Paribus – Assuming other variables remain unchangedDisposable Income – Income after taxes on income have been deducted and state benefits havebeen addedReal Disposable Income – Income after taxes on income have been deducted and state benefitshave been added and the result has been adjusted to take into account changesNormal Goods – Goods for which an increase income leads to an increase in demandInferior Goods – Goods for which an increase in income leads to a fall in demandSubstitutes – Competing GoodsComplements – Goods for which there is joint demandEfficiency - Where the best use of resources is made for the benefit of consumersDisequilibrium Graph:

Consumer Surplus – The extra amount that a consumer is willing to pay for a product above theprice that is actually paidProducer Surplus – The difference between the price a producer is willing to accept andwhat is actually paidHow a Consumer / Producer Surplus Changes (Mark Scheme) (4 Marks): Correctly labelled, Downward sloping demand curve / Upward sloping supply curveOriginal Consumer / Producer surplus identifiedConsumer / Producer surplus will Increase / DecreaseArea of Consumer / Producer surplus Increase / Decrease indicated by letters orlabelsComment on size of change of Consumer / Producer surplus: Change in priceElasticity of Curve

DemandDemand – The quantity of a product that consumers are able and willing to purchase at variousprices over a period of timeNotional Demand – The desire for a productEffective Demand – The willingness and ability to buy a productDemand Curve - This shows the relationship between the quantity demanded and the price of aproductDemand Schedule – The data that is used to draw the demand curve for a productMovement Along The Demand Curve – This is in response to a change in the price of a productChange In Demand – This is where a change in a non-price leads to an increase or decrease indemand for a productILAPTIMERS(Demand shifters / Determinants):I – Income – Increase in Income Increase in DL – Legislation – Eg. Motorcycle Helmet Law Introduced Increase in D for Motorcycle HelmetsA – Advertising – Increase in Advertising stimulates demand Increase in DP – Population – Increase in Population Increase in DT – Tastes – Consumer Taste changes to 3D TVs Increase In D for TVsI – Interest Rates – Decrease Interest Rates Increase in DM – Market Size – Increase in Market Size Increase in D (Not 100% sure about this one)E – Expectations of Future Prices – Price expected to increase D increases nowR – Related Goods – Increase in price of Substitutes Increase in D for original productS – Seasons – Christmas is coming Increase in D for Santa CostumesIncome Substitution Effect For A Price Increase – Why The Demand Curve Is Downwards Sloping:-If the price of a good increases, then there will be two effects:1. Substitution Effecto The good is relatively more expensive than alternative goods and people canswitch to other goods.2. Income Effecto The increase in price decreases one’s purchasing power and so one’s real disposableincome decreases. This lower income is likely to reduce demand for normal goodsbut increase demand for inferior ones.

SupplySupply – The quantity of a product that produces are willing and able to provide at different marketprices over a period of timeProfit – The difference between the total revenue (sales revenue) of a producer and total costSupply Curve – This shows the relationship between the quantity supplied and the price of a productSupply Schedule – The data used to draw the supply curve of a productChange In Supply – Occurs when a change in a non-price influence leads to an increase or decreasein the willingness of a producer to supply a productPRATNESTS(Supply shifters / Determinants):P – Productivity – Increase in productivity Increased SR – Resource Cost – Decrease in Resource Cost Increase in SA – Alternative Output – Alternative product selling for higher price Increase S of alternativeT – Technology – Better / More Technology Increased productivity Increase in SN – Number Of Suppliers – Increased Number Of Suppliers Increase in SE – Expectations of Future Prices – Price expected to rise Increase in S laterS – Subsidies – Increase in amount of Subsidy Decrease in Cost of Production Increase in ST – Taxes – Taxes Increased Increase in Cost of Production D increases nowS – Seasons – Winter is coming Decrease in S of cropsPrice – The amount of money that is paid for a given amount of a particular good or serviceEquilibrium Price – The price where demand and supply are equalClearing Price – Same as equilibrium priceDisequilibrium – Any position in the market where demand and supply are not equalSurplus – An excess of supply over demandShortage – An excess of demand over supplyComment on how overall impact of shift in D or S depends on (Generally worth 2 marks): Size of Shift/s (1 mark) elaborated with reference to effect on price or quantity (1 mark)Elasticity of curve not shifting or elasticity of both curves (1 mark) elaborated withreference to effect on price or quantity (1 mark)There are other factors that affect demand and/ or supply (up to 2 marks)

ElasticityElasticity: Is a numerical estimateMeasures the response to a change in price or to a change in any other factors thatdetermine the demand or supply of a productElasticity Definition – The extent to which buyers and sellers respond to a change in marketconditionsPrice Elasticity (PED)Price Elastic Definition – Where the percentage change in the quantity demanded is sensitive toa change in price of the product {Greater than 1 or Less than -1} / Further away from 0Price Inelastic Definition – Where the percentage change in the quantity demanded isinsensitive to a change in price of the product {Less than 1 or Greater than -1} / Closer to 0Price Unit Elastic Definition - Where the percentage change in the quantity demanded is equalto a change in price of the product {Equal to 1}Price Elasticity Of Demand (PED) Definition – The responsiveness of the quantity demanded toa change in the price of the productPrice Elasticity Of Demand (PED) FormulaeDeterminants Of The Price Elasticity Of Demand (SHITBND): The availability and closeness of substitutes – the more substitutes, the more priceelastic demand isHabit Forming – Habit forming goods tend to have very price inelastic demandsThe relative expense of the product with respect to income – Increased price elasticitywith relatively expensive goodsTime (Short Term / Long Term) – Consumers are less likely to change spending habits inthe short term but in the long term will become more aware of substitutes increasingprice elasticity. Also products that don’t warrant instant consumption and take up alarge proportion of income (cars, bathrooms etc ) are usually more price elastic.Brand Loyalty – Products with strong brands tend to have more price inelastic demandsNecessities – Necessities tend have very price inelastic demandsDurability – Goods that are expected to last a long time tend to be more price elastic asthe purchase can be delayed whereas milk will run out quickly and need to berepurchased even if its price rises

Income Elasticity Of Demand (YED)Income Elasticity Of Demand Definition - The responsiveness of demand to a change in incomeIncome Elastic Definition – Goods for which a change in income produces a greaterproportionate change in demandIncome Inelastic Definition – Goods for which a change in income produces a less thanproportionate change in demandNormal Good Definition – Goods for which an increase in income leads to an increase indemand / Goods with a positive income elasticity of demand YED 0Normal Necessity – YED 0.1 - 0.4Pure Normal – YED 0.6 - 0.9Superior Good Definition – Goods for which an increase in income leads to a relatively largeincrease in demand / Goods with a relatively large positive income elasticity of demand YED 1Inferior Good Definition – Goods for which an increase in income leads to a fall in demand /Goods with a negative income elasticity of demand YED 0Giffen Good – YED -2Income Elasticity Of Demand (YED) FormulaeComment on Income Elasticity of Demand:1.2.3.4.5.6.YED Coefficient – What type of good is it? Its Elasticity10% Example – YED 1.5 Income goes up 10% Demand goes up 15%Does the YED correspond with economic theory? e.g. A TV can’t be an inferior goodThese are estimates They may also be unreliableThese estimates can change over timeAssumes ceteris paribus which may not apply (Usually accepted)

Cross Elasticity Of Demand (XED)Cross Elasticity Of Demand (XED) Definition – The responsiveness of demand for one product inrelation to a change in the price of another productA positive XED indicates two substitutes PS --- Positive SubstituteA negative XED indicates two complements CNN --- Complement Negative NumberA zero XED indicates that the two products have no real relation in terms of Price affecting D(Zero XED would be a vertical line)Cross Elasticity Of Demand (XED) FormulaeComment on Cross Elasticity of Demand:1.2.3.4.5.6.XED Coefficient – Substitute or Complement Its Elasticity10% Example – XED 1.5 Product X goes up 10% Product Y goes up 15%Does the XED co

Economics AS Level Notes Economics Definition – The study of how to allocate scarce resources in the most effective way Economic Problem Definition – How to allocate scarce resources among alternative uses Household Definition – A group of people whose spending decisions are connected Microeconomics Definition – The st