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Unit 1: Markets in Action

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  1. 1.3.1 - Introductory concepts

    1. Economics as a social science: inability to conduct scientific economics experiments.

    2. The development of models in economics based on assumptions.

    3. The use of the ceteris paribus assumption in building models and drawing conclusions based on them.

    4. The distinction between positive statements and value normative judgements on economic issues. economics

    5. The role of value judgements in influencing economic decision making and policy.

    6. The problem of unlimited wants and finite resources.

    7. The distinction between renewable and non-renewable resources.

    8. The link between scarcity and opportunity cost.

    9. The distinction between free goods and economic goods.

    10. The use of production possibility frontiers to depict: possibility; the maximum productive potential of an economy frontiers; efficient or inefficient allocation of resources; possible and unobtainable production; opportunity cost (using marginal analysis); economic growth and decline.

    11. The distinction between movements along, and shifts in, production possibility frontiers, and their possible causes.

    12. The distinction between capital goods and consumer goods.

    13. The significance of capital goods for productivity and economic growth.

    14. The advantages and disadvantages of specialisation and the the role of money division of labour in organising production; Adam Smith's views and financial on the division of labour. markets

    15. The function of money as a medium of exchange, a measure and store of value, and a method of deferred payment; the significance of these functions for specialisation.

    16. The role of financial markets:; to facilitate saving; to make funds available to businesses and individuals; to facilitate the exchange of goods and services; to provide forward markets in commodities and currencies; to provide a market for equities.

    17. The distinction between free market, mixed and command mixed and economies. command

    18. The advantages and disadvantages of free market and command economies economies.

    19. The role of the state in a mixed economy.

  2. 1.3.2 - Consumer behaviour and demand

    1. The assumption of rationality in decision making: consumers aim decision making to maximise utility by making rational choices; firms aim to maximise profits.

    2. Reasons why consumers may not aim to maximise utility:; the influence of other people's behaviour (herding); habitual behaviour; inertia; poor computational skills; the need to feel valued; framing and bias.

    3. The concept of 'demand'.

    4. The distinction between movements along a demand curve and shifts of a demand curve.

    5. The concept of diminishing marginal utility and its significance for the shape of the individual demand curve.

    6. Factors that may cause a shift in the demand curve:; changes in the price of substitutes or complementary goods; changes in real income; changes in tastes; changes in size and age distribution of the population; advertising.

    7. The concepts of 'price', 'income' and 'cross-elasticities of cross-elasticities demand'. of demand

    8. How to use formulae to calculate price, income and cross-elasticities of demand.

    9. Interpretation of numerical values of price elasticity of demand:; perfectly price elastic demand; price elastic demand; unitary price elastic demand; price inelastic demand; perfectly price inelastic demand.

    10. The factors influencing price elasticity of demand:; availability of substitutes; branding; percentage of total expenditure; addictiveness of product; durability of product.

    11. How to calculate total revenue.

    12. How price elasticity of demand varies along a straight line demand curve.

    13. The relationship between price elasticity of demand and total cross-elasticities revenue. of demand

    14. Interpretation of numerical values of income elasticity of (continued) demand:; perfectly income elastic demand; income elastic demand; income inelastic demand; perfectly income inelastic demand; the distinction between normal goods and inferior goods.

    15. Interpretation of numerical values of cross elasticity of demand. Significance for the degree to which goods are:; substitutes; complements; unrelated.

    16. The significance of price, income and cross-elasticities of demand for firms, consumers and the government.

  3. 1.3.3 - Supply

    1. The concept of 'supply'.

    2. The distinction between movements along a supply curve and shifts of a supply curve.

    3. Factors that may cause a shift in the supply curve:; changes in the costs of production; the introduction of new technology; indirect taxes (specific and ad valorem); government subsidies; natural disasters.

    4. The concept of 'price elasticity of supply'. supply

    5. Calculation and interpretation of numerical values of price elasticity of supply:; perfectly elastic supply; elastic supply; unitary elastic supply; inelastic supply; perfectly inelastic supply.

    6. Factors that influence price elasticity of supply:; the time period; availability of stock/perishability; mobility of factors of production; legal constraints; capacity.

    7. The distinction between the short run and long run in economics and its significance for price elasticity of supply.

  4. 1.3.4 - Price determination

    1. Equilibrium price and quantity, and how they are determined. market

    2. Causes of changes in the equilibrium price and quantity as a equilibrium result of shifts in demand and supply curves.

    3. The operation of market forces to eliminate excess demand and excess supply.

    4. The distinction between consumer and producer surplus. producer surplus

    5. How changes in demand or supply might affect consumer and producer surplus.

    6. The rationing, incentive and signalling functions of the price price mechanism mechanism for allocating scarce resources.

    7. The price mechanism in the context of different types of markets, including local, national and global markets.

    8. The impact of indirect taxes on consumers, producers and the subsidies government.

    9. The incidence of indirect taxes on consumers and producers.

    10. The impact of subsidies on consumers, producers and the government.

    11. The incidence of subsidies on consumers and producers.

  5. 1.3.5 - Market failure

    1. 1.3.5.1aWhy market failure occurs: too much or too little of a good is failure produced and/or

      Why market failure occurs: too much or too little of a good is failure produced and/or consumed compared to the socially optimal level of output.

    2. 1.3.5.1bSources of market failure: • externalities • the free-rider problem; non-provision of

      Sources of market failure:; externalities; the free-rider problem; non-provision of public goods; imperfect market information; moral hazard; speculation and market bubbles.

    3. 1.3.5.2adistinction between private benefits, external benefits and negative social benefits.

      The distinction between private benefits, external benefits and negative social benefits. externalities

    4. 1.3.5.2bdistinction between private costs, external costs and social costs

      The distinction between private costs, external costs and social costs.

    5. 1.3.5.2cdistinction between: • external benefits of production • external benefits of

      The distinction between:; external benefits of production; external benefits of consumption; external costs of production; external costs of consumption.

    6. 1.3.5.2duse of diagrams, using marginal analysis, to illustrate: • the external benefits from

      The use of diagrams, using marginal analysis, to illustrate:; the external benefits from consumption; the external costs from production; the distinction between the market and social optimum positions; identification of the welfare loss or gain areas.

    7. 1.3.5.2eimpact of externalities in various contexts: • transport • health • education •

      The impact of externalities in various contexts:; transport; health; education; environment; financial.

    8. 1.3.5.3adistinction between public and private goods: public goods • private goods: rival and

      The distinction between public and private goods: public goods; private goods: rival and excludable; public goods: non-rival and non-excludable.

    9. 1.3.5.3bWhy public goods may not be provided by the private sector making reference to the

      Why public goods may not be provided by the private sector making reference to the free-rider problem.

    10. 1.3.5.4adistinction between symmetric and asymmetric information. information

      The distinction between symmetric and asymmetric information. information

    11. 1.3.5.4bsignificance of information gaps

      The significance of information gaps.

    12. 1.3.5.4cimperfect market information may lead to a misallocation of resources in various

      How imperfect market information may lead to a misallocation of resources in various contexts:; healthcare; education; pensions; insurance.

    13. 1.3.5.5amoral hazard can occur

      How moral hazard can occur.

    14. 1.3.5.5bimpact of moral hazard on consumers, producers, workers and governments in: • insurance

      The impact of moral hazard on consumers, producers, workers and governments in:; insurance; banking.

    15. 1.3.5.6amarket bubbles may arise. market bubbles

      How market bubbles may arise. market bubbles

    16. 1.3.5.6bimpact of market bubbles on consumers, producers, workers and governments in various

      The impact of market bubbles on consumers, producers, workers and governments in various contexts:; housing; stocks and shares.

  6. 1.3.6 - Government intervention in markets

    1. The purpose of government intervention, including reference to methods of market failure. government

    2. Methods of intervention: intervention; indirect taxation (ad valorem and specific); subsidies; maximum and minimum (guaranteed) prices.; tradeable pollution permits; extension of property rights; state provision; regulation; provision of information.

    3. Contexts in which governments may intervene:; health; housing; education; transport; environment; energy; agriculture; commodities.

    4. 'Government failure' as intervention that results in a net welfare failure loss.

    5. Causes of government failure include information gaps, lack of incentives, unintended consequences, excessive administrative costs and moral hazard.