1.1 The market system

The problem of scarcity – where there are unlimited wants and finite resources, leading to the need to make choices.

Opportunity cost and its effect on economic agents (consumers, producers and government).

The use of diagrams to show production possibility curve.

Production possibility curve diagram should be used to show: • the maximum productive potential of an economy • fully employed or unemployed resources • opportunity cost • positive or negative economic growth that shifts the production possibility frontier (PPF) outwards and inwards • possible and unobtainable production.

Possible causes of positive or negative economic growth.

The underlying assumptions that: • consumers aim to maximise their benefit • businesses aim to maximise their profit.

Reasons why consumers may not maximise their benefit: • consumers are not always good at calculating their benefits • consumers have habits that are hard to give up • consumers sometimes copy others’ behaviour.

Reasons why producers may not maximise their profit: • producers may have managers that revenue maximise or sales maximise • producers may prioritise caring for customers • producers may complete charitable work.

Definition of demand.

The use of demand curve diagram to show: • changes in price causing movements along a demand curve • shifts indicating increased and decreased demand.

Explain factors that may shift the demand curve, including advertising, income, fashion and tastes, prices of substitutes and complements, and demographic change.

Definition of supply.

The use of supply curve diagram to show: • changes in price causing movements along a supply curve • shifts indicating increased and decreased supply.

Explain factors that may shift the supply curve, including production costs, technology, indirect taxes, subsidies and natural factors such as disasters and weather.

Equilibrium price and quantity and how they are determined.

The use of diagrams to show: • how shifts in supply and demand affect equilibrium price and quantity in real-world situations • excess demand • excess supply.

Define, calculate and draw excess demand and excess supply.

The use of market forces to remove excess supply or excess demand.

1.1.4.aPrice elasticity of demand (PED)

Definition of PED.

1.1.4.bPED formula

Use PED = percentage change in quantity demanded ÷ percentage change in price.

1.1.4.cCalculating PED

Calculate the PED using given percentage changes in quantity demanded and percentage changes in price.

1.1.4.dPrice-elastic and price-inelastic demand diagrams

The use of diagrams to show price elastic and price inelastic demand.

1.1.4.eInterpreting PED values

Interpret numerical values of PED that show: • perfect price inelasticity • price inelasticity • unitary price elasticity • price elasticity • perfect price elasticity.

1.1.4.fFactors influencing PED

The factors influencing PED, including: • substitutes • degree of necessity • percentage of income spent on goods or service • time.

1.1.4.gPED and total revenue

Use total-revenue calculations to show how a price change affects total revenue and determine whether demand is price elastic or price inelastic.

1.1.4.hPrice elasticity of supply (PES)

Definition of PES.

1.1.4.iPES formula

Use PES = percentage change in quantity supplied ÷ percentage change in price.

1.1.4.jCalculating PES

Calculate the PES using given percentage changes in quantity supplied and percentage changes in price.

1.1.4.kPrice-elastic and price-inelastic supply diagrams

The use of diagrams to show price elastic and price inelastic supply.

1.1.4.lInterpreting PES values

Interpret numerical values of PES that show: • perfect price inelasticity • price inelasticity • unitary price elasticity • price elasticity • perfect price elasticity.

1.1.4.mFactors influencing PES

The factors influencing PES, including: • factors of production • availability of stocks • spare capacity • time.

1.1.4.nPES of manufactured and primary products

Use examples to show the likely price elasticity of supply for manufactured products and primary products.

1.1.4.oIncome elasticity of demand

Definition of income elasticity of demand.

1.1.4.pIncome elasticity of demand formula

Use income elasticity of demand = percentage change in quantity demanded ÷ percentage change in income.

1.1.4.qCalculating income elasticity of demand

Calculate the income elasticity of demand using given percentage changes in quantity demanded and percentage changes in income.

1.1.4.rInterpreting income elasticity values

Interpret numerical values of income elasticity of demand that show: • luxury goods • normal goods • inferior goods.

1.1.4.sBusiness and government uses of demand elasticities

The significance of price and income elasticities of demand to businesses and the government, in terms of: • the imposition of indirect taxes and subsidies • changes in income.

Definition of mixed economy.

Definition of public and private sector.

Difference between public and private sectors in terms of ownership, control and aims.

How the problems of what to produce, how to produce and for whom to produce are solved in the mixed economy.

Concept of market failure – linked to inefficient allocation of resources.

Why governments might need to intervene because of market failure.

Define public goods by non-excludability and non-rivalry, and explain how these characteristics cause the free-rider problem.

The role of the public sector and private sectors in the production of goods and services.

The relative importance of public sector and private sector in different economies.

Definition of privatisation.

Effects of privatisation on: • consumers • workers • businesses • government.

Definition of external costs.

Give and explain examples of external costs, including pollution, congestion and environmental damage.

Definition of external benefits.

Examples of external benefits, including education, healthcare and vaccinations.

Definition and formula for: • social costs = private costs + external costs • social benefits = private benefits + external benefits.