1.1 The market system
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1.1.1 The economic problem
1.1.1.aScarcity, finite resources and choice
The problem of scarcity – where there are unlimited wants and finite resources, leading to the need to make choices.
1.1.1.bOpportunity cost and its effect on economic agents
Opportunity cost and its effect on economic agents (consumers, producers and government).
1.1.1.cProduction possibility curve diagrams
The use of diagrams to show production possibility curve.
1.1.1.dInterpreting production possibility curves
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.
1.1.1.eCauses of positive and negative economic growth
Possible causes of positive or negative economic growth.
1.1.2 Economic assumptions
1.1.2.aConsumer-benefit and business-profit assumptions
The underlying assumptions that: • consumers aim to maximise their benefit • businesses aim to maximise their profit.
1.1.2.bWhy consumers may not maximise benefit
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.
1.1.2.cWhy producers may not maximise profit
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.
1.1.3 Demand, supply and market equilibrium
1.1.3.aDemand
Definition of demand.
1.1.3.bMovements and shifts on demand curves
The use of demand curve diagram to show: • changes in price causing movements along a demand curve • shifts indicating increased and decreased demand.
1.1.3.cFactors that shift demand
Explain factors that may shift the demand curve, including advertising, income, fashion and tastes, prices of substitutes and complements, and demographic change.
1.1.3.dSupply
Definition of supply.
1.1.3.eMovements and shifts on supply curves
The use of supply curve diagram to show: • changes in price causing movements along a supply curve • shifts indicating increased and decreased supply.
1.1.3.fFactors that shift supply
Explain factors that may shift the supply curve, including production costs, technology, indirect taxes, subsidies and natural factors such as disasters and weather.
1.1.3.gEquilibrium price and quantity and how they are determined
Equilibrium price and quantity and how they are determined.
1.1.3.hMarket equilibrium, excess demand and excess supply diagrams
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.
1.1.3.iCalculating and drawing excess demand and excess supply
Define, calculate and draw excess demand and excess supply.
1.1.3.jMarket forces removing excess demand or supply
The use of market forces to remove excess supply or excess demand.
1.1.4 Elasticity
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.
1.1.5 The mixed economy
1.1.5.aMixed economy
Definition of mixed economy.
1.1.5.bPublic and private sector
Definition of public and private sector.
1.1.5.cPublic and private sector ownership, control and aims
Difference between public and private sectors in terms of ownership, control and aims.
1.1.5.dWhat, how and for whom to produce in a mixed economy
How the problems of what to produce, how to produce and for whom to produce are solved in the mixed economy.
1.1.5.eMarket failure and inefficient resource allocation
Concept of market failure – linked to inefficient allocation of resources.
1.1.5.fWhy governments intervene in markets
Why governments might need to intervene because of market failure.
1.1.5.gPublic goods and the free-rider problem
Define public goods by non-excludability and non-rivalry, and explain how these characteristics cause the free-rider problem.
1.1.5.hPublic and private sector roles in production
The role of the public sector and private sectors in the production of goods and services.
1.1.5.iRelative importance of public and private sectors
The relative importance of public sector and private sector in different economies.
1.1.5.jPrivatisation
Definition of privatisation.
1.1.5.kEffects of privatisation on stakeholders
Effects of privatisation on: • consumers • workers • businesses • government.
1.1.6 Externalities
1.1.6.aExternal costs
Definition of external costs.
1.1.6.bExamples of external costs
Give and explain examples of external costs, including pollution, congestion and environmental damage.
1.1.6.cExternal benefits
Definition of external benefits.
1.1.6.dExamples of external benefits
Examples of external benefits, including education, healthcare and vaccinations.
1.1.6.eSocial cost and social benefit formulae
Definition and formula for: • social costs = private costs + external costs • social benefits = private benefits + external benefits.