Micro Economics Edexcel A level

• What are the four assumptions of micro economics?

  Rational Consumers, perfectly competitive market, average consumer, ceteris paribus
• What is a positive statement?


  a statement that can be tested and validated
• What is a normative statement?


  an opinion, a value judgement
• What is the economic problem?

  Resources are scarce, however wants are unlimited. There are finite resources so goods/services need to be allocated efficiently.
• What is opportunity cost?

  Cost of the next best alternative foregone
• What is the PPF?

  production possibilities frontier is a graph showing the combinations of output that the economy can possibly produce given the current production and technology
• What do points x, b and y show?

  X - underutilisation - at this point the opportunity cost is zero as you can increase one good without decreasing the other.

  B - Efficient

  C - unattainable

  
• Difference between capital and consumer goods?

  Capital goods are used to make consumer goods, consumer goods are goods to meet needs and wants when consumed
• What are the economic agents?

  Producers - decide what to make and how much they are willing to sell for

  Consumers - decide what they want to buy and how much they are willing to sell for

  Governments - decide how much to intervene in the way producers and consumers act
• What is specialisation?


  when a country decides to focus on making a particular good/service
• What is division of labour?

  production process of a good which is broken down in various small tasks
• What are the advantages and disadvantages of specialisation and division of labour?

  Advantages

  - Greater output - focus on one means they will become better

  - Less wastage - less mistakes more efficient

  - Lower unit costs - EOS gained cause unit costs to decrease

  - Greater variety - more countries producing different goods

  
  

  Disadvantages

  - Boredom - same thing every day

  - Structural unemployment - people wont have skills to find other jobs

  - Over-reliance - on trading partners
• What are the functions of money?

  medium of exchange, unit of account, store of value, deferred payment
• What is a free market economy?

  Economic system based on supply and demand
• What is a command economy?


  An economic system in which the government makes decisions to allocate resources
• What is a mixed economy?

  a combination of a free market and command economy
• Advantages and disadvantages of free market economy

  +Choice- if enough demand firms will produce+Competition- Free market economies allow firms to compete against each other. This entails many benefits, the main two being lower prices and greater quality.+Efficiencies- efficiency gains which high levels of competition can result in

  -Profit maximisation- consumers may have to pay high prices and suffer from low quality goods-Missing markets- no provision of public goods-Monopolies- lack of competition
• Advantages and disadvantages of command economy

  +More equal society– state allocates in society’s best interest, maximising social welfare rather than businesses which aim to maximise profit.+Provision of public goods+Prevention of monopolies- state allocates resources so less risk of monopolies

  -Inefficient allocation of resources-Lack of innovation-Lack of information
• Define Demand


  Demand refers to the amount of consumers that are willing and able to buy a certain good at a given price in a given period of time
• What are factors that cause a shift in demand?

  PIRATESP- Population. The larger the population, the higher the demand.I- Income. If consumers have more disposable income, they are able to afford more goods, so demand increases.R- Related goods. Related goods are substitutes or complements. A substitute can replace another goodA- Advertising. This will increase consumer loyalty to the good and increase demand.T- Tastes and fashions. The demand curve will also shift if consumer tastes change.E- Expectations. This is of future price changes.S- Seasons. Demand changes according to the season.
• Why is the demand curve downward sloping?

  The law of diminishing marginal utility-as more of a product is consumed, the marginal benefit to the consumer falls, hence the consumer is prepared to pay less

  The income effect-As prices rise, the amount of disposable income falls

  The substitution effect-As prices rise, consumers will start to evaluate alternatives
• What is quantity demanded?

  the quantity of a good that people are willing to buy at a particular price at a given time
• What is the law of demand?

  there is an inverse relationship between price and quantity demanded
• Define PED, XED and YED

  Price elasticity of demand - responsiveness of quantity demanded to a change in price

  
  

  Income elasticity of demand - responsiveness of quantity demanded to a change in income

  
  

  Cross elasticity of demand - responsiveness of quantity demanded for good A to the change in the price of good B
• What is the PED, XED, YED formula?

  %change in Q / %change in price/income/good B
• What are the values of PED?

  ped > 1 then price elastic

  ped < 1 price inelastic

  ped = 1 unitary elastic

  ped = 0 perfectly inelastic

  ped is infinity then perfectly elastic
• What are the factors affected in PED?

  DANSPP

  1) Necessity: A necessary good, such as bread or electricity, will have a relatively inelastic demand.

  2) Substitutes: If the good has several substitutes, such as Android phones instead of iPhones, then the demand is more price elastic.

  3) Addictiveness or habitual consumption: The demand for goods such as cigarettes is not sensitive to a change in price because consumers become addicted to them

  4) Proportion of income spent on the good: If the good only takes up a small proportion of income, such as a magazine which increases in price from £1.50 to £2, demand is likely to be relatively price inelastic.

  5) Durability of the good: A good which lasts a long time, such a washing machine, has a more elastic demand because consumers wait to buy another one.

  6) Peak and off-peak demand: During peak times, such as 9am and 5pm for trains, the demand for tickets is more price inelastic.
• What are the values of YED?

  if

  YED < 0 inferior good - demand decreases when income increases

  YED > 0 normal good - demand increases as income increases

  YED > 1 luxury good - increase in income causes bigger increase in demand
• What are the values of XED?

  XED < 0 complements - if ones expensive both fall in demand

  XED > 0 substitutes - can replace goods so increase in demand

  XED = 0 unrelated goods
• What is the importance of PES, PED, YED and XED?


  PES - can help know level of stock

  PED - government can use for externalities and firms can use for general use

  YED - depending on recession or general income of country

  XED - if a substitute has an impact on my good or complements have an impact
• Define supply


  Supply is the goods and services that firms are willing and able to provide to customers at given time period.
• Factors that can shift supply

  PINTSWC

  P- Productivity. Higher productivity causes an outward shift in supply, because average costs for the firm fall. o I- Indirect taxes. Inward shift in supply.

  N- Number of firms. The more firms there are, the larger the supply.

  T- Technology. More advanced the technology causes an outward shift in supply.

  S- Subsidies. Subsidies cause an outward shift in supply.

  W- Weather. This is particularly for agricultural produce. Favourable conditions will increase supply.

  C- Costs of production. If costs of production fall, the firm can afford to supply more. If costs rise, such as with higher wages, there will be an inward shift in supply
• Define PES

  responsiveness of quantity supplied to a change in price
• Factors affecting PES

  TSBLH

  1)Time scale: In the short run, supply is more price inelastic, because producers cannot quickly increase supply. In the long run, supply becomes more price elastic.

  2) Spare capacity: If the firm is operating at full capacity, there is no space left to increase supply. If there are spare resources, for example in a recession there are lots of spare and unemployed resources, supply can be increased quickly.

  3) Level of stocks: If goods can be stored, such as CDs, firms can stock them and increase market supply easily. If the goods are perishable, such as apples, firms cannot stock them for long so supply is more inelastic. 4) How substitutable factors are: If labour and capital are mobile, supply is more price elastic because resources can be allocated to where extra supply is needed. For example, if workers have transferable skills, they can be reallocated to produce a different good and increase the supply of it.

  5) Barriers to entry to the market: Higher barriers to entry means supply is more price inelastic, because it is difficult for new firms to enter and supply the market.
• Values of PES

  PES > 1 - elastic

  PES < 1 - inelastic

  PES = 0 supply fixed

  PES infinity - Supply is perfectly elastic
• Define Equilibrium price and quantity

  The equilibrium price is determined by the forces of supply and demand.
• Draw Excess demand, and what does this mean to firms

  If there is excess demand, market forces will result in an extension in supply and a contraction in demand. This is because firms will spot this excess demand and recognise that they will have to increase prices in order to ration demand. This means there can be market equilibrium.

  
• Draw excess supply, and what does this mean to firms

  If there is excess supply, market forces will result in a contraction in supply and an extension in demand, causing a fall in price to its market clearing level. This shortage in demand will result in a decrease in the price of the good as firms will realise that they have to lower their prices if they are to sell all their goods.

  
• Define consumer surplus

  the difference between what the consumers are willing and able to pay for a good/service and what they're actually paying for the good/service.
• Define producer surplus


  the difference between what the producers are willing and able to sell a good/service for and what they're actually paying for the good/service.