key topics

• advantages of the division of labour

  • increase Labour porductivity
  • increases efficiency of resources, helping to reduce cost per unit of output
  • increase in the quality of output, workers work to their skillset
• disadvantage of division of labour

  • repetition creates monotony and boredom
  • breaking down production into different tasks creates chance for machinery to take over
  • specialisation creates interdependence in production
• functions of money

  • medium of exchange - enables buying and selling and removes need for barter
  • measure of value - value on products = can be bought and sold
  • store of value - way of storing wealth/ holds value
  • method of deferred payment - borrowing and lending (interest)
• advantages of the free market

  • economic efficiency and lower prices
  • quality of goods
  • greater choice
  • financial incentives
• disadvantages of the free market

  • monopolies may form due to competition
  • distribution of income and wealth unequal
  • external costs and benefits sometimes ignored
  • information gaps persist
  • lack of regulation and taxation to protect consumers
  • lack of welfare support = poverty
  • underprovision of merit and public goods
  • erratic swings in the business cycle
• advantages of a command

  • cooperation between firms can lead to high levels of output
  • reduction in inequality - gov in charge of wages
  • limit external costs
  • can fund the provision of public goods
  • gov. has control over economy so there's smaller swings in the business cycle
• disadvantages of command

  • no price mechanism = markets suffer from shortages and surpluses
  • lack of competition leads to inefficiency
  • lack of competition leads to poor-quality products = maximising output rather than profits
  • less choice/ less product portfolio
  • lack of financial incentives - no profit incentive
  • underperformance - growth and SOL increase slower
• rational decision making is down to:

  • perfect market information
  • computational and judgemental skills
  • ability to take decisions free from the behaviour of others
  • sufficient time to make devcision
• factors to shift the demand curve:

  • fall in price of complementary goods
  • rise in the price of substitute goods
  • changes is wants/ needs
  • increased advertising
  • increase in real incomes
  • decrease in income tax
  • increase in populaion
• factors to shift the supply curve:

  • improvements in technology
  • reduction in labour costs
  • reduction in capital costs
  • reduction in transport costs
  • increase in the number of firms
  • reduction on indirect tax
  • increase in gov. subsidies
• functions of the price mechanism

  • rationing device - resources to those who are prepared to pay for the most for them
  • incentive device - rising prices =rising production = rising profits
  • signalling device - indicates changes in the conditions of demand or supply = more of fewer resources allocated
• advantages of indirect taxes to correct market failure

  • pollution - help internalise external costs
  • work with market force so choice still exists unlike regulation
  • tax funds raised for gov. help clean up environment
  • indirect paid in small amounts and regular rather than large sum
• disadvantages of indirect taxes to correct market failure:

  • indirect taxes increase costs of production
  • widespread uses of indirect taxes may be inflammatory
  • firms may relocate to other countries
  • tax revenue may not be used to clean environment
  • unintended consequences - illegal markets
  • regressive nature of indirect taxes - burden of payments fall on low-income groups
• advantages of subsidies applied to renewable energy markets:

  • reduce air pollution and other external costs
  • rate of consumption of non-renewable resources is reduced
  • work with market forces so maintain choice
  • internalise external benefits
• disadvantages of subsidies applied to renewable energy markets

  • opportunity cost to gov. subsidies
  • unintended consequences - firms become dependent
  • wind and solar power may be less reliable than fossil fuels
  • external costs such as noise, visual pollution, property prices
• advantages or maximum prices:

  • reduce exploitation of consumers
  • reduce inequality - salary cap
  • help those on low incomes afford key products
• disadvantages of maximum prices:

  • unintended consequences - distorts price mechanism
  • reduces supply of rental property
  • producer surplus falls = landlords have less income
  • problems arise over how to allocate supply to meet excess demand
  • danger o shadow markets being created
• advantages of minimum prices:

  • reduce consumption of goods which are harmful to consumers
  • encourage producer to with to making healthier drinks/ foods
  • reduce fluctuations in food prices - easier to budget income
  • stabilise and guarantee producer incomes
  • national minimum wage reduces exploitation of labour
• disadvantages of minimum wage:

  • unintended consequences - distorts price mechanism
  • price of some foods/drinks will increase
  • less effective in reducing consumption when dealing with price inelastic goods
  • leads to Govs buying up surpluses = opportunity costs
  • food surpluses may be sold overseas at low prices - damage farmers who cant compete with low prices
  • less incentive for framers to improve quality/ keep production costs down
  • national minimum wage - unemployment in low skilled markets
  • difficult to monitor