GCSE Economics Notes

What is the basic economic problem?

unlimited wants, limited resources (scarcity)

What is opportunity cost?

the cost of the next best alternative e.g. if i buy an apple, i could have bought a chocolate instead.

What is the central purpose of economic activity?

the production of goods and services to satisfy needs and wants

What are key economic decisions

• what to produce
• how to produce,
• who is to benefit from the goods and services produced

What is a market?

A place where buyers and sellers meet to exchange goods & services

What is demand?

The quantity of a good or service that consumers are willing and able to buy at each given price.

What causes the demand curve to shift?

• PIRATES
• population
• incomes
• related goods (complements and substitutes)
• advertising
• trends
• expectations
• seasons

What is supply?

 The quantity of goods and services that firms are willing and able to sell at each given price.

Why is the supply curve upwards sloping?

Firms are motivated to sell more goods and services at a higher price, as they are motivated by profit.

What causes the supply curve to shift?

• PCTWINS
• productivity (if staff are more skilled)
• costs of production (if wages fall)
• technology (better machines)
• weather
• indirect taxes
• number of firms
• subsidies

What is equilibrium?

The price & quantity at which supply meets demand.

What is disequilibrium

When demand is not equal to supply

What is excess demand?

When quantity demanded is higher than quantity supplied at a given price . This causes prices to increase towards equilibrium.

What is excess supply?

When quantity supplied is higher than quantity demanded at a given price. This causes prices to decrease towards equilibrium.

What is price elasticity of demand?

PED = % change in demand/ % change in price.

The responsiveness of demand to a change in price.

What is price elasticity of supply?

PES = % change in supply/ % change in price.

The responsiveness of supply to a change in price.

What are the factors that affect PED?

If price increases, demand will always decrease, but by how much?

• SANDPIT
• substitutes (calculators have no substitutes but coffee does)
• addictive (lottery tickets could be addictive)
• necessity (electricity bills are a necessity)
• durability (beds will last a long time)
• proportion of income (fizzy drinks cost a small % of income)
• time (everything becomes more elastic over time)

What do different values of PED represent?

• 0 to -1 - inelastic
• -1 and below - elastic
• -1 unit elastic
• 0 - perfectly inelastic
• negative infinity - perfectly elastic

What are the factors that affect PES?

If price increases, supply will always increase, but by how much?

• SECTS
• level of stocks
• barriers to entry (qualifications of a dentist vs a taxi driver)
• spare capacity (land for houses)
• time
• substitutability of factors of production

What are the four factors of production?

• CELL
• Capital
• Entr

What are the sectors of the economy?

• Primary sector: raw materials e.g. sand or oil
• Secondary sector: manufactured goods e.g. calculators
• Tertiary sector: services e.g. accountant or doctor or university

What is productivity?

Output per worker

What factors affect productivity?

• labour - education and training, specialisation
• capital - faster or better machines
• land - fertiliser or drainage

What is division of labour?

Division of labour is when each worker focuses on one specific task in a large production process.

Division of labour 😄

• increase in productivity and lower costs of production
• increase in quality (these happen because workers repeat the same task and learn while doing the job)

Division of labour ☹️

• workers get bored or lose motivation more often (lowers productivity or workers leave regularly)
• more structural unemployment (when a specific industry declines and workers don't have transferable skills e.g. UK steel industry)

What are the main business objectives?

• The main business objective is profit maximisation.
• Other objectives
  • maximise sales
  • maximise revenue
  • gain market share

What is profit?

Total revenue - total costs

What is total revenue?

price x quantity

What is total costs?

Total fixed costs + total variable costs

What are fixed costs?

Fixed costs do not change when output increases e.g. rent for my factory or my office

What are variable costs?

Variable costs increase when output increases e.g. raw materials/ packaging

What are average costs?

Total cost/ quantity

What are economies of scale?

When average costs fall as output increases.

Imagine if it costs a small bakery 50p per coffee on average. It might cost a large coffee chain only 30p per coffee.

Types of economies of scale

• Really fun mums try making pies
• Risk-bearing
• Financial (large firms can borrow money at cheaper rates)
• Managerial
• Technical (large chains will save costs as they have better technology which is used to produce a lot more output)
• Marketing - Nike Just Do It
• Purchasing (large chains can buy things in bulk)

What are diseconomies of scale?

When average costs rise as output increases

What causes diseconomies of scale?

• Communication becomes difficult so decisions take longer (so productivity falls)
• Workers get demotivated when working for a large company (they feel less important so then they are less productive)

What are external economies of scale?

When average costs fall as output increases. This happens to the entire industry.

For example, Nike and Adidas would both benefit from:

• more skilled workers
• better infrastructure

What is productivity?

• output per worker
• output per hour