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

What is a competitive market?

• many buyers and sellers
• no product differentiation
• no barriers to entry or exit (firms can easily enter or leave)

Advantages and disadvantages of competitive markets

• 😄
• lots of choice so low prices
• 😦
• lower quality (less profit so less re-investment)

What is a non-competitive market?

• high market share
• product differentiation (unique product)
• high barriers to entry (difficult for new firms to enter)

What is a monopoly?

When one firm dominates the market

• high market share for one firm
• product differentiation (unique product)
• high barriers to entry (difficult for new firms to enter)

What is an oligopoly?

When a few firms dominate the market

• high market share for a few firms
• product differentiation (unique product)
• high barriers to entry (difficult for new firms to enter)

How do firms in an oligopoly behave?

1. collude and set high prices
2. non-price competition

Advantages and disadvantages of non-competitive markets

• 😦
  • high price (high market share and low choice)
  • diseconomies of scale
• 😄
• economies of scale
  • they are able to grow more (larger output)
  • lower long run average cost
  • this can be used to reduce prices or re-invest
• better quality (more profits so more re-investment)

Examples of barriers to entry

• high start-up costs
• economies of scale e.g. marketing/ technology
• copyright or patents

What is a labour markets

A place where workers and firms meet to exchange labour in return for a wage.

What is supply of labour?

The number of people who are willing and able to work, at each wage rate.

Factors that affect supply of labour (apart from wages)

• population/migration/age/retirement age
• wages in substitute jobs
• skills and qualifications
• transport

What is demand for labour?

The number of workers that firms are willing and able to hire, at each wage rate.

Factors that affect demand for labour (apart from wages)

• demand for the final good/service
• productivity of the workers
• quality/price of capital

What are wage differentials?

When two workers earn different wages as they do different jobs.

What is market failure?

When there is a misallocation of resources.

One example of a market failure is externalities.

This could mean that a good or service is over-produced/ under-produced/ over-consumed/ under-consumed.

What are externalities?

Externalities can be positive or negative.

Externalities are the cost/benefit to a third party, from a transaction.

Third party: anyone apart from the buyer or the seller e.g. NHS/ taxpayers

What is a positive externality?

External benefit = social benefit - private benefit.

Private benefit - me enjoying the gym

External benefit - less burden on the NHS due to bad health

What is a negative externality?

External cost = social cost - private cost.

Private cost - the cost to the firm to make magazines

External cost - the cost to the environment from cutting down trees

Government intervention

Government intervention can be used to reduce or correct market failure.

Types of government intervention

• taxation
  • a cost paid by firms to the goverment
  • this causes supply to shift to the left
  • 😄 quantity of demerit goods consumed decreases
  • 😦 taxes don't work well if the good is inelastic in demand
• subsidies
  • a payment given to firms by the government
  • this causes supply to shift to the right
  • 😄 quantity of merit goods consumed will increase
  • 😦 opportunity cost to the government e.g. NHS budget
• regulation
• pollution permits
  • firms are given a permit to pollute by a certain amount
  • firms who want to pollute more would have to buy more permits
  • firms wbo pollute less sell their extra permits
  • 😄 incentives
  • 🙁difficult to measure and monitor
• provision of information
  • 😄 it can lead to an increase or a decrease in demand
  • 😦 the information can be ignored by the consumer
  • 😦 opportunity cost

What are the main macroeconomic objectives?

• economic growth
• low and stable price level
• low unemployment
• balance of payments on the current account

What are some other macroeconomic objectives?

• minimising environmental damage
• reducing inequality and poverty
• reducing national debt

What is inflation?

A rise in average price level

What is deflation?

A fall in average price level

What is disinflation?

When the rate of inflation slows down (but remains positive) e.g. from 3% to 2%

What is the Consumer Price Index?

• Take an average basket of goods and services
• Each item is weighted
• Track the price of the basket over time

What is our inflation target?

2% (low and stable)

Why is high inflation bad?

• assuming that wages are not rising as well
• high inflation means that everything is increasing in price
• so living standards would fall
• as people have less disposable income left over after paying their bills and shopping etc.

Why is deflation bad?

• price level is falling
• people form an expectation that prices will continue to fall
• people will delay their spending
• this causes economic growth to slow down
• this could also cause unemployment

What is unemployment?

The people who cannot find a job but they are willing and able to work.

What is frictional unemployment? 

When workers are moving between jobs.

What is seasonal unemployment?

This occurs during particular times or seasons.

What is structural unemployment? 

When there is a decline in demand for goods and services in a particular industry.

E.g. steel miners in the UK lost their jobs as steel is now imported

What is cyclical (demand-deficient) unemployment? 

This is caused by a lack of aggregate demand in an economy, during a recession.

E.g. COVID

What is economic growth?

An increase in real GDP

What is real GDP?

The total value of goods and services produced in an economy, adjusted for inflation.

Real

Adjusted for inflation

Per capita

Per person (divided by the population).

What is balance of a payments?

Value of imports = value of exports

What is a current account deficit?

Value of imports > value of exports

What is a current account surplus?

Value of exports > value of imports

What could cause a current account deficit?

• high inflation rate relative to other countries
• low quality goods and services here (supply side policies)
• exchange rate

What policies can be used in macroeconomics?

1. fiscal policy
2. monetary policy
3. supply side policies

What is fiscal policy?

Use of government spending & taxation to influence aggregate demand.

What is expansionary fiscal policy?

The government increases spending or reduces taxation.

This leads to an increase in aggregate demand.

For example, if the government reduces income tax, people have more disposable income.

So, consumer spending increases.

This leads to more economic growth and lower unemployment.

However, it can cause higher inflation and also cause a budget deficit.

What is contractionary fiscal policy?

The government decreases spending or increases taxation.

This leads to a decrease in aggregate demand.

For example, if the government increases taxes, people have less disposable income.

So, consumer spending decreases.

This leads to lower inflation.

However, it could reduce economic growth and increase unemployment.

Examples of government spending

• infrastructure
• NHS
• police
• defence
• pensions
• welfare benefits

Examples of taxes

• income taxes
• corporation taxes
• VAT

What is monetary policy?

Use of interest rates to influence aggregate demand

What are interest rates?

The cost of borrowing or the reward for saving.

What is expansionary monetary policy?

The Bank of England reduce interest rates.

This makes it cheaper to borrow money and less rewarding to save money.

Consumer spending increases.

This leads to more economic growth and less unemployment.

It also causes inflation to increase.

What is contractionary monetary policy?

The Bank of England reduce interest rates.

This makes it cheaper to borrow money and less rewarding to save money.

Consumer spending increases.

It also causes inflation to decrease.

But it could also cause economic growth to decrease and unemployment to increase.