AQA A-LEVEL ECONOMICS
Specification
Year 1 Microeconomics
The Operation of Markets and Market Failure
A complete revision guide with worked diagrams
Covers the five AS microeconomics topic areas in full.
Excludes the distribution of income and wealth, and behavioural economics
(both studied in Year 2 of the full A-level).
AQA A-Level Economics (7136) — Year 1 Microeconomics • Page 1
,Contents
1. Economic methodology and the economic problem............................................................... 4
1.1 The economic problem......................................................................................................... 4
1.2 Economic methodology......................................................................................................... 4
1.3 The production possibility frontier (PPF)................................................................................. 5
2. Price determination in a competitive market............................................................................ 8
2.1 Demand.............................................................................................................................. 8
2.2 Supply................................................................................................................................. 9
2.3 Market equilibrium................................................................................................................ 9
2.4 Price elasticity of demand (PED).......................................................................................... 13
2.5 Income and cross elasticities of demand............................................................................... 14
2.6 Price elasticity of supply (PES)............................................................................................ 15
2.7 The interrelationship between markets................................................................................. 16
3. Production, costs and revenue............................................................................................... 18
3.1 Production and productivity................................................................................................. 18
3.2 Specialisation and the division of labour............................................................................... 18
3.3 Costs of production............................................................................................................. 18
3.4 Economies and diseconomies of scale................................................................................. 19
3.5 Revenue............................................................................................................................ 20
3.6 Profit................................................................................................................................. 21
4. Competitive and concentrated markets.................................................................................. 23
4.1 The spectrum of market structures....................................................................................... 23
4.2 The objectives of firms........................................................................................................ 23
4.3 Competitive markets and perfect competition........................................................................ 24
4.4 Monopoly and monopoly power........................................................................................... 24
4.5 The competitive market process.......................................................................................... 26
5. The market mechanism, market failure and government intervention.................................. 28
5.1 The price mechanism and its functions................................................................................. 28
5.2 The meaning of market failure............................................................................................. 28
5.3 Public goods...................................................................................................................... 28
5.4 Externalities....................................................................................................................... 29
5.5 Merit and demerit goods, and information failure................................................................... 32
5.6 Other market imperfections................................................................................................. 32
5.7 Government intervention..................................................................................................... 33
5.8 Government failure............................................................................................................. 37
Where this fits in the full A-level................................................................................................. 38
AQA A-Level Economics (7136) — Year 1 Microeconomics • Page 2
,How to use this guide
This guide covers the Year 1 (AS) microeconomics content of the AQA A-Level Economics
specification — the unit titled The operation of markets and market failure. It is written to the
standard expected at the A/A* boundary, with each topic followed by the diagrams, evaluation
points and exam-technique notes that the AQA mark scheme rewards.
Three types of coloured box appear throughout:
• Key definitions (blue) — the precise wording examiners look for. Learn these verbatim; a
sharp definition is often worth the first mark of an answer.
• Evaluation (amber) — the 'on the other hand' material that lifts an answer from knowledge
and application into the higher analysis and evaluation bands.
• Exam technique (green) — how the point is actually tested on Paper 1, including
command words and common pitfalls.
Every diagram is drawn to AQA conventions. When you reproduce one in the exam, always title
it, label every axis and curve, and label the original and new equilibria — unlabelled
diagrams score little even when the shape is correct.
EXAM TECHNIQUE
The AS course is assessed on one paper for the standalone AS, but for the full A-level
this material is examined within Paper 1 (Markets and market failure) and can appear
anywhere. Expect multiple-choice questions, short data-response questions and a 25-mark
essay.
Microeconomics is the study of individual markets, firms, consumers and the allocation
of resources — as opposed to macroeconomics, which studies the economy as a whole.
Almost every micro answer ultimately comes back to one question: are resources being
allocated efficiently, and if not, why?
AQA A-Level Economics (7136) — Year 1 Microeconomics • Page 3
, 1. Economic methodology and the economic problem
1.1 The economic problem
Economics begins from a single hard fact: resources are scarce, but human wants are
unlimited. Because we cannot have everything we want, every economic agent — consumers,
firms and governments — must make choices about how to use the resources available. This is
the economic problem, and the whole of microeconomics is a study of how those choices are
made and whether they are made well.
KEY DEFINITIONS
Scarcity — the fundamental economic problem: there are not enough resources to satisfy
all of society's wants.
Finite resources — resources are limited in supply at any one time, whereas wants are
effectively infinite.
Opportunity cost — the value of the next best alternative forgone when a choice is made.
Because choosing one thing means giving up another, every decision carries an opportunity
cost. If a government spends £1bn building a hospital, the opportunity cost is the schools, roads
or tax cuts that the same money could have funded. Opportunity cost is the single most
important idea in the subject: it is the reason scarcity forces choice.
Factors of production
Resources used to produce goods and services are grouped into four factors of production,
each earning a reward:
Factor Definition Reward
All natural resources — physical land, minerals, sea,
Land Rent
forests.
Labour The human effort, physical and mental, used in production. Wages
Man-made aids to production — machinery, tools,
Capital Interest
factories.
The entrepreneur who organises the other factors and
Enterprise Profit
bears risk.
Every society must therefore answer three basic questions: what to produce, how to produce
it, and for whom to produce. In a free market these are answered by the price mechanism
(Section 5); in a command economy they are answered by the state; most real economies are
mixed.
1.2 Economic methodology
AQA A-Level Economics (7136) — Year 1 Microeconomics • Page 4
Specification
Year 1 Microeconomics
The Operation of Markets and Market Failure
A complete revision guide with worked diagrams
Covers the five AS microeconomics topic areas in full.
Excludes the distribution of income and wealth, and behavioural economics
(both studied in Year 2 of the full A-level).
AQA A-Level Economics (7136) — Year 1 Microeconomics • Page 1
,Contents
1. Economic methodology and the economic problem............................................................... 4
1.1 The economic problem......................................................................................................... 4
1.2 Economic methodology......................................................................................................... 4
1.3 The production possibility frontier (PPF)................................................................................. 5
2. Price determination in a competitive market............................................................................ 8
2.1 Demand.............................................................................................................................. 8
2.2 Supply................................................................................................................................. 9
2.3 Market equilibrium................................................................................................................ 9
2.4 Price elasticity of demand (PED).......................................................................................... 13
2.5 Income and cross elasticities of demand............................................................................... 14
2.6 Price elasticity of supply (PES)............................................................................................ 15
2.7 The interrelationship between markets................................................................................. 16
3. Production, costs and revenue............................................................................................... 18
3.1 Production and productivity................................................................................................. 18
3.2 Specialisation and the division of labour............................................................................... 18
3.3 Costs of production............................................................................................................. 18
3.4 Economies and diseconomies of scale................................................................................. 19
3.5 Revenue............................................................................................................................ 20
3.6 Profit................................................................................................................................. 21
4. Competitive and concentrated markets.................................................................................. 23
4.1 The spectrum of market structures....................................................................................... 23
4.2 The objectives of firms........................................................................................................ 23
4.3 Competitive markets and perfect competition........................................................................ 24
4.4 Monopoly and monopoly power........................................................................................... 24
4.5 The competitive market process.......................................................................................... 26
5. The market mechanism, market failure and government intervention.................................. 28
5.1 The price mechanism and its functions................................................................................. 28
5.2 The meaning of market failure............................................................................................. 28
5.3 Public goods...................................................................................................................... 28
5.4 Externalities....................................................................................................................... 29
5.5 Merit and demerit goods, and information failure................................................................... 32
5.6 Other market imperfections................................................................................................. 32
5.7 Government intervention..................................................................................................... 33
5.8 Government failure............................................................................................................. 37
Where this fits in the full A-level................................................................................................. 38
AQA A-Level Economics (7136) — Year 1 Microeconomics • Page 2
,How to use this guide
This guide covers the Year 1 (AS) microeconomics content of the AQA A-Level Economics
specification — the unit titled The operation of markets and market failure. It is written to the
standard expected at the A/A* boundary, with each topic followed by the diagrams, evaluation
points and exam-technique notes that the AQA mark scheme rewards.
Three types of coloured box appear throughout:
• Key definitions (blue) — the precise wording examiners look for. Learn these verbatim; a
sharp definition is often worth the first mark of an answer.
• Evaluation (amber) — the 'on the other hand' material that lifts an answer from knowledge
and application into the higher analysis and evaluation bands.
• Exam technique (green) — how the point is actually tested on Paper 1, including
command words and common pitfalls.
Every diagram is drawn to AQA conventions. When you reproduce one in the exam, always title
it, label every axis and curve, and label the original and new equilibria — unlabelled
diagrams score little even when the shape is correct.
EXAM TECHNIQUE
The AS course is assessed on one paper for the standalone AS, but for the full A-level
this material is examined within Paper 1 (Markets and market failure) and can appear
anywhere. Expect multiple-choice questions, short data-response questions and a 25-mark
essay.
Microeconomics is the study of individual markets, firms, consumers and the allocation
of resources — as opposed to macroeconomics, which studies the economy as a whole.
Almost every micro answer ultimately comes back to one question: are resources being
allocated efficiently, and if not, why?
AQA A-Level Economics (7136) — Year 1 Microeconomics • Page 3
, 1. Economic methodology and the economic problem
1.1 The economic problem
Economics begins from a single hard fact: resources are scarce, but human wants are
unlimited. Because we cannot have everything we want, every economic agent — consumers,
firms and governments — must make choices about how to use the resources available. This is
the economic problem, and the whole of microeconomics is a study of how those choices are
made and whether they are made well.
KEY DEFINITIONS
Scarcity — the fundamental economic problem: there are not enough resources to satisfy
all of society's wants.
Finite resources — resources are limited in supply at any one time, whereas wants are
effectively infinite.
Opportunity cost — the value of the next best alternative forgone when a choice is made.
Because choosing one thing means giving up another, every decision carries an opportunity
cost. If a government spends £1bn building a hospital, the opportunity cost is the schools, roads
or tax cuts that the same money could have funded. Opportunity cost is the single most
important idea in the subject: it is the reason scarcity forces choice.
Factors of production
Resources used to produce goods and services are grouped into four factors of production,
each earning a reward:
Factor Definition Reward
All natural resources — physical land, minerals, sea,
Land Rent
forests.
Labour The human effort, physical and mental, used in production. Wages
Man-made aids to production — machinery, tools,
Capital Interest
factories.
The entrepreneur who organises the other factors and
Enterprise Profit
bears risk.
Every society must therefore answer three basic questions: what to produce, how to produce
it, and for whom to produce. In a free market these are answered by the price mechanism
(Section 5); in a command economy they are answered by the state; most real economies are
mixed.
1.2 Economic methodology
AQA A-Level Economics (7136) — Year 1 Microeconomics • Page 4
