Edexcel A Level Microeconomics 2022|2023 latest updated

Edexcel A Level Microeconomics 2022|2023 latest updated Factors influencing demand for labour Demand for final product - if rise in output increase in productivity Relative productivity of labour to capital - substitution effect £3,000 subsidy for hiring unemployed 18-24 y.o. = half UK's youth minimum wage Factors influencing supply of labour Cost of living Cost of gaining skills UK uni fees capped at £9,250 per year Number of workers UK raises state pension age from 67 to 68 Market failures in labour markets Geographical immobility - inability of labour to move from one location to another Occupational immobility - inability of labour to move form one industry to another Employer monopsony - wage-setting power - wage lower than equilibrium 10% decline in real wages of NHS worker since start of recession Solutions to market failures in labour market Education and training Housing market reform Wage-setting UK raises NMW from £7.50 to £7.83 Evaluate solutions to market failures in labour market If increases elasticity of S(labour) - lower wages If D(labour) if elastic - min wage will increase unemployment Explain wage determination in competitive labour market Firms are wage takers - set W where S = D S(labour) is perfectly elastic - AC = MC - max profits at MRP = MC - employ Q₁ Positive statement (def.) Evidence based statement which can be proven true or false Normative statement (def.) Value judgment which cannot be tested Scarcity (def.) Lack of resources to fulfil everyone's wants and needs Renewable resources (def.) Resources which can be replenished over time Non-renewable resources (def.) Resources which cannot be replenished once they are used PPF (def.) Max amount of two goods that can possibly be produced in economy with given set of resources, time and technology Capital goods (def.) Useful not in themselves but for goods and services they can help produce in future Opportunity cost (def.) Value of next best alternative forgone Pareto efficiency (def.) State of allocation of resources in which it is impossible to make any one party better off without making at least one party worse off Allocative efficiency (def.) When value consumers place on good or service (reflected in price) = cost of resources used up in production Specialisation (def.) When worker concentrates on performing specific task or narrow range of tasks in production process Division of labour (def.) Separation of production process into individual tasks Advantages of specialisation (micro) Workers gain skills in narrow range of tasks - higher productivity Workers specialise in tasks to which they are best suited - higher productivity Worker isn't constantly changing tasks - higher productivity Division of labour - cost efficient to provide workers with specialists tools - higher capital productivity Disadvantages of specialisation (micro) Monotony - boredom - lower productivity Lack of diversification - lower tolerance to external factors - higher risk factor Workers less transferable between jobs Workers more replaceable by machinery Advantages of specialisation (macro) Comparative advantage theory Disadvantages of specialisation (macro) Over-dependence on commodity + Prebish-Synger hypothesis - deterioration in terms of trade Pressure to cut costs - race to bottom - lower wages, compromised health&safety Overuse of non-renewable resources Functions of money Medium of exchange Allows g/s to be traded without need for double coincidence of wants Store of value Value of asset can be retrieved at later date - people can save now to fund future spending Unit of account Allows value of items to be compared Standard of deferred payment Allows expression of value of debt - people able to pay back loan in future with asset that is acceptable to creditor Centrally planned economy (def.) Economic system where resources are owned by government and allocated by central planning committee Free market economy (def.) Economic system where resources are privately owned and allocated by price mechanism Mixed economy (def.) Where resources are partly allocated by market forces and partly by government Transitioning economy (def.) Economy that is moving from CPE to FME Advantages of FMEs Profit incentives - high labour productivity Autonomous decision making, profit incentive - innovation - dynamic efficiency No operational costs Large range of choice High degree of freedom of choice Disadvantages of FMEs Inequity - social unrest Unemployment - poverty Uncertainty - volatility Excessive risk-taking Monopolies Monopsonies Advantages of CPEs Lack of competition - lack of waste - efficiency Equality - fairness Certainty - stability Large social safety net - low level of unemployment, most vulnerable protected Potential to mobilize resources quickly and efficiently Ability to override individual self-interest to achieve higher societal goals Disadvantages of CPEs Insufficient accuracy when detecting customer preferences - allocative and pareto inefficiency Small range of choices Low degree of freedom of choice Lack of coordination between sectors - allocative inefficiency Lack of incentives - low labour productivity - pareto inefficiency Interdependence of sectors - complications in planning Centralisation of power - corruption Distribution of resources - operational costs Conditions of demand ∝ ability: income ∝ willingness: taste ∝ population ∝ P(substitute goods) ∝ 1/P(complementary goods) Veblen good (def.) Good for which quantity demanded increases as price increases PED 0 Giffen good (def.) Good for which higher price causes increase in demand Income effect substitution effect Law of diminishing marginal returns When increasing quantity of variable factor is applied to given quantity of fixed factor - marginal, average and total returns decrease Types of demand Latent Effective Competitive Joint Derived Composite Latent demand (def.) There is willingness to purchase good or service, but consumer lacks purchasing power to be able to afford product Effective demand (def.) Quantity of good or service that consumers are willing and this willingness is backed up by ability to buy at given price in given time period Competitive demand (def.) When demand for one good increases or decreases, demand for another good does opposite Joint demand (def.) When demand for one good increases or decreases, demand for another good follows Derived demand (def.) Product is demanded only because of demand for final product it contributes to Composite demand (def.) When good is demanded for different purposes. Change in demand for one purpose affects others Conditions of supply ∝ cost of production ∝ price of factor inputs ∝ productivity of factor inputs ∝ number of firms Excess supply Excess demand Roles of price mechanism Rationing Scarcity increases - ED - P increases - QD decreases - scarcity decreases Allocating P(industry A) increases - allocation of more resources to industry A - allocative efficiency Signalling P increases - signal to consumers to leave, signal to producers to enter - QD decreases, QS increases PED (eq.) PED = %∆QD/%∆P YED (eq.) YED = %∆QD/%∆Y XED (eq.) XED = %∆QDa/%∆Pb Unitary price elastic demand PED = 1 Perfectly price elastic demand PED = ∞ Relatively price elastic demand PED 1 Perfectly price inelastic demand PED = 0 Relatively price inelastic demand PED 1 Inferior good YED 0 Normal good YED 0 Luxury good YED 1 Substitute goods XED 0 Complementary goods XED 0 Unrelated goods XED = 0 Determinants of PED Availability of substitutes ∝ |PED| % income spent ∝ |PED| Time period ∝ |PED| Breadth of definition ∝ 1/|PED| Brand loyalty ∝ 1/|PED| Necessity ∝ 1/|PED| Addictiveness ∝ 1/|PED| Relationship between P(elastic good) and TR P(elastic good) ∝ 1/TR Relationship between P(inelastic good) and TR P(inelastic good) ∝ TR PES (eq.) PES = %∆QS/%∆P Determinants of PES Amount of spare capacity ∝ PES Ease of entry into industry ∝ PES Factor mobility ∝ PES Time period ∝ PES Length of production process ∝ 1/PES Availability of stocks ∝ PES Durability ∝ PES Direct tax (def.) Tax on income or wealth Indirect tax (def.) Tax on expenditure (only taken when good is purchased) Specific tax (def.) Tax per unit Ad valorem tax (def.) Tax based on percentage of price of g/s Impact of PED on producer and consumer share of tax Subsidy (def.) Grant paid by government to producers to increase supply Market failure (def.) When free market fails to allocate resources efficiently Public good (def.) Goods that are non-rival and non-excludable Non-rival (def.) Consumption of good by one person does not reduce amount available for others Non-excludable (def.) It is not possible to provide good or service to one person without it thereby being available for others to consume Free-rider problem When consumers wait for someone else to pay for good then consume for free Not possible to prevent anyone from enjoying good once it has been provided - no incentive to pay for good - market doesn't recognise any demand - under-provision Quasi-public good (def.) Good that only has one characteristic of public good - either non-rival or non-excludable Private cost (def.) Costs experienced by two parties involved in transaction External cost (def.) Costs experienced by third parties not involved in transaction Social cost (def.) Private costs + external costs Private benefit (def.) Benefits experienced by two parties involved in transaction External benefit (def.) Benefits experienced by third parties not involved in transaction Social benefit (def.) Private benefits + external benefits Deadweight loss (def.) Loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure Negative externality diagram Positive externality diagram Characteristics of contestable market Low barriers to entry + potential for large number of firms - threat of entry - abnormal profit only in SR Implications of contestable markets for behaviour of firms Lower prices Sales maximisation Limit pricing Proactive efforts to establish entry barriers Cartels Types of barriers to entry High fixed start-up costs Brand loyalty Licences/regulation Access to supply chain Patent laws Conditions necessary for monopsony market High barriers to entry One dominant buyer Costs of monopsony Lower wages for workers Compromised working conditions Often monopoly selling power - higher prices for consumers Benefits of monopsony Abnormal profit - ability to invest in R&D - dynamic efficiency Purchasing EoS - lower LRAC - lower prices Itself being counterweight to monopoly supplier Imperfect information (def.) When at least one party has incomplete information Asymmetric information (def.) When one party in transaction has more information than other Merit good (def.) Good which is under-consumed by consumers if left to free market MPB(perceived) MPB(actual) Demerit good (def.) Good which is over-consumed by consumers if left to free market MPB(perceived) MPB(actual) Market failures Tragedy of the Commons Free rider problem Imperfect information Asymmetric information Merit good Demerit good Negative externality Positive externality Commodity markets Labour markets Organic growth (def.) Increase factors of production in its own industry Vertical integration (def.) Merger between two firms at different production stages in same industry Horizontal integration (def.) Merger between two firms at same stage of production in same industry Conglomerate integration (def.) Merger between two firms in different industries, with no common interest LRAC curve Firm's lowest cost per unit at each level of output, assuming that all factors of production are variable Types of economies of scale Purchasing Technical Financial Marketing Distribution Types of diseconomies of scale Control Principal-agent problem between shareholders and managers Coördination Coöperation Alienation - loss of morale Regulatory Risk aversion MES (def.) First unit of production where firm can produce such that its long run average costs are minimised Short-run shut down point AVC AR Long-run shut down point AC AR Behavioural biases Herd mentality Habitual behaviour Weakness at computation Loss aversion Tragedy of the commons No one owns resource - over-used Individual self-interest - collectively worse-off Profit maximisation MC = MR Revenue maximisation MR = 0 Sales maximisation AR = AC Allocative efficiency When value consumers place on good or service = cost of resources used up in production P = MC Productive efficiency When output is being produced with minimum of combination of factor inputs MC = AC Technical efficiency When maximum output that can be obtained from given input Dynamic efficiency Productive efficiency of firm over extended period of time X-inefficiency When firm lacks incentive to control costs Characteristics of perfectly competitive market Perfect knowledge No entry or exit barriers Homogeneous outputs Homogeneous inputs Every firm is price-taker Large number of firms Abnormal profit only in SR Long-run profit maximising equilibrium in perfectly competitive market Abnormal profit - new entrants - demand for existing firms shifts left until only normal profit is obtainable Characteristics of monopolistically competitive market Almost perfect information Almost no barriers to entry Price setting ability Products are differentiated Physical product differentiation Marketing differentiation Distribution differentiation Large number of firms Short-run profit maximising equilibrium in monopolistically competitive market Abnormal profit is obtainable Long-run profit maximising equilibrium in monopolistically competitive market Abnormal profit - new entrants - demand for existing firms shifts left until only normal profit is obtainable Characteristics of oligopoly High barriers to entry and exit High concentration ratio Interdependence of firms Product differentiation n-firm concentration ratio (def.) Cumulative % market share of n largest firms in industry Reasons for collusive behaviour Joint-profit maximisation Prevention of price and revenue instability Cut costs of competition Marketing wars Reasons against collusive behaviour Exposure of illegal price-fixing by regulator Falling market demand - excess capacity - pressure on firms to discount prices to maintain revenue Enforcement problems Cartel aims to restrict production to maximize total profits, but each individual seller finds it profitable to expand production Overt collusion (def.) Explicit agreement between suppliers in market to avoid competition Tacit collusion (def.) Implicit agreement between suppliers in market to avoid competition Cartel (def.) Formal agreement between suppliers in market to avoid competition Types of price competition Price war Period of fierce competition in which traders cut prices to increase market share Predatory pricing Deliberate strategy of driving competitors out of market by setting very low prices or selling below AVC (such that other firms breach shut down point) Limit pricing Pricing by incumbent firm below SR profit maximising price but above competitive level to deter entry or expansion of fringe firms Characteristics of monopoly Dominant seller Working monopoly = 25% of market Dominant monopoly = 40% of market High entry and exit barriers Abnormal profit possible in SR and LR Price-setting power P MC - allocative inefficiency Low competition - X inefficiency EoS - productive efficiency Abnormal profit - dynamic efficiency potential Conditions necessary for third-degree price discrimination Price-setting ability Ability to identify different consumer groups Ability to stop reselling between consumer groups Third degree price discrimination diagram Costs of price discrimination by monopoly Higher price - reduction in consumer surplus - allocative inefficiency Higher prices - lower output - EoS not exploited - productive inefficiency Monopoly too large - DEoS - rising LRAS Possible use of discrimination as limit pricing - barrier to entry - reinforces monopoly power Regressive effect on lower income consumers Benefits of price discrimination by monopoly Increased producer surplus More efficient use of firm's spare capacity - less waste Natural monopoly Brings new consumer into market that would have been excluded by higher normal price Higher producer surplus + barriers to entry - abnormal profit sustainable - ability to invest in R&D - dynamic efficiency Potential for cross subsidy of activities that bring social benefits Natural monopoly Industry where LRAC curve falls continuously as output expands - room for only one supplier to fully exploit economies of scale Buffer stock scheme diagram