Economics Unit 1 OCR Revision Guide - 11.05.2015

Finished

PLEASE DO NOT REMOVE CONTENT -Makashima

Revision material comprised by several nice economic students

• Notes kindly sent by Kevin Longe - http://www.mediafire.com/view/8ait8byiqje9963/Economics_AS_Level_Notes.docx

Economic problem - How to allocate scarce resources amongst alternative uses.What to produce, for whom and how. Demand is greater than supply

Scarcity - A situation where there are finite resources to meet unlimited wants. Demand is greater than supply.

Opportunity cost - The cost of a decision in terms of the benefits of the next best alternative forgone.

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Factors of Production - The resource inputs available to an economy for the production of goods and services.

(The 4) Factors of Production: remember as CELL - capital, enterprise, land, labour

• Labour -  The human input involved in production.
• Capital - Man made machinery used to aid in production (i.e. goods that have been made in order to produce some other good or service).
• Land - Natural resources in an economy/Physical infrastructure
• Enterprise - The factor that brings together the other factors in order to produce a profitable product. It is associated with risk taking and finding new businesses.

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Specialisation - The concentration of a worker, firm, region or a country to produce a narrow range of goods and services.

Division of labour - The specialisation of labour where the production process is broken down into separate tasks.

The +ves and -ves are the same as for specialisation?

Advantages of Division of Labour:

• More efficient workers
• More goods can be produced than before
• Leading to higher skills thus can demand higher wages

Disadvantages of Division of Labour:

• Lack of flexibility of workers - boredom
• Over specialising - workers are unable to switch to other jobs

Advantages of Specialisation:

• Increase in world output
• Increase in widening range of good available
• Possible increased trade between developed and developing countries could increase world equality
• Increases size of marker for suppliers which can give opportunities for economies of scale. Also increases competition so firms must make efficiency gains to survive in global marker.

Disadvantages of Specialisation:

• Specialisation may refer purchasings technology and capitals that can replace workers thus unemployment increases.
• Adverse weather / political events can disrupt trade. Dangerous if countries are dependant on each other could be damaging to economy.
• Increased transport of goods across world increases greenhouse gas emissions
• Reduced flexibility
• If the production relies on finite resources, when it runs out the economy will suffer

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Production Possibility Curve (PPC) - A PPC shows the maximum potential output of two goods (or classes of goods) that can be produced in the current time period if all resources are efficiently employed.

Graph can be including: Capital Goods vs Consumer Goods; Good A vs Good B; Specific Good vs Specific Good

Market - A market exists wherever consumers and producers come together for the purpose of an exchange of goods and services.

Consumer Surplus - the difference in price between what consumers are willing to buy goods and services for and the price at which they actually buy goods and services

Producer Surplus - the difference in price between what producers are willing to sell their  goods and services for and the price at which they actually buy goods and services

Substitutes - A good which can be replaced by another good to satisfy a want.

Complements - Goods that are consumed together.

Allocative Efficiency - SMC = SMB (or where the quantity demanded is equal to the quantity supplied) OR Customer satisfaction is maximised

Productive Efficiency - Where production takes place using the least amount of scarce resources (for maximum output).

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Externalities:

Externalities - Costs accruing to 3rd parties who are not involved in a transaction

Negative Externalities -  Where the social costs of an activity is greater than the private costs.

Positive Externalities -  Where the social benefits of an activity exceeds the private benefit.

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Market Failure - Where the free market mechanism fails to achieve economic efficiency

Information Failure - A lack of information resulting in consumers and producers making decisions that do not maximise welfare.

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Demand and Supply:

Demand - The quantity of the product that the consumers are willing and able to pay at a given price over a period of time.

Derived Demand - Where the demand for one good arises from the demand for another good or service.

Consumer surplus - The difference between the price the consumer is willing to pay and what is actually paid (the market price).The extra amount amount a consumer is willing to pay above the price that is actually paid

Determinants of Demand:

NOTE: (If the question ask about the determinant of demand, don't say price)

Remember through PASIFIC - its basically the ocean, spelt wrong

• Population
• Advertising
• Substitutes
• Income
• Fashion
• Interest Rates
• Complements
• Expectations of Future Prices

Supply- The quantity of the product that the suppliers are willing and able to produce at a given price over a period of time. Will decrease with price rise

Producer surplus - The difference between the price the producer is willing to accept and what is actually paid (the market price). Will increase with price rise

Determinants of Supply:

Remember through PINTS WC. If you have too many PINTS you have to use the WC xD

Or Alternatively SPLAT - Subsidies, Percentage of income, Luxury, Addiction and Technology.

• Productivity/Percentage of income
• Indirect tax (included in costs of production)
• Number of firms
• Technology
• Subsidies
• Weather
• Cost of production
• Changes in price/profitability of other goods the firm could supply (i.e. changes in the price/profitability of substitutes in supply)

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Elasticity & Their Calculations:

To work out %change - change in value / original value * 100

Price Elasticity of Demand (PED) - Measures the responsiveness of quantity demanded to a change in price of a product. Always negative.

• Inelastic = 0-1
• Elastic = +1

Determinants of Price Elasticity of Demand:

• Time
• Price of the good as a % of income
• Availability of substitutes
• Degree of necessity
• Addictiveness

Determinants of Price Elasticity of Supply:

• Number of stocks
• Spare capacity
• Time to produce
• Perishability of good - if a good has a short life then this affects how long it can be kept as stocks
• Flexibility of resources
• Availability of resources -  if a firm has lots of resources available they can quickly produce more to increase supply in response to a change in price

Cross Elasticity of Demand (XED) - Measures the responsiveness of the quantity demanded of product A in relation to the change in price of product B. Either complements (-ve XED) or substitutes (+ve XED). Can be weak or strong.

• “% Change in QD of Good A” DIVIDED BY “% Change in Price of Good B”

Income Elasticity of Demand (YED) - measures the responsiveness of demand to a change in income levels of a product. Either normal good (0-1 YED) or inferior good (- YED) or superior / luxury good (1+ YED). Greater than 1 - elastic YED, less than 1 - inelastic YED

• “% Change in QD” DIVIDED BY “% Change in Price”

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Types of Goods:

Merit Goods - A good that is under-consumed/produced because of consumer's lack of information

Demerit Goods - A good that is over-consumed/produced  because of consumer's lack of information

Public Good - “Non-excludable” & “Non-rivalry in Consumption”

Private Good - Excludable & Rivalrous

Quasi Public Goods - Goods that have some but not all the characteristics of a public good

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Policy Definitions:

Subsidies - A subsidy is a payment, usually from the government, to encourage production or consumption of a product, by reducing the costs of production

Information Provision - Providing information that helps enable consumers and producers make decisions that maximise welfare

Indirect tax -  A tax levied on goods and services

Regulations - Legislation, rules, limits set by governments to reduce/control consumption or production of a good (typically one that generates negative externalities).

Tradable Permits - A permit that allows the owner to emit a certain amount of pollution and if unused or partially used can be sold on to another polluter

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Elasticities:

• When referring to the calculated elasticity figures do not say “It is elastic”, must refer it as “The PED figure is …”. Based from the 2014 exam mark scheme, examiners complained the vagueness of the word “it’s”
• For comment marks: The data are only estimates possibly based on consumer surveys thus the results could be inaccurate therefore unreliable and may change over time (1-2 marks) (These will only get marks once you’ve applied business relevance to the question!) E.g PES .. / supply tends to be price inelastic in the short term where it is difficult to switch production. Over time supply becomes more price elastic…
• Apply to ceteris paribus, assuming nothing else changes the e.g. determinants of demand, e.g income, fashion/trends etc ..
• Also might be based on past data that does not reflect current market conditions / account for time lag of consumers changing preferences according to change in price/ income etc.

Identify two characteristics of a ‘public good’

• non rivalry -consumption by one does not affect the consumption of others
• non excludability- individuals cannot be excluded from the consumption

Identify one possible example of a positive externality arising from education. Explain why this is a positive externality

Students receive a better job as a private benefit this benefits a third party such as the UK as it means a faster growing economy which is the external benefit.

Demand:

• incomes rising - good becomes more affordable (as consumers have more to spend?), if the good is a normal good then when incomes rise so does the demand for the good according to YED (think that would be 3 marks)
• Increase advertising
• Fashion/Tastes
• price of substitutes increase therefore consumers switch to cheaper alternative, so the demand for that good increases and it's become more affordable, so demand increases ( please tell me if I’ve done anything wrong or if this is not worth 3 marks)
• Future price changes, if the good price is to rise in the future thus it is more sensible and convenient to purchase the goods now whilst it is still cheaper.

Supply:

• supply will increase if there is a decrease in costs of production. e.g. packaging costs reduced.
• I'm gonna rewrite the above point:
• If there was a fall in the cost of raw materials it would lead to a lower cost of production, as a result a firm has a greater incentive to supply as it can make more profit therefore supply increases
• it will also increase if there is an advancement of technology
• subsidies lower total costs of production for firms so they become more willing to supply as they can now afford to

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General Questions:

For L4 on tradeable permits can you say if demands lowers and shifts left then it's not correcting market failure and 1 firm could buy up a lot of permits thus concentrating pollution in 1 spot? anyone?

erms i wouldn't suggest doing that L4 points-  just go for the simple ones - u dont get more marks for a more complex idea

OKAY thanks can u remind me of some other L4 points?thanks

enforcing and monitoring costs - requires a lot of money & resources - creates opp cost - could it be used elsewhere? nice 1

difficulty in getting the size of permits - what if it's too much?nice2 market failure still occurs

what if the number of permits is too low? 

would another point be that countries that aren't in europe may still pollute thus making our firms uncompetitive due to high costs

yeah !! avoiding the permit

another 1...should the tradable permit policy be applied internationally? if not then firms can just move to other countries and pollute their → global warming         yes sounds like a good point thanks

so all these points could achieve 18/18?

If firms are being forced to reduce pollution, they may also become less efficient reducing overall productivity in the economy.

(hey so is how it works and how it solves mf different diagrams?) oh ok !! so i wouldn't draw the diagram with no shifts just explain how it works i think i might draw it just so i don't get confused lol

for ‘how it works’ its just talking about how it solves neg ext- no need for diagrams examiners not bothered

this is how i would go about achieving 18/18 on TP

Definitions - how it works - how it solves market failure - two negatives - alternative - compare - judgement

what could an alternative be like regulations and taxes for polluting?

subsidies: could give subsidies to firms for research and development into cleaner fuels to reduce pollution

regulations: limit on how much they can produce (similar to TP) but they can't buy permits so its better. Set fines so that they have an incentive to reduce their pollution to prevent being fined.

jus another points on TP: a negative you could mention::

if it already is applied internationally then rich countries can buy permits off poorer countries thus pollution still exists in high amounts. i fucking like that idea

if you do an alternative point later 2 is more then enough

What are some common example of positive and negative externalities??

• Smoking can lead to private cost such as cancers and other smoking-related illnesses and overall the social cost is the strain applied on the NHS and also the need to derived tax revenue into the NHS department when the money could have directed into more useful project such as infrastructure or education
• Chewing gum particularly the therapeutic benefits people teeth and health (e.g. fresher breath). Thus can repeat NHS point, less strain in the dental department.

Can someone tell me the business relevance of PES. It is favourable to have an elastic PES because then firms can react to market changes. This means that if there is a price rise in the future, they can cash in on it by increasing supply. Similarly, if prices fall, they can quickly move resources away from such products and into other products where there is a positive relationship.

It is also good for firms to be able to look at their competitors PES estimates so they can see how other firms will react to changes in price.

Right what is the hardest thing in f581 in peoples opinion?  

Ight. Anything else I should know about it?

Is that enough for the 8 marks? Do calculations, say elastic/inelastic. say its unreliable, etc. ? Oh okay. I will do.

Yeah I would say it varies along supply curve. Changes over time ceteris paribus. Whack it all down and hope for the best.

Ceteris Paribus - refers to all the things assumed to be constant or equal.

• With  elaboration in your comment points such as size, you can potentially gain 3 marks along with well a detailed answer.

e.g it will depend on much supply increases - if it was larger this would lead to a larger increase in price and quantity - probably get u 2 marks

merit goods - goods that have more private benefits that consumers actually realise- they are generally under-consumed and underproduced in the free market right and DEMERIT are just opp of this?cool cheers ya

Yes. and underprovided because the public don't realise the benefits

Guys, if you saw this question in the exam, what would have you answered?

4. (a) Explain two reasons why a manufacturer might increase its production of chewing gum. - banter - maybe if there is an in the price of chewing gum in the market, if pes is elastic they can increase supply to cash in on the increased revenue available.

what makes supply inelastic

• no stock of goods
• no spare capacity
• time - if the good requires a lot of time to make (growing fruit)
• demand greater than supply? (not sure tbh) ok thanks :)
• if the good is perishable then its inelastic as it can’t be stored long

From YED how do you know if something is a luxury good? - positive figure elastic greater than 1                 indicates normal good if it's greater than 1 it's a luxury good

Wait so whats the difference between normal and luxury if there both positive and larger than 1

not much really just that if incomes rise there would be a greater rise for luxury goods

and inferior good is q.d goes down with increased incomes?ok yes

NORMAL GOOD - +VE AS INCOMES RISE, DEMAND RISE.

INFERIOR GOOD - -VE AS INCOMES RISE, DEMAND FALLS

Essay plans

Discuss whether education should be provided by the private sector or the public sector (18)

Plan:

Define: privatisation - The transfer of ownership of property or businesses from a government to a privately owned entity

Public,

• Left in free market, it would be a merit good ie under consumed and underprovided
• Free market doesn't take positive externalities into consideration when the price is set. - However if the government were to subsidise education it would be very hard to estimate the correct size of subsidy to implement as it is hard to estimate the size of an externality. Potentially case government failure if cost of govt intervention exceeds benefits generated
• Education generate positive externalities, enable labour to become more productively efficient due to gain in more and new skills and qualification etc

• Rationing of price mechanism would mean that poor are not able to afford it (get priced out) in private. Morally this is bad as it is depriving children from education - increased income inequality. BUT if placed in the private sector it might motivate those with lower incomes to work harder to afford education for their children - this could drive up efficiency. And if it remained compulsory (combine it with regulation) for children to be educated, education providers will receive more / guaranteed (due to enforcement of education) profit allowing them to be more productive - I know it's harsh but you have to show all the sides of the argument in an essay

Private,

•  produce efficiency due to the competition within the market (Avoids X-inefficiency of public sector due to profit motive)
• Firms will compete which may result in specialisation. This will result in greater output of education (such as different subjects etc) and higher quality (of teaching).

• If run by the government there would be no profit incentive and so would not try to be
• There is an opportunity cost for the government - the funds could be spent on other merit goods/goods, like the NHS or police, that produce positive externalities - The significance of this depends on the government's current fiscal position and whether they can afford to increase their spending or not

Explain two reasons why education is not a ‘public good’

• there are a limited number of places in schools (ie limited supply) so rivalous to some degree - there’s “competition” for school places as there’s more demand for school places, in certain schools, than there is supply
• Some school are excludable as they are in expensive locations to live so people are excluded from them as they can’t afford to live there. Also private schools are payed-for so are price excludable.

Whenever a question on public goods come up think “no diminishable?” non rivalrous?

Exam Techniques

Be concise and plan your essay

Supply/Demand Comment marks:

• magnitude of supply shift (go on to explain to get elaboration marks)
• When only demand shifts to the right, you will get 1 mark if you say depends on the elasticity of supply. Vice versa for only supply shifting, say it depends on the elasticity of demand.
• magnitude of demand shift (same)
• we assume ceteris paribus - there could be other factors
• PED/PES (talk about PED if supply changes → opposites)
• TRY TO EXPLAIN EACH COMMENT MARK TO INCREASE YOUR CHANCE OF GETTING THE MAXIMUM MARKS AVAILABLE FOR COMMENT SECTION

60 marks 1 hour 30 minutes

Advice to spend 40 minutes in section A

50 minutes in section B (includes 5 mins essay plan)

Last year 2014 national average mark of essay is 9

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General feedback!

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Really wish you guys the best of luck! Do your best!