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MARKETS AND SOCIETY
THE BASIC ECONOMIC PROBLEM

Opportunity cost - the next best alternative foregone

Firms Firms may have to decide whether to invest in new machinery or to
increase dividends to shareholders

Government The government may be faced whether to allocate money to the
NHS or to education

Individuals…

Page 2

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Specialisation



pens Advantages

Workers can be assigned to well suited tasks

Workers `learn by doing' - efficiency through experience

Saves time changing tools

Makes it cost effective to provide specialist capital
equipment for workers

guns
Disadvantages

Workers get bored of doing repetitive tasks

Regions or countries that specialise are dependent…

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Demand curves are usually negative sloping because:

· a fall in the price makes the good cheaper relative to substitutes

· a fall in price increases the consumers purchasing power and may encourage them to
buy more of the good

Exceptions

Veblen goods a fall in the price of a…

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Market equilibrium - When the market clears, demand equals supply.


P S P S




PE PE




D D
Q QE Q Q Q QE Q Q



Excess supply is shown above, here firms Excess demand is shown above, here firms
will be forced to reduce prices in order to will…

Page 5

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Consumer and Producer Surplus



P
S




Consumer surplus
PE

Producer surplus




QE Q


Consumer surplus - the difference between what customers are willing to pay for a good
or service and what they actually pay

Producer surplus - the difference between what producers are willing and able to supply
a…

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Price elasticity of demand

0 perfectly inelastic

0-1 inelastic

1 unitary elasticity

1- elastic

perfectly elastic

Factors that effect price elasticity of demand

· Number of close substitutes within the market

· Luxuries will have a more elastic curve

· Necessities will have a more inelastic curve

· Percentage of…

Page 7

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Factors effected cross price elasticity of demand

· Level of spare capacity

· Suitability of factors of production

· Level of stocks
inelastic short run
elastic long run
· Time period

· Production lags


RESOURCE ALLOCATION AND MARKET FAILURE

Price has three functions:

Rationing function The increase demand for the…

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Asymmetric information is when there is imperfect knowledge. In particular where one
party has different information to another. For example when selling a car, the owner is
likely to know the full service history and likelihood of breakdown. But the potential buyer
in contrast will be in the dark as…

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State Provision

S (fixed by government)
P

In some cases e.g. healthcare in the UK
and education the government rather
than subsidising goods will pay for them
entirely making them free of charge (this
is usually merit goods)



D

Excess demand Q
at zero price



Maximum Prices

P S



A…

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National Minimum Wage

The NMW can generate unemployment in the form of excess supply of labour

An increase in NMW may help to alleviate poverty but it can lead to job losses because of
raising costs for firms

Male and female pay may be more equal - helping women.

Young…

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definitely the most valuable document I've had for revision, I literally can't thank you enough!

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