Competitive Markets: How they work and why the fail - FULL UNIT

Unit 1 of economics: competitive markets

Entire course covering the specification enlisted on the website

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  • Created on: 15-04-15 13:59
Preview of Competitive Markets: How they work and why the fail - FULL UNIT

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Unit 1:
Measures the next best alternative forgone
If the government spends £10 billion on NHS the opportunity cost is the benefits from spending it
on education etc
Marginal analysis:
Firms use it as a decision making tool to maximise profits
Situation that arises from unlimited wants and limited resources
The government makes choices of where to allocate resources
Basic economic problem:
"Unlimited wants combined with limited resources"
Faced by producers, consumers and the government
Factors of production:
"not created by human beings"
Natural resources available for production
Oil, fish, soil, forests, climate, rain
The skills of the work force & the quantity of labour they produce
Reward is wages and salaries
The risk taking role of business owners undertaken in pursuit of profit; specialised form of
Reward is profit
Investment in manmade aids to production eg buildings, factories, computers
Goods use in supply of other products
Renewable resource
One whose stock level can be maintained over a period of time eg solar energy, water, timber
Unrenewable resource
One whose stock level decreases over time as it is consumed eg coal, oil, gas, copper
Sustainable developments:
"meeting the needs of the present without compromising those of the future"
Positive statement:
Can be proven/disproven, it is an objective statement

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UK are the highest in Europe"
Normative statement:
Opinions that contain a value judgement and cannot be proven/disproven, it is a
subjective statement
These statements influence economic decision making and policies
" children deserve free school meals
Any place or process that brings together buyers with a view to agreeing a price
How an economy operates ­ through production & subsequent exchange
Many companies have global markets due to advancements in technology eg ebay
Commodities eg rubber, oil, coal, gas,sugar, copper
Stocks,…read more

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Motivated by self interest
Limited government intervention eg tax, regulations
Businesses choose to allocate its resources to activities where they are likely to gain the
greatest rewards/profits
Referred to as capitalism
Price mechanism used to allocate resources
Government role:
Provision of public goods
Provision of legal system
Provision of money and maintaining price stability
Pressure on environmental issues
"watchdog" of the economy
No true free economies worldwide; least gov intervention is Japan
Mixed economy
Some resources are owned by the public (government)
Some…read more

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Division of labour
A process whereby the production procedure is broken down in a stages and workers are assigned
to a particular stage
Increased productivity
Improved skills
Specialised equipment
Less downtime
Workers concentrate on what they're good at
Tedious & monstrous jobs ­ high staff turnover which increases production costs to select
and train new staff
Breaking production down leads to structural unemployment whereby the workers are
replaced by machines
Lack in quality
Drop in productivity
Independence in production meaning one person/group going…read more

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Economic changes
The boundary can move out if the economy has experience economic growth (increase in GDP)
due to:
Increase in resources available
Increase in the quality of resources
The expansion of further or higher education
Government training schemes
Increase in investment and development in technology
The boundary can shift in if potential GDP falls, following a disaster whereby many resources are
destroyed eg in 2011, Japan suffered from the tsunami and PPF shifted inwards
Amount consumers desire to purchase at various prices
Reflects…read more

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An increase in demand refers to the whole demand curve shifting outward at every price level
A decrease in demand refers to the whole demand curve shifting inward at every price level
Reasons for a shift
A fall in the price of complementary goods
A rise in the price of substitute goods
a change in fashion and tastes
increased advertisements
an increase in real incomes
a decrease in income tax which leads to an
increase in disposable income
an increase in population or change in…read more

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It is important for firms to know the PED of their products when making pricing decisions, because
this affects revenue and profitability
If demand is elastic
Then a cut in priceincrease total consumer spending and revenue to the firm.…read more

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The % of a consumers income allocated to spending on the good
Goods and services that take up a high proportion of a households income will tend to
have a more elastic demand than products eg a car or boat
Goods that take up a small % of income will tend to be price inelastic eg newspaper or
tomato ketchup
Addictive and habit forming goods
Tobacco, alcohol and coffee are the type of goods that tend to be price inelastic
The time period
For most…read more

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Demand will increase in Y increases
Normal/luxury goods
Has a YED greater than 1
As Y increases, people will spend more on the good
Cross elasticity of demand
A measure of responsiveness of a quantity demanded of one good or service to a change in price
of another good or service
Helps us to understand the relationship between goods
Used to determine whether goods are complements or substitutes for one another
XED = % change in quantity demanded for good B
% change in…read more

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Movement along a supply curve
There is a movement only when there is a change in its price
A price rise causes an extension in supply
A fallin price causes a contraction in supply
Shifts in the supply curve
An increase in supply refers to the whole supply curve shifting outwards to the right at every price
A decrease in supply refers to the whole supply curve shifting inwards to the left
Influences for a shift
Production costs
Wage costs
Raw material components
Energy…read more


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