complete AS Micro economics notes OCR

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Micro economics notes
The economic problem: how to allocate scarce resources among alternative uses
The basic economic problem is how to allocate scarce resources these resources are also
factors of production the main factors of production are
land this is a natural resource includes minerals and deposits like oil ect
Labour this is a human resource which is available in any economy it is dependent on the
quantity and quality of labour
Capital this is a form physical resource covering anything that can be regarded as a man
made aide of production e.g factories, office blocks, machinery
Entrepreneurship this is a very particular form of human capital
Factor endowment ­ the stock of factors of production
So the economic problem is most people have unlimited wants or want more then they can
due to lack of income or time
This position includes scarcity, choice and opportunity cost
So because of unlimited wants choices have to be made to where the scarce resources are
allocated, when making these choices economists usually consider possible alternatives, the
next best alternative forgone(opportunity cost)
Specialisation and exchange
This is a concept where different firms regions or economies concentrate no a particular task
or upon producing specific good and service, this means that not everyone does everything
for them selves. Specialisation in trade that involves the exchange of goods and services
normally for money. Barter is when no money is involved.
An increase in output when a country is found to be specialisation in a product that some
cannot such as the uk and bananas
Specialisation mainly occurs due to the factors of production available in the country
if a country has finite resources such as oil if they run out the economy is to suffer
deindustrialisation the loss of manufacturing capacity and jobs ­ thousands of jobs have
been lost in textiles ect because it is more productively efficient for other countries such as
china to specialise in these products ( more choice lower prices better quality)
bad weather can remove crops
the taste and needs of consumers may change so some products are not needed as much
Division of labour
In order to be competitive labour costs must be kept low, by specialising in certain task, the
process can be broken down into a series of separate tasks (division of labour)
Adam smith showed how the production of pins was more effective when divided
However too long hours and doing constantly the same job can lead to boredom meaning
low productivity and poor quality products

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A production possibility curve is to show resources being allocated.
A PPC shows the maximum quantities of different combinations of output of two products,
given the current resources and state of technology
Draw a PPC here for televisions and tvs
Then show how it can shift along the PPC it can change the amount of different products
produced, and the opportunity is the reduction of the one product in the increase of the
other.…read more

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The market economy
An economy that is biased on demand and supply as to where the scarce resources are
allocated the government has little or no intervention.…read more

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Consumer surplus is the extra amount that consumers are prepared to pay for a
product above the price they paid.
Calculation of total expenditure and total revenue
Data that is drawn from a market or an individual demand curve can be used to calculate the
total expenditure made by the consumer.
Total expenditure= price*quantity
Factors affecting demand ­ the only thing that will cause a shift along the demand curve is
price and price alone.…read more

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L egisation
O other eg weather
T echnology
I industry (size ect)
S ubsidies/ tavation
These factors can shift supply to the left and the right In a diagram.
How prices are determined
Price is the amount of money paid for a given good or service, prices are determined by the
equilibrium price, the equilibrium price is where demand and supply are equal, this is also
known as clearing price.…read more

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Price inelastic: where the percentage change in quantity demanded in in sensitive to
a change in price.
Determinants of price elasticity
A substitute good, if there is a close substitute then consumers will be more price sensitive
cause the elasticity to be more elastic.…read more

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The responsiveness of demand for one product in relation to a change in the price of another
%change in demand for product A
% change in price of product B
a positive estimate would suggest that the two goods are substitute goods and a negative
estimate would suggest complementary goods, zero would suggest no relationship between
the two products.…read more

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Time period
If it takes long for supply to adjust then they will be more inelastic, In the long term supply
will generally be more elastic.
Business relevance
This is always positive, in short term price is many inelastic for most industries, this means
that it is harder for these firms to increase supply. Over time however it is likely to be more
price elastic.…read more

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Information failure
A lack of information resulting in consumers and producers making decisions that
do not maximise welfare.
Economic efficiency is when allocation of resources is maximising welfare for the consumer,
however in practise the ability of consumers to benefit in these terms is biased on them
having accurate, up to date information on the quality and prices of the products they want
to consume.…read more

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External costs and external Benefits
This is when the externalities fall on third parties.
External costs: the costs that are the consequence of externalities on a third party
External benefits: the benefits that accrue as a consequence of externalities to a
third party.…read more


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