Unit F581: Markets in Action (Microeconomics) FULL REVISION NOTES

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Preview of Unit F581: Markets in Action (Microeconomics) FULL REVISION NOTES

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MARKETS IN ACTION NOTES
THE REASONS FOR INDIVIDUALS, ORGANISATIONS AND SOCIETIES HAVING TO MAKE CHOICES
Economics is the study of how to allocate scarce resources in the most effective way.
DESCRIBE WHAT ECONOMISTS MEAN BY `THE ECONOMIC PROBLEM'
This is the fact that resources are scarce in relation to wants that are unlimited, leading to choices having to be made.
UNDERSTAND THE DIFFERENT FACTORS OF PRODUCTION AS ECONOMIC RESOURCES
Factor of production: the resource inputs that are available in an economy for the production of goods and services.
1. Land: natural resources in an economy
2. Labour: the quantity and quality of human resources
3. Capital: Man made aids to production
4. Entrepreneurship: the willingness of an entrepreneur to take risks and organise production
The amount of output produced in a period depends upon the inputs of factors of production.
EXPLAIN HOW SPECIALISATION CAN BE USED TO ADDRESS THE PROBLEM OF SCARCITY
Specialisation is the concentration by a worker or workers, firm, region or whole economy on a narrow range of goods
and services. Consequently, output per employee or productivity is increased. Specialisation opens up the possibility of
trade.
Division of Labour: the specialisation of labour where the production process is broken down into separate tasks.
Benefits Drawbacks
Increase in the output of goods and series when If a country has finite resources, e.g. oil, copper, when
compared to circumstances where each country is there run out, the economy is likely to suffer unless
self-sufficient. It has globally raised living standards since revenues earned have been invested wisely.
there is more output from a particular volume of
resources.
Widening range of goods available Deindustrialisation ­ in the UK, many people are jobless
due to cheap imports
Exchange between developed and developing economies. Bad weather may wipe out a whole years crops reducing
Trade has been important in facilitating export led incomes and creating widespread economic chaos
growth for China, Thailand, Malaysia + new members of
the EU.
Trade permits countries to specialise in products which Taste or needs of consumers may change leaving a
they are able to make efficiently country's exports vulnerable
Political factors may result in risks due to specialisation.
World's economies heavily rely on each other so any
unplanned shocks to system are likely to be more acutely
felt in a specialised economy.
UNDERSTAND THE ROLE OF MARKETS IN ALLOCATING SCARCE RESOURCES
Economic system is the way in which production is organised in a country or group of countries. The choices that are
made and how they are made is determined by the economic system of a particular country. The economic system is
used to describe the means by which a country's people, organisation and government make decisions with respect to:
What goods and services are to be produced
How these goods and services are produced
Who should receive these goods and services
Types of economic systems:

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Market economy
Resources are allocated by the forces of demand and supply through the price mechanism. Decisions on how resources
are to be allocated are invariably taken by millions of people and thousands of firms. The government has little or no
direct involvement in this process. Households and firms interact as buyers and sellers. Price and the free operation of
the price system are central to the way in which resources are allocated
2.…read more

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Diminishing returns occurs because not all factor inputs are equally suited to producing different
goods and services.
Reallocating scarce resources from one product to another involves an opportunity cost. If we go back to
the PPF diagram, if we increase our output of Good X (i.e. a movement along the PPF from point A to point
B) then fewer resources are available to produce good Y. Because of the shape of the PPF the opportunity
cost of switching resources increases ­ i.e.…read more

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PPFs can also be used to show the difficult choices that have to be made by many developing economies.
Such economies invariably have low standards of living, expanding populations, little or no economic
potential. Consequently, scarce resources have to be allocated to meet present needs at the expense of
investing in capital goods that would increase economic potential in the longer run.
Positive statement is a statement about what is i.e. a fact.
Normative statement is a statement about what ought to be.…read more

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EXPLAIN HOW DEMAND IS INFLUENCED BY PRICE AND OTHER FACTORS SUCH AS INCOME, THE PRICES OF OTHER
GOODS, AND CHANGES IN TASTES AND FASHION;
Factors that shift the demand curve: WASPTIC
Weather
Products such as umbrellas will see a high demand on rainy days however there will not be as much
demand for umbrellas on sunny days. Similarly, ice creams are in high demand on warm days rather than
cold days.…read more

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ANALYSE THE DIFFERENCE BETWEEN SHIFTS IN DEMAND AND A MOVEMENT ALONG A DEMAND CURVE;
A change in any of the non-price (wasptic) factors affecting demand will lead to a shift in the position of the
demand curve. Do not confuse this with a movement along the demand curve, which is due to a change in
price alone.…read more

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UNDERSTAND THE FACTORS THAT WILL INFLUENCE THE SUPPLY OF A PARTICULAR PRODUCT, INCLUDING THE
IMPACT OF CHANGING COSTS OF PRODUCTION ON SUPPLY;
FACTORS THAT SHIFT THE SUPPLY CURVE: PINTSW
ithC hips
Productivity
Increased productivity can shift the supply curve to the right. While, decreased productivity can shift the
supply curve to the left.
Indirect Taxes
An increase in taxation will be passed on to the consumer through increased prices. In turn, increased
prices will affect the willingness of a producer to supply.…read more

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Elasticity is the extent to which buyers and sellers respond to change in market conditions.
Price elasticity of demand (PED) : the responsiveness of the quantity demanded to a change in the price of
the product.…read more

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­ which is obviously
not good news for sellers as it would decrease their profit margin.
Price elasticity of demand Price increase, total revenue...…read more

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PES<1: Elastic 0<PES<1: Inelastic PES=1: Unit elastic
Determinants:
Availability of stocks of the product
Availability of factors of production
Time period
Business Relevance:
Where it is possible for firms to hold stocks in anticipation of a price rise, so if a price rise is expected, firms
are advised to have good stock availability.…read more

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