AQA Economics Knowledge Organiser Year 1 PDF

AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Nature & Purpose of Economic Activity and Scarcity, Choice and Allocation of Resources The Purpose of Economic Activity...

AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Nature & Purpose of Economic Activity and Scarcity, Choice and Allocation of Resources The Purpose of Economic Activity Opportunity Cost To produce goods and services to meet our needs and wants Opportunity cost is the value of the next best alternative foregone (given up) when Need: something you must have to survive or to do something a choice is made Want: something you desire but it is not essential Capital goods Basic Economic Problem A The basic economic problem is that there are infinite wants and finite K1 Start point A: K1 capital resources. Resources are scarce in relation to wants. goods and C1 consumer Choices need to be made about how to allocate resources among B K2 goods are produced. competing uses: What to produce? How to produce? For whom to produce? Moving to B: The opportunity Resources = factors of production Microeconomics v Macroeconomics cost of producing C1-C2 more consumer goods is the K1-K2 Resources are used in the Microeconomics is a branch capital goods foregone production process: of economics that studies the Land – natural physical resources behaviour of individuals and Labour – human input firms in the market. Capital – man-made resources, Macroeconomics considers eg machinery the economy as a whole C1 C2 Consumer goods Enterprise/Entrepreneurship - Economic agents and rational the ability and willingness to decision-making Positive and normative statements organize, coordinate, and take risks in the production process What rational economic Positive statements describe the agents aim to maximise: Normative statements express an world as it is, without making any Rewards to factors of production Consumers: total utility opinion about what ought to be. value judgements. They are based Land = rent Workers: wages and benefits They are subjective statements - i.e. on objective facts, and they can be Labour = wages from work they carry value judgements. proven or disproven. Example: The government should Capital = interest Producers: profit Example: A rise in the minimum wage increase spending on healthcare. Enterprise = profit Government: social welfare decreases employment. AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Production possibility diagrams Production possibility frontier (PPF) Shifts in PPFs A production possibility frontier (PPF) shows the maximum possible What causes an outward shift in output combinations of two goods or services an economy can achieve the PPF? when all resources are fully and efficiently employed An increase in the quantity of the factors of production: eg discovery & PPFs are usually curved extraction of new natural because of the Law of resources Diminshing Returns – the An increase in the quality of the marginal (extra) output of factors of consumers goods diminishes production: eg increase in as more factor resources are labour productivity due to allocated to it. better management An advance in technology: eg a PPFs and productive efficiency new innovation in resource use Using the diagram above: Point A – inefficient, some resources unemployed What causes an inward shift in the PPF? Points B, C & D – efficient, all resources fully employed Point E – unattainable with current resources and state of technology A decrease in the quantity of the factors of production: eg war or conflict or natural disasters Movements along the PPF and opportunity A decrease in the quality of the factors of production: eg capital scrapping or cost labour hysteresis (loss of workers' skills) in a prolonged recession Start point: K1 capital goods and C1 consumer goods are produced. A non-parallel A straight line PPF indicates The opportunity cost of producing shift: a resources are equally efficient C1C2 more consumer goods is the technological at producing both goods shown K1K2 capital goods foregone advance in car on the PPF axes – opportunity production cost is constant Opportunity cost increases as more only Production possibility consumers goods frontier - are produced macroeconomy AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Individual economic decision-making Consumer behaviour Important information failure terms Rational consumer behaviour: decision-making process that is based Symmetric information – for markets to work, buyers and sellers need to on making choices that maximise utility. This assumes: have the same perfect information Consumers make all choices independently Asymmetric information – buyers and sellers have different amounts Consumers have fixed and consistent preferences of information e.g. buyers often know less than sellers when buying second- Consumers have full information hand cars; buyers often know more than sellers when buying car insurance Consumers always make the optimal choice given their preferences Adverse selection - people taking out insurance are often those at highest Law of Diminishing Marginal Utility risk e.g. a person leading an unhealthy lifestyle is more likely to take out health insurance, meaning more payouts for insurance company Total utility – the total satisfaction the consumer gets from purchasing units Moral Hazard – being insured can make you more careless e.g. banks made of a good. Rational consumers aim to maximise their total utility. risky decisions before the global financial crisis aware that they would likely Marginal utility - the change in total utility from consuming an extra unit of receive bail-outs a product. Principal-agent problem – goals of the principals, those who lose/gain from Law of Diminishing Marginal Utility – as a consumer buys and consumes a decision, are different from the agents, those making the decisions e.g. more units of a good, the extra satisfaction gained diminishes. This means at managers (agents) may have more information than shareholders higher quantities, consumers are less willing to pay a higher price, helping to (principals) explain the downward sloping demand curve. Policies to address information failure/gaps Importance of the margin when making choices Government policies can improve information to help producers and Rational consumers make decisions by calculating the marginal cost (change in consumers value the actual costs and benefits more accurately, reducing or total cost when one more unit is bought) and marginal benefit (change in total eliminating the market failure. Remember that the government may act on when one more unit is consumed) poor/incomplete information so there may be government failure. Compulsory labelling on products Campaigns on dangers of gambling Imperfect information Improved nutritional information on addiction food/drinks Performance league tables for Information failure occurs when people have inaccurate, incomplete, Hard-hitting anti-speeding advertising schools/school inspections uncertain or misunderstood data and so make potentially 'wrong' choices Campaigns to raise awareness of risks Consumer protection laws Information gaps exist when either the buyer or seller does not have access of drink-driving/drug abuse/ Industry standards and guarantees to the information needed for them to make a fully-informed decision, smoking/vaping for selling used products leading to a misallocation of scarce resources = market failure AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Demand Demand concepts Shifts in demand (non-price determinants of demand) Effective demand – demand supported by intention and ability to buy Factors causing a shift in demand: Latent demand – willingness to buy but not yet ability to buy Change in tastes/preferences Joint or complementary demand – demand for one good is closely linked to Change in incomes the demand for another, ie two of or Free moremarket goods that go well together Characteristics Economy Change in the price of related Competitive demand - two or more goods that are close substitutes for goods (complements or each other substitutes) Derived demand – when demand for one product drives the demand for Change in size/structure of the another (eg demand for factors of production driven by demand for final population goods) Changes in interest rates Composite demand – good is demanded for more than one use Changes in the law Individual demand – a consumer's demand for a good/service Changes in expectations Market demand – all consumers' demands in the market summed together Why the demand curve slopes downwards Movements along the demand curve Substitution effect – consumers substitute in favour of the good that become Law of Demand – as price falls, the relatively cheaper; if price of good X falls, consumers buy more of good X quantity demanded increases and Real income effect – if the price of good X falls, the consumer buying good X vice versa. Demand slopes will gain purchasing power; this extra 'income' available for spending can be downwards to the right used to buy more X Extension in demand – a movement along the demand curve from A to B Consumer irrationality/behavioural economics (lower P, higher Qd) When using demand, economists assume consumers are rational but they Contraction in demand – a may be irrational because: movement along the demand curve Bounded rationality and bounded self-control from B to A (higher P, lower Qd) Biases in decision making – rules of thumb, anchoring, availability & Ceteris Paribus social norms The importance of altruism & perceptions of fairness Ceteris paribus – all other influencing factors are held constant Choice architecture & framing The demand curve is drawn “ceteris paribus”. Other factors affecting Nudges demand, such as income and tastes, are held constant to show how demand Default choices, restricted choice & mandated choice varies with price. AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Price Elasticity of Demand (PED) Price Elasticity of Demand PED along a straight-line demand curve Price elasticity of demand – the responsiveness of quantity demanded of a PED is NOT the gradient or slope of good to a change in its price the demand curve PED = % change in quantity demanded PED = -1 at the mid-point of the % change in price demand curve PED is elastic at high prices Values for PED PED is inelastic at low prices PED varies all the way along the PED is negative because the quantity demanded is inversely related to demand curve price. The values of PED ranges from 0 to – infinity. The mid-value is -1 PED and total revenue (TR) Inelastic demand: quantity demanded is not responsive to price changes; When PED is elastic: the % change in Qd is < the % change in P; value is between 0 and -1 a rise in P leads to a more than proportionate fall in Qd, so TR falls Elastic demand: quantity demanded is very responsive to price changes; a fall in P leads to a more than proportionate rise in Qd, so TR rises the % change in Qd is more than the % change in P; value is between -1 When PED is inelastic: and -∞ a rise in P leads to a less than proportionate fall in Qd, so TR rises Unit or unitary demand: PED = -1; the % change in Qd is the same as the % a fall in P leads to a less than proportionate rise in Qd, do TR falls change in P When PED = unitary, TR will not change when price changes Perfectly elastic demand: PED = -infinity Perfectly inelastic demand: PED = 0 Factors influencing PED Availability of close substitutes Time frame when making choice Price inelastic demand Price elastic demand Cost of switching suppliers Brand loyalty Breadth of product definition %of income spent on product Degree of necessity Habitual demand Uses of PED Determination of pricing policy/impact on revenue Indication of competition faced (number/closeness of substitutes) Price setting in price discrimination Government decision on which goods to tax indirectly AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Income elasticity of demand (YED) and cross price elasticity of demand (XED) Income Elasticity of Demand (YED) Cross elasticity of demand (XED) Income elasticity of demand – the responsiveness of demand for a good to a Cross elasticity of demand – the responsiveness of demand for a good to a change in income change in the price of a related good YED = % change in demand XED = % change in demand for good A % change in income % change in price of good B Values for YED Values for XED YED is positive for normal goods (when income rises, the Qd increases) XED is positive for substitute goods (when price of good B rises, the YED is negative for inferior goods (when income rises, the Qd decreases) demand for good A increases and vice versa) Interpreting values of YED YED is negative for complementary goods (when the price of good B rises, Positive YED between 0 and +1: as income rises, there is only a relatively the demand for good A decreases and vice versa) small increase in demand (and vice versa); this typically indicates the good is Interpreting values of XED a necessity Positive XED between 0 and +1: goods are weak substitutes Positive YED between +1 and + infinity: as income rises, there is a relatively Positive XED between +1 and + infinity: goods are strong substitutes large increase in demand (and vice versa); this typically indicates the good is Negative XED between 0 and -1: goods are weak complements a luxury Negative XED between -1 and - infinity: goods are strong complements Negative YED: as income rises, there is a fall in the quantity demanded Substitutes and complements (and vice versa); this typically indicates the good is an inferior good Substitutes are goods that can be used in place of each other to satisfy a Normal v inferior goods similar need or desire, eg tea and coffee Normal goods are products or services for which demand increases as consumer income Complements are goods that are typically consumed or used together rises. because they enhance each other's value, eg tennis rackets and tennis balls When people's incomes go up, they tend to buy more of these goods. Examples of normal goods include restaurant meals, vacations, and higher-end Uses of YED Uses of XED electronics. Effect of recession/growth on Marketing strategies, eg Inferior goods are products or services for which demand decreases as consumer income demand selling complements together rises. When people's incomes increase, they typically buy less of these goods and may shift Business planning for product / in bundles to higher-quality alternatives. range If a competitor changes its Examples of inferior goods often include lower-quality or generic foods, used or older- Helps firms anticipate future price, firms can work out the model cars, and certain low-cost, generic products. demand effect on their demand AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Supply Supply concepts Shifts in supply (non-price determinants of supply) Joint supply – two or more goods that derive from a single production Factors causing a shift in supply: Decrease in process; a change in the supply of one good leads to a change in the supply Change in the costs of Price supply – S1 S3 of a by-product production (raw materials, shifts to S3 less Individual supply – a producer's supply of a good/service is supplied at S1 Characteristics of Free market Economy wages, energy....) each and every Market supply – all producers' supplies to the market summed together Change in production price S2 Movements along the supply curve technology Change in weather/climate Law of Supply – as price falls, the Events such as strikes, quantity supplied decreases and vice pandemic Increase in supply – versa. Supply slopes upwards to the Changes in indirect taxes S1 shifts to S2 more right is supplied at each Changes in producer subsidies and every price Extension in supply – a movement Changes in the price of along the supply curve from A to B substitutes in production (higher P, higher Qs) Quantity Changes in the number of firms Contraction in supply – a supplying to the market movement along the supply curve from B to A (lower P, lower Qs) The Market The market is created by the interaction of buyers (demand) and sellers (supply) Why the supply curve slopes upwards Higher market prices motivate firms to supply more as they expect more Equilibrium = a state of rest profit. At equilibrium E1, there is one Producing more increases the marginal cost of production so firms need. unique price P1, where the plans higher prices to cover these costs (assumes Law of Diminishing Returns) of producers match the plans of consumers Ceteris Paribus The quantity demanded equals the quantity supplied at P1 Ceteris paribus – all other influencing factors are held constant. The supply This is sometimes called the curve is drawn ceteris paribus. Other factors affecting supply, such as costs market-clearing price. of production, are held constant to show how demand varies with price AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Price Elasticity of Supply (PES) Price Elasticity of Supply Price elasticity of supply – the responsiveness of quantity supplied of a good to a change in its price Any straight line supply curve that PES = % change in quantity supplied starts at the origin has PES = +1 % change in price Values for PES PES is positive because the quantity supplied is positively related to price The values of PES ranges from 0 to + infinity. The mid-value is +1. Inelastic supply: quantity supplied is not responsive to price changes; the % Factors influencing PES change in Qs is less than the % change in P; value lies between 0 and +1. Elastic supply: quantity supplied is very responsive to price changes; the % Time period change in Qs is more than the % change in P; value lies between +1 and +∞ Bottlenecks in supply Unit or unitary supply: PES = +1; the % change in Qs is the same as the % Breakdowns in supply chains change in P Spare capacity Perfectly elastic supply: PES = + infinity Stock levels Perfectly inelastic supply: PES = 0 Availability of producer substitutes Ease of entry into the market Price inelastic supply Price elastic supply Elasticity diagram tips Sketch a line across the top of your diagram This creates an I for the Inelastic curve and an E for the Elastic one. Applies to both demand and supply Steep curves are relatively inelastic, shallow curves are relatively elastic AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Market: shifts in demand and supply, & interrelated markets Shifts in demand Shifts in supply Characteristics of Free market Economy Decrease in demand Increase in supply Decrease in supply Increase in demand Demand shifts left from D1 to D2 Supply shifts right from S1 to S2 Supply shifts left from S1 to S2 Demand shifts right from D1 to D2 At original price P1, there is now an At original price P1, there is now an At original price P1, there is now At original price P1, there is now an excess supply. excess supply, so price falls. an excess demand​, price rises. excess demand. This signals to producers to reduce This signals to consumers to extend This signals to consumers to This signals to producers to increase price and contract their supply from their demand from Q1 to Q2 to contract their demand from Q1 to Q2 price and extend their supply from Q1 Q1 to Q2 to restore the market restore the market equilibrium to restore the market equilibrium to Q2 to restore the market equilibrium. The new equilibrium is at P2 and The new equilibrium is at P2 and Q2. equilibrium. The new equilibrium is at P2 and Q2. Q2. The new equilibrium is at P2 and Q2 Interrelated markets More interrelated markets Substitutes - if supply of a good shifts left, this increases the market price, so Joint supply – if the demand for a good decrease (left shift), then the market the demand for a substitute will shift to the right equilibrium quantity falls, so the supply of a good in joint supply will Complements/joint demand – if the supply of a good shifts right, this decrease (shift left). decrease its market price, which will cause demand for the complement to Derived demand – if the demand for a final good increases, then the shift right demand for the factors of production used to produce it will also increase. Composite demand – if the demand for a good increases, the quantity increases, this causes supply to shift left in the market for the good that is in ALL EXAMPLES CAN BE DONE 'VICE VERSA' and all assume CETERIS PARIBUS composite demand AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Functions of Price & Consumer and Producer Surplus Functions of Prices Producer surplus Prices in markets help ALLOCATE the scarce resources between their Producer surplus - the difference between what producers are willing and competing uses via their signalling, incentivising and rationing functions. able to supply a good for (indicated by the supply curve) and the price they actually receive (the market price). It is a measure of producer welfare. Signalling SIGNAL – prices provide key information to buyers and sellers; if the Diagram for consumer surplus price changes because of a shift in demand, this signals to producers to adjust their output levels; if the price changes because of a shift in supply, this The consumer surplus is area indicates to consumers to re-think how much they will purchase. APB. Incentivising If supply increases ie shifts right, INCENTIVISE – higher prices can incentivise producers to extend supply as the market price falls and the they anticipate more profit; lower prices can incentivise consumers to extend consumer surplus will increase demand as they pay less for a good yielding the same utility (and vice versa) (and vice versa) Rationing RATION – if supply is limited, the price rises, which rations the good to those who are most willing and able to pay; Diagram for producer surplus When the functions of prices may not work effectively Signalling - can fail if there are externalities; if the government imposes a The producer surplus is area maximum or minimum price; if the price set by producers is not at the APC. equilibrium; if there is imperfect information Incentivising – may be missing for public goods If demand increases ie shifts Rationing – may not work if the government sets the price right, the market price rises and the producer surplus will Consumer Surplus increase (and vice versa) Consumer surplus – the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total they pay (the market price). It is a measure of consumer welfare. AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Production and productivity, Specialisation, Division of Labour and Exchange Production and productivity Advantages and disadvantages of specialisation and the division of labour Production converts inputs (the factors of production) into output Advantages Disadvantages Factors of production – the resources used as inputs = land, Increased Productivity Higher staff turnover labour, capital and enterprise greater output from same resources workers may find repetitive tasks Short run - the time period where at least one factor of allows workers to become more monotonous & unrewarding, leading to production is fixed skilled & experienced in specific job dissatisfaction. Long run – the time period when all factors of production are tasks, leading to higher efficiency Dependency variable develop specialist machinery, more overreliance on one work/task/factory Productivity measures the efficiency of a factor input automation makes units vulnerable to staff illness or Labour productivity – output per worker or per labour hour Lower Costs economic shocks. Total factor productivity – output per unit of input reduced training time and waste Structural unemployment Economies of Scale workers trained in fewer skills Importance of productivity mass production possible including machines can replace some labour tasks assembly lines (technological unemployment) Higher productivity can lead to: larger quantities of identical goods Lack of variety Higher profit can be produced more efficiently. Mass produced goods can reduce Higher wages consumer choice Lower unit costs Greater international competitiveness Money and its role in exchange Better trade performance Money – anything generally accepted in payment of a debt; removes the needs to Faster economic growth barter, avoiding the double coincidence of wants Characteristics of money: acceptable to all, portable, durable, easily divisible, Specialisation & division of labour uncounterfeitable and scarce in supply. Specialisation - the concentration of individuals, firms, or nations The Four Functions of Money on producing a limited range of goods or services. Medium of exchange –money facilitates transactions between buyer and seller; Specialisation can occur at household, firm, region and country specialisation and the division of labour requires a means of exchanging goods and level. services; money promotes this. The division of labour - a form of specialisation where the tasks Unit of account - a nominal unit of measure used to value/cost/price products, needed to produce an item are divided among workers. assets, debts, incomes and spending Adam Smithpossibility Production argued thatfrontier specialisation leads to increased - macroeconomy Store of Value – an asset that holds value over time productivity and economic growth in the Wealth of Nations (1776) Standard for deferred payment – the accepted way in each market to settle debt AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Economic Systems: Free Market Economies Economic system The price mechanism in action Economic system is a network of individuals, organisations and If consumers exercise their sovereignty and are willing and institutions used by a society to resolve the basic problem of what, how able to buy more of a good, the market demand curve shifts much, how and for whom to produce. right Suppliers are incentivised to extend supply to meet the Characteristics of a free market economy demand and can increase price to reduce the excess Also known as a laissez-faire, market or capitalist economy: demand Private ownership of resources This causes the market price and quantity to increase The market has allocated more scarce resources to the Owners of resources and producers are free to buy/sell production of this good – the quantity has increased. Economic agents are motivated by self-interest Consumers have sovereignty – they determine what is produced by being willing and able to buy goods and services Disadvantages of a free market economy Income depends on the market value of an individual's work Income/wealth inequality, and poverty Resources are allocated by the price mechanism (market Market failure can reduce social welfare mechanism) Lack of provision of public goods Free market economies still require the allocation of property rights Over-provision of goods with negative externalities and a legal system to protect them. Under-provision of goods with positive externalities Information gaps may cause market failure Advantages of free market economy Unemployment/worker exploitation/low pay for some​ Resources can be bought and sold Environmental depletion/degradation Consumer sovereignty Resources may be wasted on advertising and marketing Freedom of choice Firms may develop monopoly power and push up prices Profit-motive and self-interest incentivises Macroeconomic instability Incentive to worker harder for higher wages; productivity rises Friedrich Hayek Firms face competitive forces driving down prices Hayek came from the Austrian School of economics. He had a strong belief in the Incentive to innovate and invest in new ideas (dynamic efficiency) individual in an economy rather than government. In the 1930s Keynes The invisible hand supported active government intervention to stimulate growth, whereas Hayek Adam Smith's 'invisible hand' - if economic agents act in their own best did not. Hayek favoured market economies – he thought a small group of interests, the forces of demand and supply in the market can promote an individuals in government would never have enough information to meet efficient allocation of scarce resources for society people's needs. AQA ECONOMICS KNOWLEDGE ORGANISER: YEAR 1 Economic Systems: Command Economies & Mixed Economies Characteristics of a Command Economy (centrally planned) Disadvantages of a Command Economy Government owns and allocates resources deciding what, how and for Danger of government failure whom to produce Difficult for the government to set and correct output planning targets Government sets productions targets and growth rates according to and fix prices appropriately its view of people's wants Government may not have enough information to make good decisions Characteristics of Free market Economy eg malinvestment by state Goods are allocated through rationing Workers are given job by the government Very bureaucratic – lots of red tape which reduces efficiency Market prices do not inform resource allocation Underemployment Queuing is used to ration scarce goods Lack of choice for consumers Lack of incentives to be innovative and entrepreneurial Advantages of a Command Economy Lack of incentives to work hard, causing lower productivity Resources are allocated by the government to maximise social welfare Corruption is likely to develop Relatively even distribution of income/wealth Shadow market activity can flourish Workers are given jobs by the state; there is no unemployment Adequate provision of public goods Mixed economy Government should take externalities into account in decision-making There is a mix of private and public (government) sectors Environmental protection possible Resources are allocated by the price mechanism, when it works efficiently, but Government can invest in economy's infrastructure easily the government intervenes to correct market failures Policies to manage the macroeconomy Aims to achieve the best aspects for both free market and command Welfare safety net economies while avoiding their disadvantages. National interest considered rather than individual profits Traditional Economies Transition Economies Karl Marx Traditional/subsistence In his Communist Manifesto, Marx defined a command economy as Transition economies are in the process of economies are those 'common ownership of the means of production’. Marx argued free moving from a command economy to a characterised by family markets are chaotic and there is often surplus labour; labour specialisation mixed/free market economy. Markets are groups, low productivity, and population growth push wages down – workers are exploited (not paid liberalised, state assets are privatised, state little specialisation, barter the value they add to production). He argued that capitalism would subsidies are removed. This can cause trade and no surplus eventually push workers towards revolution against the capital owners. some short-term problems such as inflation production for investment Communism is not the same as Socialism, but both favour more and unemployment eg in world's most government intervention in the economy. eg Cuba, Eastern European countries underdeveloped regions