GCSE/IGCSE Economics Notes PDF

GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources Topic 2 – The allocation of resources Table of Content 2.1 Microeconomics & Macroeconomics................................ 2 2.2 The role of markets in allocating resources...................... 2 2.3 Demand......

GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources Topic 2 – The allocation of resources Table of Content 2.1 Microeconomics & Macroeconomics................................ 2 2.2 The role of markets in allocating resources...................... 2 2.3 Demand............................................................................ 2 2.4 Supply.............................................................................. 4 2.5 Price determination.......................................................... 5 2.6 Price changes.................................................................... 5 2.7 Price elasticity of demand (PED)....................................... 5 2.8 Price elasticity of supply (PES).......................................... 6 2.9 Market economic system................................................. 7 2.10 Market failure................................................................10 2.11 Mixed economic system.................................................11 Exam questions......................................................................12 For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources 2.1 Microeconomics & Macroeconomics Microeconomics: study of particular markets & sections of economy Individual firms, consumers, & markets making individual decisions within the economy E.g. effect of a price change on the demand/supply of a good Macroeconomics: study of economic behavior & decision making in whole economy Aggregates (total supply/demand for g/s in an economy at a particular time) E.g. level of inflation, national spending, national output, economic development etc. Decisions are made by government in managing the economy as a whole 2.2 The role of markets in allocating resources Resource allocation – the way in which markets decide what goods & services to provide, how to produce them & who to produce them for Price mechanism Prices respond to shortages & surpluses Price rises: consumers ration Reduces amount they are willing/able to buy o Tells producers there is excess supply in the market Gives suppliers incentive to decrease supply o Shortages causes price to rise o Surpluses causes prices to fall Market system - method of allocating resources through market forces of demand & supply Goods are bought/sold in a market at an equilibrium price Producers produce goods that consumers demand the most Market equilibrium Demand = supply for a good Demand changes e.g. ↑income: people can afford more goods Supply changes e.g. weather impacts supply (drought) = ↓ crops) Market is more likely to be in state of disequilibrium than equilibrium Demand & supply constantly change Economic questions 1. What to produce 2. How to produce 3. For whom to produce Price mechanism - system of relying on market force of demand & supply to allocate resources 2.3 Demand Demand – the willingness and ability to buy a product Effective demand: willingness to buy is backed by the ability to pay for the purchase Quantity demand: effective demand for a particular goods E.g. Want a phone but don't have the money to buy (demand) For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources Have the money to buy (effective demand) Individual demand: demand from one customer Market demand: total (aggregate) demand; sum of all individual demands of consumers Demand curve - shows effective demand Law of demand Increased price = decreased demand Decreased price = increased demand Slopes down from left to right Demand increases as price falls (vice versa) Movements are due to change in price Price rise = contraction along demand curve (less demand) Price falls = extension along demand curve (more demand) Reasons for shifts Consumer incomes o Increased income = people can afford more e.g. bicycle replaced by motorcycle Tax on incomes (more/less disposable income) Rise/fall in the price of substitute (eg. tea & coffee) Rise in the price of complements (eg. printers & ink cartridge) o Two products used/consumed together o As demand for 1 product increases, demand for other product increases Successful/unsuccessful advertising Weather Legislation Age distribution Fashion/trends Demand varies depending on age group E.g. trainers are more popular amongst young people o Majority of population is young people = high demand ↓ price (80 to 60) = ↑ demand ↑ demand (500 to 600) ↓ demand (500 to 400) without (300 to 500) ↑ demand due to changes in change in price Extension in demand from A other factors (excluding ↓ demand for a product due to B price) to changes in other factors Causes shift to the right (A to (excluding price) ↑ price (60 to 80) = ↓ in B) Causes shift to the left (A to demand (500 to 300) B) For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources Contraction in demand from B to A 2.4 Supply Supply – the willingness of producers to supply a good or services at a given price Quality supplied: amount of goods producers are willing to make & supply Market supply: amount of goods all producers supplying the product are willing to supply Supply curve Law of supply Increased price = increased supply Decreased prices = decreased supply Slopes down from right to left Higher supply = increase in price Movements are due to change in price Increase in price = extension in supply (increase in quantity supplied) Decrease in price = contraction in supply (reduced quantity supplied) Reasons for shifts Change in costs of production (COP) o Producers can produce & supply products cheaply o COP rises = supply falls Changes in quantity of resources available o Resources rise = supply rises (vice versa) Technological changes (higher productivity/output) Profitability of other products o Producers might shift to producing more profitable products (reduces supply of initial product) Joint supply - when a product is made as a by-product of another Weather Regulation/bureaucracy Increased number of producers in the market ↑ price (60 to 80) = ↑ supply (500 to 700) ↑ supply without change in price (S to S1) due to ↓ supply due to changes in price (without changes in other factors (excluding changes in other factors) price) Causes a contraction in supply ↓ supply without change in price (S to For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources S2) due to changes in other factories (excluding price) 2.5 Price determination Market equilibrium: quantity demanded = quantity supplied, X shortage/surplus Equilibrium price: price at which demand curve intersects supply curve Equilibrium quantity: quality demanded or supplied at the equilibrium price Marginal benefit = marginal cost Movements to a new equilibrium o Increased demand (demand curve shifts right) o Increased supply (supply curve shifts right) Market disequilibrium Disequilibrium price: price at which market demand & supply curves don’t meet Revenue = Price × Quantity 2.6 Price changes Cause – change in supply/demand Consequences Effect on equilibrium market price Effect on equilibrium market quantity Demand shifts to the right Increase Increase Demand shifts to the left Increase Increase 2.7 Price elasticity of demand (PED) PED: responsiveness of demand to a change in price Calculation % △ 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑃𝐸𝐷 = % △ 𝑝𝑟𝑖𝑐𝑒 Demand unresponsive to changes in price PED < 1 Inelastic Quantity demanded < price Eg food, electricity For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources Demand responsive to changes in price PED > 1 Elastic Quantity demanded > price Eg luxury PED = 0 Perfectly inelastic Change in price X effect quantity demanded PED = ∞ Perfectly elastic Change in price leads to 0 quantity demanded PED = 1 Unitary %△ quantity demanded = %△ price Determinants of PED 1. Availability of close substitutes - ↑substitutes → products easily replace if ↑price → elastic 2. Proportion of income spent on products - ↑income, △price X matter → inelastic 3. Cost of substituting between products - ↑substitution cost → inelastic 4. Brand loyalty / habit - less sensitive to △price → inelastic 5. Advertisement - ↓PED → inelastic 6. Necessity - essential → inelastic, luxury → elastic 7. Durability - non-durable → inelastic, durable → elastic 8. Time - takes time for consumers to change habits → long run → elastic Significance of PED Firms Gov Determine price strategies to max revenue Decide products to impose taxes (usually on Determine if use price discrimination inelastic products) (Charge different customers different price of same product coz differences in PED) Predict impact on producers following changes in exchange rate But - Difficult to calculate accurately as PED changes constantly 2.8 Price elasticity of supply (PES) PES: responsiveness of supplied to a change in price Calculation For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources % △ 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 𝑃𝐸𝑆 = % △ 𝑝𝑟𝑖𝑐𝑒 PES < 1 Inelastic Supply unresponsive to changes in price PES > 1 Elastic Supply responsive to changes in price PES = 0 Perfectly inelastic Change in price X effect quantity supplied PES = ∞ Perfectly elastic Change in price leads to 0 quantity supplied PES = 1 Unitary %△ quantity supplied = %△ price Determinants of PES 1. Spare capacity - if has spare capacity, can ↑supply → elastic 2. Level of stock - ↑stock ↑elastic 3. No of firms in industry - ↑no of firms ↑elastic 4. Ease & cost of factor substitution - if capital / labour occupationally mobile → elastic coz resources can be mobilized to supply extra output 5. Time period & production speed - long time, firm adjust production level → elastic Significance of PES Firms Gov ↑ competitive Ensure everyone has access to affordable products ↑ profit Encourage migrant labour Relieve shortage of labour Improve PES in labour market 2.9 Market economic system Types 1. Free market economy eg Hong Kong Relies on market forces of demand & supply in private sector to allocate resources with minimal gov intervention For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources Adv Dis 1. Competition helps firms to pay 1. Income & wealth inequalities attention & respond quickly to Richer ppl have more choice & econ freedom consumers wants Producers meet needs & wants of rich ppl, → stimulate innovation, neglect poor ppl ↑efficiency 2. Environment issues 2. Freedom of choice E.g. use non-renewable resources → pollution Producers & consumers choose what to produce / consume 2. Planned economy eg North Korea Relies on gov in public sector allocating resources 3. Mixed economy eg Japan Combination of free market & planned economy Changes in demand & supply changes price & quantity Allocation of resources is determined by profit motive Adv Dis 1. Freedom of choice 1. Heavy 2. ↓ social cost coz gov analysis social tax cost & benefits 2. ↓ 3. ↓ inequality efficient 4. Monopolies under close supervision How gov solve market failure? Solution Definition Graph Adv Dis Maximum Gov sets price Products more Create price below equilibrium affordable shortage price Encourage ↑ tax consumption Minimum price Gov sets price Producers know Create above equilibrium in advance the surplus price price they'll Encourage receive over- → enable production plan investment & output For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources Encourage output of certain goods/services Indirect Aim to ↓ demand ↑ tax Great impact taxation for demerit goods ↓ demand on low ↑ gov revenue income earners Subsidies Payment by gov ↓production ↑ tax cost Difficult to set up appropriate subsidy coz hard to measure external benefit Regulations eg - complete ban ↓consumption Cause black - age limit ↑awareness markets to provide products Ppl break rules eg fake ID cards Privatisation Transfer ↓gov tax & Create ownership of debt monopoly assets from public Private firm Still require to private sector ↑competitive gov intervention → protect public interest Nationalisation Purchase of Protect Large oppo private sector employment cost assets by gov Promote economic stability Direct eg - education Goods/services Oppo cost provision - healthcare accessible to all Over- ppl consumed Private benefits Long queues for individual & ↑shortage For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources external Free riders benefits for 3rd parties 2.10 Market failure Market failure - occurs when market force are unsuccessful in allocating resources efficiently Private costs: direct costs of production & consumption of a individual, firm or gov Eg (pro) wages, (con) price paid for goods by conusmers External costs: -ve side-effects of production & consumption incurred by 3rd parties for which no compensation is paid Eg (pro) air, (con) passive smoking Social costs: private costs + external costs Private benefit: benefits of production & consumption enjoyed by a individual, firm or gov Eg To producer - profit received To consumer - satisfaction gained External benefit: +ve side effects of production & consumption experienced by 3rd parties for which no money is paid Eg vaccination protect surrounding ppl Social benefits: private benefits + external benefits Types of market failure Definition / Cause Example Gov solution 1. Public goods goods/services that are non- Street Tax excludable & lighting non-rivalrous no one willing to pay → producers lack motivation → X supply 1. Merit goods goods/services when consumed create Education Subsidy +ve spillover effects in economy 1. Demerit goods goods/services when consumed create Cigarettes Tax -ve spillover effects in economy Banning X gov intervention → over- produced/consumed 1. Monopoly Single supplier, price maker Attract foreign firms X gov control → exploit market power →↑competition 1. Geographical Provide public immobility housing & transport 1. Occupational Provide more training immobility For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources 1. Information failure Good where ppl unaware of long-term Chocolate Education effects 2.11 Mixed economic system Mixed economy Decisions are made by a combination of the govt & the private sector (market) Eg. USA, India, China, Singapore, Japan etc. For more help, please visit our website www.exampaperspractice.co.uk  GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources Exam questions For more help, please visit our website www.exampaperspractice.co.uk GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources For more help, please visit our website www.exampaperspractice.co.uk GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources For more help, please visit our website www.exampaperspractice.co.uk GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources For more help, please visit our website www.exampaperspractice.co.uk GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources For more help, please visit our website www.exampaperspractice.co.uk GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources For more help, please visit our website www.exampaperspractice.co.uk GCSE/IGCSE Economics Notes Topic 2 – The Allocation of Resources For more help, please visit our website www.exampaperspractice.co.uk