Download Core concepts to revise for mocks

Section A, micro
1. Prices and markets
a. Price mechanism (plus diags)…function of
markets…resource allocation
b. Illustrate the above using 2 S&D diags + one
PPF
c. Market failure
i. Do markets clear? (Hrm…in LR, markets
TEND towards equil.)
ii. Success or failures; ext’s…public or merit
goods…demerit goods and bads,
mon/olig)
2. Demand
a. Slope…(neg corr);
i. income and
ii. substitution effect!
b. Recall; effective D (will/abil.)
c. Qd…vs shift
3. Shifts in D
a. Non-P
vars…pop…prefs…tastes…Y…Px…Py…ads…
change in pop structure…derived demand
(labour…derived from D for goods and services)
4. Supply curve
a. Upward slope (pos corr);
i. Incentives f of P;
ii. rising mkt P means that firms can cover
increasing costs…and thus are able to
put more on the mkt!
b. Law of S…
c. Change in Qs…vs…change in S (shift)
5. Change in S
a. Weather…
b. Avail…P…Quality…Quantity of fops
c. Indir taxes (VAT vs unit) and subsidies
d. Mkt entry/exit
6. Equil – mkt clearing
a. S = D; equil…mkt clearing…AND efficiency in
resource all (link to PPF and dim rets)
b. ΔS → ΔP → ΔQd
c. ΔD → ΔP → ΔQs
d. TR: P x Q
e. TR is P x Q…(the “boomerang”)
f. Excess D and excess S…(once again, the P
mech!)
g. Note that zero PES is poss (theatre tickets) and
that the BM price is where S=D!
7. PED
a. Rel change in Qd…DUE TO a rel change in P
b. Var’s affecting PED:
i. Fashion…avail/closeness of
subs…nec…proportion of y spent on
it…Px and Py…time..
c. Values (minus!)…-1.2 is “greater” than -0.8
d. Slope NOT the same as PED!
e. More than 1; elastic and less = inelastic, 1
means unitary
f. PED goes from 0 (totally inel) to infinity
g. Value of |0.8| is inelastic (rel insensitive to
change in P)…|1.5|
h. is elastic….value of -1 is unitary
i. Curves!
8. PES
a.
b.
c.
d.
Def: rel change in Qs due to a rel change in P
Positive…1.5 is “elastic”…0.6 is “inelastic”
Intercepts: P-axis = elastic; Q-axis = inel
Det’s of PES; prod substs…stock levels…spare
capacity…techn…switching costs…time..
9. yED
a. %change in Qd…over % change in income
b. “+” value is a normal good; “-“ is inferior
c. Dets; luxury or necessity
10. Applications of elasticity
a. TR
i. Def: P x Q
ii. TR is maxed when PED is unitary
iii. P↑ when PED is 0.8 will lead to Δ↑in
TR
iv. P↓ when PED is 2.3…leads to Δ↑ in
TR
v. “Expl why a mon might set the price
higher than a PCM…”
b. Price fluctuations
i. “…prices will fluctuate greatly when PED
is low and PES is low…”
ii. “…quantity will fluctuate greatly when
PED is high and PES is high...”
c. Taxes
i. Indirect tax; tax is paid by HHs…but goes
to govt indirectly
ii. Expenditure tax – a tax on the sales of a
good (often called sales tax)
iii. Unit tax: USD2 per bottle of beer….or
USD1 per gallon of gasoline…or USD4
per tonne of wheat…
iv. VAT: percentage on the sales value, e.g.
25% in Sweden
v. What would discerning wine drinkers
prefer; a unit tax of USD10 per bottle or a
percentage tax of 15%?!
vi. Why tax cigahol?
1. Low PED…Qd does not fall a lot
when the tax is added
2. Neg exts are reduced
d. (Links to X rev)
11. Scarcity (and PPF)
a. Limited resources…unlimited
wants…choice…opp costs and the basic econ
problem
b. Use PPF to illustrate rising opp costs and dim
returns
12. Mixed economy
a. Private and public ownership
b. Why some goods are supplied by govt (e.g.
market failure of P&M goods)
c. All economies are mixed…the degree varies
d. Efficiency; lowest AC
e. Types of mkt failure (4 reasons)
i. Externalities (pos and neg)
ii. Imperf comp
iii. Lack of info
iv. Over-/ under-provision/consumption
(Over: de-merit and bads. Under: merit
and public.)
13. Specialisation and div of labour
a. Div of labour…Smith…productivity
revisited…advantages and disadvantages…
b. Note: you should know that population and TLF
are NOT the same!
14. Labour markets
a. Labour supply and demand (ASL and ADL)
b. Min wage and effects
c. Factors affecting DL
d. Factors affecting SL
e. Trade unions and govt intervention – effects on
U and Wr
f. Wage determination – and why wages differ
g. A REAL ISSUE: Wr = Wnom / CPI x 100
i. Other real issues;
1. GDPreal (Yr) = GDPnom /GDP
defl x 100
2. Pr = Pnom / CPI x 100
3. (rreal = rnom – infl)
15. Govt intervention in lab mkt
a. Min wage…plus diag…plus outcomes! (EVAL!)
b. Trade unions and union power (e.g. appxing
min wage)
Section B: Business economics
16. Factors and productivity
 Fixed (defines the SR!) and variable factors (in LR, all
factors are variable)
 Productivity (measure)
o Q output / Qinput (often labour)…however…
o …per unit of labour hour is better!
17. Sectors in the economy
 Primary → secondary → tertiary
 De-industrialisation (permanent decline in sec ind as a
proportion of total GDP)
o Link to structural unempl in macro!
18. Costs…
 TFC + TVC = TC…divide by Q…
 …AFC + AVC = ATC
 ATC is a “smiley” – falls at first, then rises…as DIM
RETS set in!
 TR; P x Q…
o π = TR – TC…or…
o NPOA: π = (P – AC) x Q
 When TR > TC: abn profit
 When TR < TC: loss
 When TR = TC: normal profit or “BEP”
19. EOS
 In LR, all FoPs are variable…and thus…
 You get a LRAC curve…
o I: EoS…
o II: Constant returns to scale
o III: Diseconomies of scale (critique!)
 Internal (firm causes EoS) and external (market
situation causes EoS)
20. Productivity
 FoPs and increased productivity
 PPFs…show de facto and potential growth
 Ex’s of how to ↑prod’y
o Land: GMO…better irrigation…
o Labour: edu…work methods…
o Capital: technology…
21. Externalities
 Neg: MSC > MPC
 Good is being over-consumed/over-produced
 Exs: neg ext (pollution) is and example of neg ext in
prod…
o and de-merit goods are also an example of neg
ext in cons
 Social costs; costs inflicted on 3rd parties




Private costs; costs to firm and consumer
Soc cost – priv cost = neg ext
Neg: Soc costs greater than priv costs – over-cons or
over-prod
Pos: Soc bens greater than priv benefits – under-cons
or under-prov
o Merit (“…my use benefits others…and good for
me in LR…”)
o Public (“…non-excl and non-rivalrous…”)
o Govt policies
 Pos exts; subsidise…provide using tax
monies…create incentives for people to
consume more of them…
 Neg exts: taxes…neg
advertising….decrease D by providing
cheaper substitutes…
22. Competition – the PCM
 Basic assumptions…
o No BTE…many firms…many consumers…perf
knowl and info…homog goods…firms is
assumed to be a SR profit-maximiser
 Firm is too small to influence P or Q…is a pricetaker…competes on PRICE!
 Benefits: choice…eff (lowest poss cost per unit…and
allocative eff – S = D)…lower
prices…quality…innovation…
 Possible disadv: no EoS…***mkt failure (envir, missing
goods…etc)…”normal profit” in LR
23. Large and small
 Measuring firms’ size
o Employees…turnover…mkt share (capital
employed)
 Olig: few…large…dominate…mkt power (set P or
Q)…4FCR (4 largest firms have circa 30% or more of
mkt → olig)
 Eval:
o Large firms adv:
 EoS…domination…poss to keep out
rivals (predatory P)…innov due to huge
profits…larger mkts and safety of many
geo areas and products…
 Neg in large firms…lower
motivation…costs rise in coord/control →
poss diseconomies of scale…incentive
for CARTELS…
o Small firms


Adv: flexibility (adapting to changes in
mkt…tastes…prefs…)….personal
service…ease of internal comms…poss
to have lower wages…possible “niche”
markets are innovative and have no EoS
Disadv: lack of finance (high borrowing
costs…lack of startup cap)…higher costs
(no EoS)…vulnerability (in a narrow
range of products and poss narrow geo
area)…
24. Growth of firms
 Why…survival…lower cost…etc; ↑π !!!!!
 Internally (organic): growth through retained profit
 Externally: takeover…merger…(hostile takeover)
o Horizontal (two café chains)
o Vertical
 Backward
 Forward
o Lateral (similar but non-competitive)
o Diversifying or conglomerate
 Limits to growth: size of mkt…disecs of scale…lack of
capital…mkt entry (low BTE)…
25. Monopoly
 One company….(25% of mkt or more)
 Assumps: high BTE, non-perf knowl/info, “unique”
good, firms is SR profit-maximiser
 Sources of mon power: high
BTE…patent…copyright…only source of FoP…unique
production process…bound up the supply chain…and
YES EoS and high start-up costs etc
 Assumptions: high BTE…profitmax…good is
unique…imperf knowl/info
o Results: firm is a price-setter
o CS falls
 Nat mon: two key chars: 1) Huge EoS; 2)High start-up
costs and FC; 3) not even a SINGLE firm can fully
exploit the EoS
 Eval of mon.
o Bad:
 Higher P
 Lower Q
 Loss of CS
 Mon is allocatively ineff (DW loss in diag)
Lack of incentives for innov…R and
D…new products…better quality (good
example here is India)
o Not so bad:
 EoS…
 A mon might have such EoS that
the AC would be lower than for,
say, 1,000 PCM firms
 Nat Mon
 Even at profitmax P can set P
lower and Q higher than two
competing firms (duopoly)
 “Should a country privatize public
utilities?” No, probably not: two
(private companies) will see their
AC far higher than the nat mon!
Also; a benevolent municipal govt
will be both willing and able to set
price at BEP…due to very high
pos exts!!!!
 Of course, abn profits ploughed
back into R and D

o

26. Oligopoly
 Few and large…with mkt power
o 4FCR of more than circa 30%
o High BTE…both homog and non-homg!
 Often MNCs…Nike…
 Two main chars:
o Price rigidity
o Non-P competition
 Interdependent…results often in cartels…
o Collusive (e.g. cartel)
o Non-collusive
 Often we see economies of scale
 Illustrating the two main chars: kinked D-curve
 Eval:
o Good: choice (due to non-P nature of the
competition in non-coll olig), innovation, poss
lower AC and thus lower price
o Bad: danger of collusion/cartels → higher
prices…less choice (loss of CS and cons sov)
o Uncertain: do prices in fact rise of fall when
firms grow?! (Fall due to EoS…but there is an
element of mkt power in oligs that means prices
might rise.)
27. Public and private sectors
 Private; basis of competition…firms are in it for profit
(maybe also growth….kill off rivals…take over
market…TR…BUT all this is still profit in LR!)
o Note “sole provider” has complete responsibility
for debts (100% liability)
o Shareholder company is its own legal entity
(owners are NOT personally liable)
 Public; other goals – equity…equality…provision of
goods with high pos exts…(public and merit goods –
see “mkt failure”)
28. Govt regulation
 Forms: laws/rules/regs, anti-trust authorities, consumer
regulation offices, labour legislation…etc
 Anti-trust (or competition commission): fine firms for
misconduct (predatory pricing…collusion…cartelbuilding…locking out rivals from supply chains…);
have the last say (often) as to mergers
 Promoting competition; soft loans for new startups…govt subsidies…govt aid in legal help…
 IGCSE favourite: “…how can govts influence the
location of industries…”
o Why: population reasons…environment…health
and safety…unemployment…equity/equality…
o How: public ownership and thus allocation;
subsidies; govt can provide infrastructure; (in
Scandivaia, govts often put large govt offices in
rural areas)
29. Privatisation (see Thatcher and Reagen, 1980s)
 What? When govt sells off or “farms out” government
firms or services
o Selling of British Steel or Brit Rail…
o In US, many local services are paid for by tax
monies but provided by private firms (lowest
bidder wins the contract)
 Reasons: increased efficiency; get rid of loss-making
industries; one-off increase in govt rev for the sale;
simple ideology – increasing competition in the
economy
o Note that govt run firms were often “politicized”
– e.g. were run along vote-winning lines rather
than profit motives
 Effects:
o Firms: higher eff; lower costs; greater
innovation; improved int’l competitiveness…
o HHs: better goods; lower prices…more
choice…BUT; often with the cost of higher U in
SR!