Lesson 1- The economic problem

Lesson 2- Production possibility curve

Vocabulary:
Capital goods: those purchased by firms to produce
otherFinite-
goodsHaving
such asand
machinery,
end or a tools
limit. and
equipment.
Infinite- Does not have any limits.
Consumer goods: those purchased by households
Needs- basic requirements for basic human survival.
such as food, cars, tablets, and furniture.
Wants- peoples desires for goods and services.
Economic growth: Increase in the level of output
Limited supply- scarce or hard to come by.
by a nation.
Opportunity
The main reasonscost- The benefits
for economic lost of
growth the best next thing.
are:

 Expenditure- spending by a government (usually a national government)

New technology
 Scarce
New recourse
resources- when supply is limited due to less available resources
 Education and training of the population
 Improved efficiency
The economic problem is when demand is higher than supply, which creates
scarcity.

The main reasons for negative economic

growth are:
 Resources running out
 Erosion of infrastructure
 Military conflict between nations
 Natural disasters
 Lesson 3 – Economic assumptions
I can explain what is meant by the economic assumption
that consumers aim to maximize benefit.
• Economists assume that consumers will choose a
course of action that gives them the greatest
satisfaction.
• This will help them maximize their benefit.
Maximize: to increase something such as profit,
satisfaction, or income as much as possible.
• For example: If a consumer is faced with buying a
product from three different suppliers at the same •
price, the consumer will buy the best quality
product. To buy a product of lower quality would be
irrational.
I can explain why consumers may not always
maximize their benefit
• Consumers may have difficulty in calculating the
benefits from consuming a product, e.g., it’s hard to
quantify in numbers the satisfaction gained from
consuming a product.
• Develop buying habits affects rational choices, e.g.,
consumers may stay loyal to the same brand – who
can charge higher prices.
Influenced by others, e.g., by parents or friends, they
may copy purchases to fit in or pressure from their
peers.
Assumptions: things that you
think are true although you have
no definite proof.
Irrational: Not based on clear
thought
Rational: Based on a clear
thought and on a reason
 Lesson 4 - Demand
Demand: is the amount of a good that will be bought at
given prices over a period of time.
Effective demand: amount of a good people are willing
to buy at given prices over a given period of time
supported by the ability to pay

I can use a demand curve to show that changes in price

cause a movement along the demand curve.

•The demand curve slopes down from left to right for most
goods.
•There is an inverse relationship between the price and the
quantity demanded:
•When prices go up, demand will fall
•When prices go down, demand will rise

I can use a demand curve to show that shifts in the demand curve
indicate increased and decreased demand

Example:
An increase in incomes: the quantity demanded for
holidays will increase from D1 to D2 (a right shift of the
demand curve).
A decrease in incomes: the quantity demanded for
holidays will decrease from Q1 to Q3 (a left shift of the
demand curve).
 Lesson 5 – Factors shifting the demand
curve

Increase in demand: Decrease in demand:

If there is an increase in demand: (outward shift) If there is an decrease in demand: (inward shift)

If a good is more demanded, there is an increase If a good has a fall in demand, there is an
in quantity demanded and prices. decrease in quantity demanded and prices.

1) Advertising: 4) Price of compliments:

•If goods are advertised more heavily, the quantity
demanded is likely to increase, due to higher brand
awareness.
•For example, Coca-Cola spent US$3.5 billion on advertising.
•Complementary goods: goods purchased together
because they are consumed together.
For example, if the price of tennis rackets were to
increase, the demand for tennis balls may fall.

2) Income:
5) Substitute goods:
•If disposable incomes rise, generally demand for goods rise, e.g., if
•Substitute goods:
workers’ wages goods
go up, theybought as an
can spend alternative
more on eating out.
to another but perform the same function.
•Normal goods: good for which demand will increase if income
•For example,
increases if the
or fall pricefalls,
if income of Coca-Cola increased,
for example a new car or a luxury
theholiday.
demand for substitute goods such as Pepsi may
rise.
•Inferior goods: goods for which demand will fall if incomes rise or
rise if incomes fall, leading to a left shift of the demand curve (D1 to
6) Demographic
D3), changes:
for example own-label branded, e.g. supermarket baked beans
or public transport
•Demography: study of human populations and the way in
3) Fashion, taste and preferences: which they change.

•Clothing industry: many of the clothes bought in one •Age: if there is an increase in the number of people aged 60,
season would not be in demand in later seasons because demand for retirement homes and specialist holidays may
they would no longer be in fashion. rise.

•Social changes: Facebook and Snapchat, have seen a •Gender distribution: If there is more women in a country as
 Leeson 6 – Supply
The supply curve has a proportional
relationship between the quantity
supplied and price.
Proportional relationship: when the
price goes down the quantity supplied
also goes down. When the price goes
up, the quantity supplied goes up.

Higher production costs: would cause a

fall in the quantity supplied because it is
more expensive to produce
Lower production costs: would cause
an increase in the quantity supplied
because it is cheaper to produce

Glossary:
Supply - The amount that producers are willing
to offer for sale at different prices in each time.
Supply curve – Line drawn on a graph which
shows how much of good sellers are willing to
supply at different prices.
Proportional relationship – When prices go up,
the quantity supplied also goes up, when prices
go down the quantity supplied also goes down.
Shifts in the supply curve – Movement to the
As we can see from the diagram, it is impossible to offer
left or right of the entire supply curve. no more than 15,000 seats at this venue. Even if the
price was to increase from £100 to £150 pounds, no
more seats can be supplied.
 Lesson 7 – Supply
Factors affecting supply:

1. Costs of production:
Examples, wages raw materials energy rent and machinery.
 If costs of production rise, the quantity supplied will fall because producers will
make less profit.
 If costs of production fall, the quantity supplied would increase because
production becomes more profitable.
 Productivity: rate at which goods are produced.

2. Indirect taxes:
 These are taxes levied on spending such as VAT and duties such as those on
petrol and cigarettes.
 When these taxes a imposed or increased the supply curve will shift to the lift
because indirect taxes are a cost to a firm.
 Governments use indirect taxes to raise revue for spending an discourage the
consumption of harmful goods such as cigarettes

3. Subsidies:
 This is money given to organizations to lower prices, reduce the cost of
producing goods or providing a service usually to encourage the production of a
particular good.

4. Changes in technology:
 New technology such as lasers and high-tech data analysis equipment helps
measure the potential yield of new oil wells.
 New technology will help lower a firms cost of production, causing an outward
shift of the supply curve

5. Natural factors:
 Good growing conditions can help improve crop yields increasing supply, and
therefore there will be an outward shift in the supply curve
 A natural disaster, presence of pests or disease can cause a reduction in the
quantity supplied, causing an inward shift of the supply curve
 Lesson 8 - Market equilibrium

Equilibrium price: price at which supply, and demand are equal (The point in the
graph where they meet)
Market clearing price: price at which the amount supplied matches the amount
demanded.
Revenue: Price x Quantity produced (TR = P * Q)

Increase in supply: (outward shift) Decrease in supply (inward shift)

For example, a government subsidy to farmers lowersFor example, an increase in indirect taxes would increase a
cost of production which means they lower their firm's cost of production, which lowers quantity supply and
prices, causing them to be more competitive means they will put the extra cost onto consumers -
(increasing supply). increasing prices
Lesson 9 – Excess demand and supply

Excess demand: Where

demand is greater than supply and
there are shortages in the market.

Excess supply: Where supply

is greater than demand and there
are unsold goods in the market.
 Price elasticity of demand (PED)

 PED: the responsiveness of demand to a change in price

 The formula is: %change in quantity demanded / %change in price
 To calculate percentage change: new number – old number / old number x 100

Product A: the price change resulted in a small change in

demand, prices fell from 10 to 8 but demand only
increased from 100 to 110 (Inelastic demand). Products
like tobacco and electricity are considered essentials .
Product B: the price change resulted in a large change in
demand, prices fell from 10 to 8 which led to an increase
in demand of 100 to 150 this shows elastic demand.

Interpreting the numerical value of elasticity

• PED is less than 1 = demand is inelastic
• PED is greater than 1 = demand is elastic
• PED is zero = demand is perfectly inelastic
• PED is equal to infinity = demand is perfectly elastic
• PED is exactly -1 = demand is said to have unitary
elasticity

• Unitary elasticity = the responsiveness of demand is

proportionately equal to the change in price.

Unitary elasticity
When demand has unitary elasticity, it
means the total revenue will be the same
at every price. Meaning that a change in
price will result in no change in revenue
 Factors affecting PED

Availability of substitutes Degree of necessity

Goods that have lots of substitutes tend to Goods considered essential (necessities) will
have elastic demand, as consumers can easily have inelastic demand. (e.g., fuel or food.)
switch from one product to another. (For
In contrast, goods that are not essential such
example, if the price of one jam rises
as luxury products. (e.g., boats and new cars)
consumers can switch to another).
– will have more elastic demand.
In contrast, if there are a few or no real
If a product is habit forming it may become a
substitutes for a product, demand will be
necessity and therefore it will have inelastic
inelastic.(For example, oil electricity and rent).
demand – (e.g., tobacco)

Proportion of income spent on a Time

product
A large proportion of their income on a
product, demand will be more elastic, (e.g.,
one off television purchases.)
In contrast, demand for products that cost
very little in relation to income will be
inelastic – (e.g., stamps and pencils.)
Short-term: goods have inelastic demand
because it can often take time for consumers
to find substitutes when the price rises.
Long-term: demand is more elastic because
consumers can search for alternatives and are
more prepared to switch.
Example: broadband providers

The relationship between PED and total revenue

When price falls, so there is an increase in the quantity demanded.
In this case demand is elastic because a fall in the price causes an increase in total revenue.

When prices fall the quantity demanded increases.

But in this case, this shows that demand is inelastic because a price cut causes total revenue to fall.
 Price elasticity of Supply

Inelastic supply: change in price results in a proportionately smaller change in quantity supplied
(price inelastic).
Elastic supply: change in price results in a proportionately greater change in the quantity
supplied (price elastic)

Formula:
Price elasticity of supply (PES) = percentage change in quantity supplied / percentage change in
price

 PES: responsiveness of supply to a change in

price.
 Figure 1 shows the supply curve for two different
products: SA and SB.
 SA: An increase in the price from £4 to £5, causes
a small increase in the quantity demanded from
20,000 to 22,500 – is supply inelastic or elastic?
 SB: An increase in the price from £4 to £5 causes
a greater change in the quantity supplied from
20,000 to 40,000 – is supply inelastic or elastic?

• S1: Perfectly inelastic supply – this means a

change in price will not affect the change in the
quantity supplied. PES value of 0.
• S2: Perfectly elastic supply – this means that
producers are prepared to supply any amount at
a given price. PES value of infinite.
• S3: Unitary supply – this means that the
percentage change in price is always the same as
the percentage change in supply. PES Value of 1.

PES = 0 – supply is perfectly inelastic

PES = ∞ - supply is perfectly elastic

PES = 1 – supply is unitary elasticity

 Factors Affecting Price Elasticity of Supply
1. Factors of production (Land, Labor, Capital, Enterprise).
 If producers have easy access to the factors of production such as raw materials
– they will be able to boost production easily, so supply is elastic.
 If production factors such as raw materials can be switched to other uses easily,
supply will be elastic.
 If specialized resources are needed for production such as skilled labor, supply
will be less mobile and supply will be more inelastic.
2. Availability of stocks.
 Producers that can hold stocks of goods can respond quickly to price changes;
supply is elastic.
 Where it is impossible or expensive to hold stocks, supply will be inelastic, e.g.,
perishable goods such as fruit and vegetables cannot be stored for very long.
3. Spare capacity.
 Supply will be elastic if there is spare capacity because producers have the ability
to produce more with spare resources.
 Firms running at full capacity will have inelastic supply because output cannot be
increased at short notice.
4. Time.
 The more tome producers have to react to price changes, the more elastic supply
will be.
 Where it is not possible to increase supply quickly, due to production limitations,
supply will be inelastic.
 For example, it will take nearly a year to increase the supply of many agricultural
products due to growing seasons (Inelastic supply).
5. PES for manufactured and primary products.
 Goods that can be produced quickly will have an elastic supply.
 In contrast, primary goods such as gold and diamonds will have inelastic supply.
This is because there are few sources around the world.
 Primary goods such as agricultural products will also be inelastic.
 Income elasticity of demand

Income elasticity of demand: Responsiveness of demand to a change in income

Formula = % change in quantity demanded / % change in income

Importance of YED to governments:

 Indirect taxes: government may increase indirect taxes such as VAT on
harmful products that are inelastic, such as cigarettes and petrol to
discourage people from spending their income on them.

 Subsidies: governments may give subsidies to lower a firm’s cost of

production for them to reduce prices and or increase production.

Importance of YED for businesses:

 If incomes are falling, businesses may reduce prices or increase investment in inferior
goods.
 If incomes are rising, businesses may increase prices or increase investment in normal or
luxury goods.

YED can be positive or negative. This depends on the type of good. A normal
good has a positive sign, while an inferior good has a negative sign
 The Public and Private Sector

Economy: system that attempts to solve the basic economic problem. (Infinite demand finite
supply)
Private sector: provision of goods and services owned by businesses.
Public sector: government organizations that provide goods and services in an economy.

Private sector ownership and control: Aims of private sector organizations:

 Owned and controlled by individuals or groups
of individuals.
 Consumer groceries and durables are provided
by the private sector.
Types of private sectors organizations:
 Sole traders: organizations owned and
controlled by an individual.
 Partnership: organizations owned by more than
2 people
 Companies: shareholders own the business.
They elect a board of directors on their behalf.
• Profit maximisation: the owners of most
businesses want to make a profit. Shareholders
want to maximise dividends: part of company
profits that are shared amongst shareholders.
• Growth: owners may want the company to
grow to achieve higher profits. However, in the
short run owners will finance the growth
through using profits made.
• Social responsibility: e.g., environmentally
friendly, helping the local community.

Public sector ownership and control: Aims of public sector organizations:

 Ownership and control: local or central
government. They are funded mainly through
taxation.
 Types:
 Central government departments: e.g. National
Health Service, Ministry of defense
 Public corporations/state owned enterprises:
government provides the capital for them. All
assets and liabilities belong to the state.
 Local authority services: delivered by local
councils, e.g. libraries, sports halls and
emergency services, e.g. police and fire
services.
• Improving the quality of services: this may
focus on the reliability, e.g., of public transport
or levels of customer service
• Minimising costs: Government resources are
scarce which means waste minimisation is
important. Public sector organisations have
been accused of being inefficient
• Allow for social costs and benefits: Public
sector organisations consider the needs and
wants of a range of stakeholders
• Profit in some countries: e.g., UAE, Emirates
Airline and Dubai World, an investment
company manages several projects for the
government in Dubai.
 The mixed Economy

A mixed economy is made up from both A market economy and Command economy.
Market economy:

 Owned by private sectors.

 Freedom to start business.
 Supply and Demand
Command Economy:

 Owned by the government.

 Government Regulations
 Price control
 Privatization

Privatization: act of selling a company or activity controlled by the government to private

investors.
Public goods: goods that are not likely to be provided by the private sector
Non-rivalry: If somebody benefits from the good. It doesn’t reduce the amount available for
others.
Non-excludability: Once provided you can’t stop anyone benefitting from the good.
Free Rider Problem – Individuals have and incentive to use good without contributing towards
cost.
Examples of public goods: Public parks, street Lighting, Drainage Systems, Police Department.

Why does privatization take place?

 To generate income – use the income to improve living standards, e.g. education, z
subsidies, healthcare, public transport, infrastructure.
 To make organizations more efficient: private sector firms have a profit incentive – so
they keep costs down.
 To reduce political interference - reducing conflicting political parties.
 Externalities

 External costs: negative spillover effects of consumption or production – they affect

third parties in a negative way.
 Examples of external costs: Noise pollution, air pollution, water pollution,
overcrowding, traffic congestion, resource depletion

 External benefits: positive spillover effects of consumption or production – they bring

benefits to third parties.
 Examples of external benefits: Education (increased productivity), Health care
(healthier workers – increased productivity), Vaccinations (less illness – increased
productivity)

Social costs Social benefits

Social costs: Costs of an economic activity to Social benefits: benefits of an economic activity
society as well as the individual or firm. to society as well as to the individual or firm.

Private costs: costs of an economic activity to
individuals and firms
Social costs are both private costs and external
costs.
Private benefits: rewards to third parties of an
economics activity, such as consumption or
production.
Social benefits are both private benefits and
external benefits.

Policies to deal with externalities.

 Taxation – used to reduce external costs.

 Subsidies – incentives to reduce external costs.
 Fines – to discourage negative conducts.
 Government Regulation – laws to reduce
externalities.
 Factors of Production and Sectors of the Economy

Production: process that involves converting resources into goods or services.

Factors of production: resources used to produce goods and services. Which include land,
labor, capital, and enterprise.
Labor intensive: production that relies more heavily on labor relative to machinery.
Capital intensive: production that relies more heavily on machinery relative to labor.

Sectors:
 Primary sector: production involving the extraction of raw materials from earth.
 Secondary sector: factory where all parts are put together to make a final product.
 Tertiary sector: production of services in the economy.
Land:
 Businesses often require a plot of land on which to locate their premises. For example, shopping centers will locate on the
outskirts of area/cities where there is more space.
 Some land used in non-renewable: this means once they have been used, they cannot be replaced.
 Renewable: Land resources are those like fish forests and water, which are replaced by nature. These resources should
not run out, but they could be over exploited or nor protected.

Labor:
 Labor is the workforce in the economy.
 Each worker is unique, possessing different skills and knowledge.
 The value of an individual worker to a business is their human capital.
 This can be increased through, education, and training.

Capital:
 Working capital refers to finished goods/ stocks of raw materials or components used up in production.
 Fixed capital: used in production to convert working capital into good and services.

Enterprise:
 Entrepreneurs: individuals who organize the other factors of production and risk their money to start a new business
 What do they do? They come up with the business idea, they are the owners of the business, and they are the risk takers.

In Europe there has been a decline in the primary and secondary sector and more growth of the tertiary sector. This
may be because people may prefer to spend more of their income on services rather than manufactured goods.
Another reason for a fall in the employment in the primary and secondary sector is because machinery is replacing
people.
 Productivity and Division of Labor
Productivity: is the output per unit of input.

Formula: Total output / the number of workers employed.

Division of labor: breaking down of the production process into small parts with each worker allocated
to a specific task.

Specialization: production of a limited range of goods by individuals, firms, regions, or countries.

Land:
1. Fertilizers and pesticides: they are used to improve the health and appearance and raise crop
yield, increasing productivity.
2. Drainage: Prevents flooding and improves the water flow of the land, ensuring productivity.
3. Irrigation: Meets the demand or crops, allowing plants to grow, improving productivity.
4. Reclamation: Reclaimed land from oceans can increase the land available to grow crops,
improving productivity.
5. Genetically modified crops: It modifies and duplicates a particular crop, this can increase the
supply, increasing sales, which can increase productivity.

Labor:
1. Training: Improves the human quality of capital, enhancing their skills and knowledge,
increasing productivity in the workplace.
2. Improved motivation: Piece rates: involves paying workers per item produced increases
productivity. Job rotation: involves employees changing tasks from time to time, reducing
boredom, therefore increasing productivity.
3. Improved working practices: Changing factory layout to reduce worker movement can increase
productivity.
4. Migration: Attracting skilled worker from overseas can fill in labor shortages and raise country’s
productivity.

Division of labor (to the workers): Division of labor (to the business):
1. Repetition of tasks creates highly skilled workers 1. Workers become more specialized through repeating of
which leads to an increase in productivity. tasks become more highly skilled and efficient increasing
2. Can gain new skills and or improve on those skills. productivity.
3. More skilled workers often earn salaries. 2. Less mistakes made in production means lowers costs for the
business.
1. Workers can become more demotivated through
repetition of tasks, reducing productivity levels. 3. Lower training costs and time taken to train; workers may
2. Repetitive tasks on manual labor jobs can affect a already have the skills.
workers health and wellbeing.
1. Lack of flexibility in the workplace.
3. Not a variety of skills, only specialized in a specific
2. Businesses may become interdependent.
area, may not have skills required for future jobs.
3. Specialist workers require salaries, increasing a business
costs or production.
4. Workers may get bored of repetitive tasks and become
demotivated.
 Business costs, Revenue and Profit

Costs: expenses that must be met when setting up and running a business.
Fixed costs: also known as overheads area costs that do not vary with output.
Variable costs: costs that change when output levels change.
Total variable costs (TVC) = variable cost per unit x output.
Total costs (TC) = fixed and variable costs added together.
Average costs (AC) = total costs / quantity produced.
Total revenue (TR) = price x quantity.
Profit = total revenue – total costs.

Some examples of fixed costs include rent, business rates, advertising, research and
development costs, and monthly wages.
Some examples of variable costs include raw materials, packaging, fuel, and labor overtime.
If the total costs are greater than the total revenue the business will make a loss.

The AC curve is U shaped, which

means as output increases,
average costs fall at first, reach a
minimum then start to rise.
 Internal Economics
Economies of scale: falling average costs due to growth.
Internal economies of scale: cost benefits that an individual, firm can enjoy when it expands.

Purchasing economies of scale:

 Suppliers offer discounts to firms that buy raw materials and components in bulk.
 This is the equivalent to a customer in a supermarket buying a multipack of chocolate.

Marketing economies of scale:

 It may be more cost effective for a large firm to run its own delivery and vehicles and
advertising.
 Marketing costs, such as producing a tv advert are fixed. These costs are spread over more
units of output for a larger firm in comparison to a smaller firm.

Technical economies of scale:

 Are the cost savings firm makes as it grows larger, arising from the increased use of large-
scale mechanical processes and machinery – increase output and productivity – machinery
is more efficient than workers.
 In the case of a mass producer of motor vehicles technical economies are likely because it
can employ mass production techniques and benefit from Specialisation and the division of
labor.

Financial economies of scale:

 Large firms can get access to different sources of finance.

 Public limited company: can raise large amounts of capital by selling shares on the stock
exchange.
 Large firms can put pressure on banks when negotiating the price of loans.

Managerial economies of scale:

 As firms expand, they can afford specialist managers and result efficiency is likely to improve
and average costs start to fall.

Risk-bearing economies of scale:

 Risk-bearing economies of scale allows a firm to spread risk by having a few different
products to fall back on.
 If there is a reduction in demand for one, it is easier to make cost savings by reducing
production.
 This is because the firm has other products that it can continue to sell.
 External Economies of Scale/Diseconomies of Scale

External economies of scale: cost benefits that all firms in an industry can enjoy when the
industry expands.
Diseconomies of scale: rising in average costs when a firm becomes too big.
Bureaucracy: system of administration that uses a large number of departments and officials.

Examples of external economies of scale:

 Skilled labor.
 Infrastructure.
 Access to suppliers.
 Similar businesses in the area.

Communication problems:
 Larger businesses tend to employ thousands of workers across the globe.
 Communication issues can arise with:
 Different zones
 Different cultures
 Different languages

Lack of control:
 A very large business may be difficult to control and coordinate.
 There may be a need for more supervision and more layers of management
making decision making slower, increasing average costs.

Distance between senior staff and management:

 There may be many layers of management between the top of the organization to the
bottom.
 As a result, senior managers may not have an awareness of shop floor workers needs.
This lack of awareness and understanding may result in workers becoming demotivated
– causing inefficiency and increased costs.

Bureaucracy
 Competition

Competition: rivalry that exits between firms when trying to sell goods to the same group of
consumers.
Innovation: commercial exploitation of a new invention.
Product differentiation: Attempts by a firm to distinguish its product from that of a rival.

Features of a competitive market:

 Large number of buyers and sellers.
 Product sold by each firm are close substitutes for each other.
 Low barriers to entry. (Does not require too much capital to enter the market)
 Each firm has almost no control over the price changed.
 Free flow of information.

How does competition affect a firm:

 Operate as efficiently as possible to keep costs low.
 Provide high quality goods and customer service.
 Charge prices that are acceptable to customers.
 Reviewing and improving the product
 Disadvantage: If firms have to keep prices low then the profit made will be limited – less
opportunities for investment

Some consumers may say that competition in a business is good because:

 It lowers prices, because if one firm raises prices, they will lose customers because
there a lot of other substitutes.
 There are more choices.
 Better quality, firms have to offer the best quality and customer service, or they will
lose business.

But other can argue that a competitive market competition is bad because it creates a lack of
innovation, and Market uncertainty.
 Large and Small firms
How the size of the firm is measured:
 Turnover/total revenue: firms with high turnovers tend to be larger than those with
small turnovers – e.g., BP had a turnover of $225, 900 million.
 Number of employees: larger firms tend to employ larger numbers of workers, e.g., BP
has 80,000 employees worldwide.
 Balance sheet total: this refers to the amount of money invested by the business
owners, e.g., BP had a balance sheet total of $98,300 million.

Benefits and drawbacks of remaining a small business:

 Flexibility. – Higher costs.

 Personal service. – Lack of finance.
 Lower wage costs. – Difficult attracting
 Better communication. quality staff.
 Innovation. – Vulnerability.

Factors influencing the growth of firms:

 Government regulations.
 Access to finance.
 Economies of scale.
 The desire to spread risk.
 The desire to take over competitors.

Benefits and drawbacks of remaining a small business:

 Economies of scale. – Diseconomies of scale.

 Market domination. – Too bureaucratic.
 Large-scale contracts. – Poor motivation.

Reasons why firms remain small:

 Size of the market: Not enough customers.
 Nature of the market: Lots of competition.
 Lack of finance: Not enough money to grow.
 Aims of the entrepreneur: They do not want to get bigger.
 Diseconomies of scale: Higher average costs prevent growth.
 Monopolies
Monopoly: A situation when there is one dominant seller in the market.
Pure Monopoly: Exits when one producer supplies the market.
Natural Monopolies: Where it is more efficient for one firm to supply to all consumers.

Features of a Monopoly:
 One business dominates the market.
 Unique product.
 Price maker.
 Legal barriers.
 Patent is a license that precents firms
copying the design of a product.
 High startup costs.
 Technology.
 Marketing budgets.

Advantages of a monopoly:

 Efficiency, as a result of the monopoly they can benefit from economies of scale
meaning they can lower average costs.
 Innovation, since monopolies often have high profits, they can invest into research and
development increasing the quality of goods and services.
Disadvantages of a monopoly:

 Higher prices than in a competitive market. This is because monopolies face inelastic
demand and can raise the prices.
 Monopolies have fewer incentives to be efficient.
 Possible diseconomies of scale, a big firm may become inefficient because it is harder to
coordinate and communicate.
 Oligopoly
Oligopoly: Market dominated by a few firms.

Features of an oligopoly:
 Few firms, usually between 3-6 firms in a particular market.
 Large firms dominate.
 Different products, firms in an oligopolistic structure aim to differentiate their products.
 Barriers to entry.
 Non – price competition.
 Price competition, price wars.

Benefits of oligopolies to consumers:

 Choice , firms provide new brands which give consumers choices of new products.
 Quality.
 Economies of scale, oligopolies can benefit from economies of scale lowering average
costs.
 Innovation.
 Price wars, if one firm significantly lowers prices, the others must follow in order to
remain competitive.

Disadvantages of oligopolies:
 Collusion: a few firms may price fix to reduce competition of new entrants – meaning
consumers could pay higher prices.
 Cartels may exist where a group of firms or countries join together and agree on pricing
or output levels in the market.
 The Labor Market

Wage rate: the amount of money paid to workers for their

services over a period of time.
The demand curve for labor is downward sloping> The reason
for this is when wages fall, the quantity of workers rises.
Factors affecting demand for labor:

 Derived demand.
 Availability of substitutes.
 Productivity of labor.
 Other employment costs.
Derived demand: (Demand for the product)
Derived demand: demand that rises because there is
demand for another good.
If there is an increase in demand for visiting coffee
shops, it will lead to an increase in demand for
baristas.
The supply for labor is upward slopping, this is
because as wages rise, people make themselves more
available to work.
Factors affecting the supply of labor:
 Increase in population.
 Increase in migration.
 Age distribution of the population.
 Increasing the retirement age.
 School leaving age.
 Female participation.
 Skills and qualifications.

Labor mobility:

 Labor mobility: ease with which workers can move

geographically and occupationally between different
jobs.
 Geographically mobile: if a worker can move from one
region to another to find work, this can increase supply
of labor.
 Occupationally mobile: if a worker can switch from one
career/industry to another more easily – this will
increase the supply of labor.
 The labor Market (2)
Trade unions: organizations representing people working in a particular industry or profession
that protects their rights.

Aims of trade unions:

 Negotiate pay and working conditions with employes.
 Provide legal protection for members, such as representation in court.
 Out pressure on the government to pass legislation that improves the rights of workers.
 Provide financial benefits such as strike pay whenever necessary.

Advantages of trade unions: Disadvantages of trade unions:

 Represent workers.  Cost-push inflation.
 Productivity deals.  Time lost to strike.
 Co-operation.  Confrontation.
 Efficiency wage theory.  Less relevant.
Importance and education and training on the quality of human capital:
 Employers want to recruit people who can read and write and have good communication
skills.
 Highly trained and educated workers tend to have higher productivity levels – which can
increase a business profit and cause economic growth in the economy.
 Higher skilled workers tend to earn higher salaries to enjoy a higher started of living.

Wages: wages increase from W1 to W2 as a result of

trade unions agreeing higher trade union power. The firm
must pay W2 at the supply labor of QL3.
Employment: Employment drops from QL1 to QL2
because the demand for labor falls when wages increase
– causing unemployment.
 Government Intervention

Policies to deal with externalities:

 Subsidies.
 Pollution permits.
 Taxes.
 Fines.
 Regulations.

Ways a government can promote competition:

 Anti-competitive practices: attempts by firms to prevent or restrict competition.
 Encourage the growth of small firms: A government could provide a grant or lower tax
rates to encourage small firms to set up and be competitive in a market.
 Lower barriers to entry: If barriers to entry are lower, there will be more firms in the
market, increasing competition.
 Introduce anti-competitive legislation: For example, competition commission of India
acts as a regulator to: eliminate practices to reduce competition, promote and sustain
competition in markets, ensure freedom of trade.

How can a government reduce monopoly power:

 Price capping – limiting price increases.
 Regulations of mergers.
 Breaking up monopolies.
 Investigations into cartels and unfair practices.
 Nationalization – government ownership.
 Government Intervention – Minimum Wage
Minimum wage: minimum pay per hour which most workers are legally entitled to be paid.

Reasons for minimum wage:

 Reduces Poverty: The minimum wage increases the wages of the lowest paid. These
workers will have increased income and will reduce relative poverty.
 Increase productivity: Higher wages can increase the incentive for people to work
harder and thus higher wages may increase labor productivity.
 Increase the incentives to accept a job: with a minimum wage, there is a bigger
difference between the level of benefits and the income from employment.

Problems with minimum wage:

 Regional variations in wages: A big problem with a national minimum wage is that
wages vary enormously within the UK. In London, with higher costs of living, not many
people get the minimum wage because wages are relatively higher.
 Higher wages passed onto consumers: An increase in the minimum wage could cause
firms to increase prices and pass the costs onto consumers.
 Incentive to work in the black market: A high minimum wage may create a incentive for
firms to find ways to avoid declaring wages to the government but offer cash-in-hand
work in the underground economy.

The Impact if minimum wages on wages and employment:

Scope for unemployment if labor markets are competitive,
a minimum wage above the equilibrium could cause a fall
in demand for workers (Q2), and excess supply (Q3).
Above the equilibrium, the national minimum wage can
cause unemployment of Q3-Q2.