Revision Guide to A2 Level Economics James Keefe and Peter Cramp
Contents The first pages you will come to offer advice on using this book. After this, you will find revision notes organised as shown below: Unit 3: (Micro) Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Appendix 1 AQA Business Economics and the Distribution of Income Edexcel Business Economics and Economic Efficiency OCR Economics of Work & Leisure or Transport Economics* Costs and Revenues.............................................................. 1 Efficiency and Equity............................................................. 7 Profit and the Objectives of the Firm................................................ 11 Competitive Markets............................................................. 15 Monopoly and Monopsony........................................................ 18 Monopolistic Competition......................................................... 24 Oligopoly...................................................................... 26 Contestable Markets............................................................. 30 Privatisation, Deregulation and Internal Markets........................................ 32 Competition Policy.............................................................. 35 Market Failure and Government Intervention.......................................... 39 Cost-Benefit Analysis............................................................. 43 Wage Determination............................................................. 46 Trade Unions and Monopsony Employers............................................. 49 Income, Wealth and Poverty....................................................... 52 Theory of the Firm Summary....................................................... 56 Unit 4: (Macro) Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21 Chapter 22 Chapter 23 Chapter 24 Chapter 25 Chapter 26 Chapter 27 Chapter 28 Chapter 29 Chapter 30 Appendix 2 AQA The National and International Economy Edexcel The Global Economy OCR The Global Economy Living Standards, Development and Sustainability...................................... 57 Economic Growth and the Business Cycle............................................. 60 Unemployment, Inflation and Deflation.............................................. 64 Fiscal Policy.................................................................... 72 Monetary Policy................................................................ 76 Supply Side Policy............................................................... 80 International Trade and Comparative Advantage........................................ 83 Protectionism.................................................................. 87 Globalisation................................................................... 90 International Competitiveness...................................................... 92 The EU and Trading Blocs......................................................... 95 Exchange Rates................................................................. 99 The Balance of Payments......................................................... 104 Limits to Growth and Development.................................................. 108 Promoting Growth and Development................................................ 110 Key Macroeconomic Diagrams Summary.............................................. 113 *This book includes the key concepts and theories that you will need for the OCR Unit 3 options, but you may wish to supplement your revision using other books set in the relevant contexts. For Work & Leisure, try Labour Markets (4th edition): The Economics of Work and Leisure by Peter Cramp (Anforme). iii
Using this book This book provides revision notes for both your A2 Economics units. It assumes that you already understand the key concepts and theories from AS level. The Revision Guide to AS level Economics (Peter Cramp & James Keefe), is also available from Anforme. For each unit, the relevant chapters follow a defined structure. It is important that you understand this structure. Unit 3 Structure Introductory concepts Markets generally work well Sometimes markets fail This may justify government intervention Government failure sometimes occurs Costs and revenues; efficiency and equity; profits and objectives of firm. Price Mechanism: Competitive markets allocate resources efficiently through the forces of supply and demand, setting the relative prices of goods. Contestable markets may also function well. Market failure occurs when markets fail to produce desirable outcomes, either because the allocation of resources is not efficient or because the outcome is unfair (there is a lack of equity). Governments may respond to market failure by intervening to improve the resource allocation or produce a more equitable outcome. Government intervention is not always effective in achieving its aims. The costs of intervention may exceed the benefits, creating a loss of economic welfare. This is government failure. The Unit 3 chapters essentially follow this structure. Each chapter has a bar at the top showing the above structure and highlighting where the particular chapter fits into this structure. For example, Chapter 4 is about Competitive Markets and helps to understand why markets generally work well and allocate resources efficiently. Markets generally work well is therefore highlighted within the structure: Chapter 4 Unit 3: Introductory concepts Markets generally work well Sometimes markets fail This may justify government intervention Government failure sometimes occurs Competitive markets If a particular chapter crosses over more than one bit of the structure, the relevant parts of the structure are all highlighted. iv
The notes for Unit 4 (macroeconomics) also follow a defined structure: Unit 4 Structure Measuring the macroeconomy How the macroeconomy works Macroeconomic performance Macroeconomic policy tools International economics The main four macroeconomic objectives (strong and sustainable growth, low unemployment, low and stable inflation and a satisfactory current account of the balance of payments) and their measurement were covered at AS level. These A2 notes pay particular attention to measurement of living standards, economic development and sustainability. The circular flow of income and aggregate supply/aggregate demand analysis were covered at AS level. Understanding the demand and supply side factors that influence performance with regard to the four main economic objectives. The difference between factors that affect the short run performance of the economy and the fundamental supply side determinants of long run performance. Fiscal and monetary policies as ways of influencing aggregate demand and stabilising the economy. Supply side policy as a tool to influence trend growth and long-term economic performance. The economics of international trade, protectionism, exchange rates, globalisation, trading blocs, monetary union, economic development and sustainability. The chapter headings also work in the same way for Unit 4 as they did in the first section of the book. For example, the chapter on Living Standards, Development and Sustainability is about Measuring the macroeconomy so this is highlighted: Chapter 16 Unit 4: Measuring the macroeconomy How the macroeconomy works Macroeconomic performance Macroeconomic policy tools International Economics Living standards, development and sustainability It may be helpful for you to have the specification (syllabus) for your exam board with you when you revise. We have tried to ensure that the relevant concepts and theories on your specification are included in the book. If you are following OCR s specification you might choose to supplement this book with notes applying the Unit 3 theory to the specific content of the option you are studying which will be either The Economics of Work and Leisure or Transport Economics. Where it is useful to do so, we have included specific guidance at the start of a chapter about its relevance to a particular specification. So, for example, Chapters 13-15 are not needed for Edexcel s Unit 3 course. However, Edexcel students may still find these chapters interesting. You can never know too much Economics! We wish you good luck with your revision programme and your exams. James Keefe and Peter Cramp v
Chapter 1 Unit 3: Introductory concepts Markets generally work well Sometimes markets fail This may justify government intervention Government failure sometimes occurs Costs and Revenues The activity of firms Firms combine factors of production (land, labour, capital and enterprise) into output (goods and services). The production of output results in costs for the firm, but the sale of output generates revenue. Costs relate to the supply side of a market, while revenue relates to demand. Costs of production An economist measures the firm s production costs as the opportunity cost of the factors of production used (the revenue that the factor could have generated in its next best use). Short run This is the period of time in which at least one factor of production is fixed (usually capital). Labour is typically regarded as a variable factor. It is impossible to put an actual length of time on the short run. A market trader may be able to buy a new stall and hire a new pitch in a day; a firm producing nuclear power could take a decade to build a new power station. Long run This is the period of time in which all factors are variable in quantity and in which it is possible for the firm to move to a new scale of production. Marginal product of labour The marginal product of labour is the additional output produced by adding one extra worker (a variable factor) to a given stock of fixed factors. This is the only way in which output can be increased in the short run. Gains from specialisation As more labour is added to a stock of fixed factors, the marginal product of labour tends to rise at first, due to gains from specialisation (extra workers more fully utilise available capital and make the division of labour possible). More specifically, the gains from specialisation are: Workers can be assigned to tasks to which they are well suited. Workers learn by doing and efficiency improves through experience. Production line methods eliminate the need to change tools and this saves time. Production line methods may make it cost effective to provide specialist capital equipment for workers. Diminishing marginal returns Eventually the gains from specialisation are exhausted and, at some point, the additional output from employing extra workers begins to diminish. The law of diminishing returns states: As more workers are added to a given stock of fixed factors, first the marginal product of labour and then the average product will eventually decline. Average product of labour The average product of labour is simply the total output divided by the number of workers used. 1