GCSE Economics Notes

What is the basic economic problem?

The basic economic problem is scarcity. This means that there are unlimited wants but limited resources.

What is opportunity cost?

Opportunity cost is the value of the next best alternative. For example, spending £5 on chocolate means you have £5 less to spend on games.

What is the central purpose of economic activity?

The central purpose of economic activity is to produce goods and services to satisfy needs and wants.

What are key economic decisions

They key economic decisions are

1. what to produce
2. how to produce
3. who to produce for

What are the four factors of production?

The four factors of production are capital, enterprise, land and labour (CELL).

• Capital: machinery
• Enterprise: business owners
• Land: raw materials and natural resources
• Labour: workers

What are the sectors of the economy?

• Primary sector: agriculture e.g. farming
• Secondary sector: manufacturing e.g. making a calculator
• Tertiary sector: services e.g. teaching

What is productivity?

Output per worker per hour

What is specialisation?

Specialisation is when each worker/region repeats one specific task.

What is division of labour?

Division of labour is when each worker focuses on one specific task in a large production process.

What are the advantages of division of labour?

1. higher productivity
   1. this leads to lower costs of production
   2. this can lead to lower prices
2. higher quality
   1. workers and businesses become increasingly skilled due to repetition

What are the disadvantages of division of labour?

1. lower productivity
   1. workers get bored over time and lose motivation
   2. this can lead to workers leaving frequently
   3. which can lead to higher costs
2. lack of transferrable skills
   1. workers only have one skill
   2. this means that if an industry declines
   3. workers would not be able to change job easily
   4. this leads to structural unemployment

What is a market?

A market is a place where buyers and sellers meet to exchange goods & services

What is demand?

Demand is the number of goods and services that consumers are willing and able to buy at each given price.

What causes the demand curve to shift?

The factors that cause a shift in the demand curve are:

• population
• incomes
• related goods (complements and substitutes)
• advertising
• trends
• expectations
• seasons
• PIRATES

What is supply?

Supply is the number of goods and services that firms are willing and able to sell at each given price.

Why is the supply curve upwards sloping?

Firms are motivated to sell more goods and services at a higher price, as they can make higher profits.

What causes the supply curve to shift?

The factors that cause a shift in the supply curve are:

• productivity (if staff are more skilled)
• costs of production (if wages fall)
• technology (better machines)
• weather
• indirect taxes
• number of firms
• subsidies
• PCTWINS

What is equilibrium?

Equilibrium is the price & quantity at which supply meets demand.

What is disequilibrium

Disequilibrium is when demand is not equal to supply

What is excess demand?

Excess demand is when demand exceeds supply at a given price . Prices would increase until the market reaches a new equilibrium.

What is excess supply?

Excess supply is when supply exceeds demand at a given price. This causes prices to decrease towards equilibrium.

What is price elasticity of demand?

PED is the responsiveness of demand to a change in price.

PED = % change in demand/ % change in price.

What is price elasticity of supply?

PES is the responsiveness of supply to a change in price.

PES = % change in supply/ % change in price.

What are the factors that affect PED?

If price increases, demand will always decrease, but by how much?

The factors that affect PED are:

• substitutes (crisps have many substitutes)
• addictiveness (coffee could be addictive or habitual)
• necessity (energy bills are a necessity)
• durability (TVs and beds will last a long time)
• proportion of income (a fizzy drink only cost a small % of income)
• time (everything becomes more elastic over time)
• (SANDPIT)

What do different values of PED represent?

PED between 0 and -1 - inelastic

PED less than -1 - elastic

PED of -1 - unit elastic

PED of 0 - perfectly inelastic

PED of negative infinity - perfectly elastic

What are the factors that affect PES?

If price increases, supply will always increase, but by how much?

The factors that affect PES are:

• level of stock
• barriers to entry (qualifications of a dentist vs a taxi driver)
• spare capacity (land for houses)
• time
• substitutability of factors of production
• SECTS

What are the main objectives for businesses?

The main business objective is profit maximisation.

Other business objectives can include:

• sales maximisation
• revenue maximisation
• increasing market share

What is profit?

Profit = total revenue - total costs

What is total revenue?

Total revenue = price x quantity

What is total costs?

Total cost = total fixed costs + total variable costs

What are fixed costs?

Fixed costs do not change when output increases e.g. rent

What are variable costs?

Variable costs increase when output increases e.g. raw materials/ packaging costs

What are average costs?

Average cost = total cost/ quantity

What are economies of scale?

Economies of scale occur when average costs fall as output increases.

What are the different types of economies of scale?

These are six main types of economies of scale:

• Risk-bearing
  • larger companies can afford to take more risks e.g. new recipes/innovation
• Financial
  • larger companies can reduce their average costs as they can access cheaper finance
• Managerial
  • larger companies can reduce their average costs as each manager can oversee more staff
• Technical
  • larger companies can reduce their average costs of acquiring technology as the technology can be used to produce more output
• Marketing
  • large companies can reduce their average costs as they can advertise their brand more efficiently
  • for example, Just Do It/ Every Little Helps
• Purchasing
  • larger companies can reduce their average costs by bulk-buying
• really fun mums try making pies

What are diseconomies of scale?

Diseconomies of scale occur when average costs rise as output increases

What are some examples of diseconomies of scale?

• Communication
  • workers may lose motivation as the company grows
• Co-ordination
  • managers find it more difficult to identify and solve problems

What are external economies of scale?

When average costs fall as output increases, but for the entire industry.

For example, Nike and Adidas would both benefit from:

• better education and training (more skilled workers)
• better infrastructure
• better technology

What is a competitive market?

A competitive market consists of

1. many buyers and sellers
2. similar products
3. low barriers to entry
4. perfect information

What are the advantages of competitive markets?

The advantages of competitve markets are:

1. low prices
2. lots of choice

What are the disadvantages of competitive markets?

The disadvantages of competitve markets are:

1. lower quality
2. lack of economies of scale

What is a non-competitive market?

A non-competitive market means that a few firms have a high market share. The market consists of

1. product differentiation
2. high barriers to entry
3. imperfect information

What are some examples of barriers to entry?

Barriers to entry can include

1. legal barriers e.g. patents
2. high start-up costs
3. economies of scale
   1. it is difficult to compete when the market leader is able to exploit economies of scale such as bulk buying/ advertising

What is a monopoly?

A monopoly is when one firm dominates a market

What is an oligopoly?

An oligopoly is when a few firms dominate the market

How do firms behave in an oligopoly?

Firms in an oligopoly may choose to

1. collude
   1. this is possible if there is trust between two firms
   2. this means they can agree to set high prices together
2. non-price competition
   1. firms can compete to gain market share
   2. they can do this by improving branding, loyalty discounts, taste.

What are the advantages of non-competitive markets?

The advantages of non-competitive markets are

• economies of scale
  • firms are able to increase market share and output
  • this means they can exploit economies of scale
  • they can decrease their average costs by bulk buying etc.
  • this can lead to more re-investment or it could potentially lead to lower prices
• higher quality
  • firms make greater profits
  • this means they can invest more
  • this can lead to greater quality

What are the disadvantages of non-competitive markets?

The disadvantages of non-competitive markets are

• high price
  • firms can benefit from their high market share
  • they are able act as price-setters
• diseconomies of scale
  • as firms increase output too high
  • they can start to face diseconomies of scale

What is a labour market?

A labour market is a place where workers and firms meet to exchange labour in return for a wage.

What is demand for labour?

Demand for labour is the number of workers that firms are willing and able to hire, at each wage rate.

What are the factors that affect demand for labour?

Demand for labour can shift if there is a change in these three non-price factors:

1. demand for the final good/service
2. productivity of workers
3. quality/price/availability of capital

What is supply of labour?

Supply of labour is the number of people who are willing and able to work, at each wage rate.

What are the factors that affect supply of labour?

Supply of labour can shift if there is a change in these non-price factors:

• geographical mobility of labour
  • how easy or hard it is to travel into work
• occupational mobility of labour
  • how easy or hard it is to gain the relevant qualifications
• working population
  • changes in migration
  • changes in the retirement age
• wages in substitute jobs

What are wage differentials?

Wage differentials occur when two workers earn different wages as they do different jobs.

This happens because there is differences in demand or differences in supply in each job market.

For example, there is a low demand for retail workers as they can be replaced by machinery (self-checkout marchines).

There is a high demand for footballers as they cannot be replaced by machinery.

What is market failure?

Market failure is when there is a misallocation of resources.

What are the main types of market failure?

Market failure can be caused by

1. externalities
2. public goods

What are public goods?

Public goods are non-excludable and non-rival.

Non-excludable means that it is impossible to prevent someone from using the good or service.

Non-rival means that the more people that use the good or service, everyone still benefits the same way.

What is the free-rider problem?

1. The free-rider problem is caused by the nature of public goods.
2. As public goods are non-rival and non-exclucable, no one is incentivised to pay for them.
3. Therefore, there is no profit available to a producer.
4. Therefore there would be a missing market.
5. This means that the government should provide them to everyone.

What are externalities?

Externalities are the cost or benefit to a third party from a transaction.

What is the third party?

The third party is anyone apart from the buyer or the seller e.g. NHS/ taxpayers

What is a positive externality?

Social benefit = private benefit + external benefit.

Private benefit - me enjoying the gym

External benefit - less burden on the NHS due to bad health

What is a negative externality?

Social cost = private cost + external cost.

Private cost - the cost to the firm to make magazines

External cost - the cost to the environment from cutting down trees

What is government intervention?

The government can intervene to correct market failure.

What is an indirect tax?

An indirect tax is an extra cost of production paid by firms to the government. It causes supply to decrease.

What is a subsidy?

A subsidy is a payment made by the government to firms. It reduces costs of production and causes supply to increase.

GCSE Economics Paper 2 Notes

What are the main macroeconomic objectives?

The 4 main macroeconomic objectives are economic growth, low and stable prices, low unemployment, and a balanced current account.

What are the other macroeconomic objectives?

Other macroeconomic objectives include

1. minimising environmental damage
2. reducing inequality and poverty
3. reducing national debt

What is inflation?

Inflation is when there is rise in the average price level

What is deflation?

Deflation is when there is a fall in the average price level

What is disinflation?

Disinflation is when the rate of inflation falls but remains positive.

For example, there is disinflation if the inflation rate falls from 4% to 2%.

What is the Consumer Price Index?

The consumer price index

• Take an average basket of goods and services
• Each item is weighted
• Track the price of the basket over time

What is our inflation target?

2% (low and stable)

What are the two causes (types) of inflation?

The two causes of inflation are

1. demand pull inflation
2. cost push inflation

Inflation happens when there is too much demand for too few goods and services.

Why is high inflation bad?

1. High inflation is bad if prices are rising at a faster rate than peoples' incomes.
2. This means that people have less real incomes/disposable incomes.
3. This means that people have worse living standards.
4. Workers may ask firms for a payrise. This causes a wage-price spiral.

Why is deflation bad?

• price level is falling
• people form an expectation that prices will continue to fall
• people will delay their spending
• this causes economic growth to slow down
• this could also cause unemployment

What is unemployment?

The people who cannot find a job but they are willing and able to work.

What is frictional unemployment? 

When workers are moving between jobs.

What is seasonal unemployment?

Seasonal unemployment occurs when demand for workers changes depending on the time of the year.

What is structural unemployment? 

Structural unemployment is when there is a decline in demand for goods and services in a particular industry.

E.g. steel miners in the UK lost their jobs as steel is now imported.

The workers need to be re-trained so that they can work in a different job market.

What is cyclical (demand-deficient) unemployment? 

This is caused by a lack of aggregate demand in an economy, during a recession.

E.g. COVID

What is economic growth?

Economic growth is when there is an increase in real GDP

What is real GDP?

Real GDP is the total value of goods and services produced in the economy, adjusted for inflation.

What does real mean?

Real means adjusted for inflation

What does per capita mean?

Per captita means per person (divided by the population).

What is balance of a payments?

Value of imports = value of exports

What is a current account deficit?

Value of imports > value of exports

What is a current account surplus?

Value of exports > value of imports

What could cause a current account deficit?

• high inflation rate relative to other countries
• low quality goods and services here (supply side policies)
• exchange rate

What policies can be used in macroeconomics?

1. fiscal policy
2. monetary policy
3. supply side policies

What is fiscal policy?

Use of government spending & taxation to influence aggregate demand.

What is expansionary fiscal policy?

The government increases spending or reduces taxation.

This leads to an increase in aggregate demand.

For example, if the government reduces income tax, people have more disposable income.

So, consumer spending increases.

This leads to more economic growth and lower unemployment.

However, it can cause higher inflation and also cause a budget deficit.

What is contractionary fiscal policy?

The government decreases spending or increases taxation.

This leads to a decrease in aggregate demand.

For example, if the government increases taxes, people have less disposable income.

So, consumer spending decreases.

This leads to lower inflation.

However, it could reduce economic growth and increase unemployment.

Examples of government spending

• infrastructure
• NHS
• police
• defence
• pensions
• welfare benefits

Examples of taxes

• income taxes
• corporation taxes
• VAT

What is monetary policy?

Use of interest rates to influence aggregate demand

What are interest rates?

The cost of borrowing or the reward for saving.

What is expansionary monetary policy?

The Bank of England reduce interest rates.

This makes it cheaper to borrow money and less rewarding to save money.

Consumer spending increases.

This leads to more economic growth and less unemployment.

It also causes inflation to increase.

What is contractionary monetary policy?

The Bank of England reduce interest rates.

This makes it cheaper to borrow money and less rewarding to save money.

Consumer spending increases.

It also causes inflation to decrease.

But it could also cause economic growth to decrease and unemployment to increase.

What are supply-side policies?

Policies that increase the productive potential of the economy.

What is globalisation?

Globalisation is the increased integration of different economies around the world.

What are four causes of globalisation?

1. Better transport
2. Better technology and communication
3. More MNCs (multinational corporations)
4. More free trade agreements

What are the two main advantages of globalisation?

Increase in economic growth

1. globalisation allows each country to specialise
2. specialisation means that each country produces fewer goods and services
3. this allows countries to increase productivity, and output

Lower prices

1. globalistion means that there are more free trade agreements
2. for example, fewer tariffs and quotas
3. a tariff is a tax on imports
4. reducing tariffs mean that imports are cheaper
5. this leads to lower prices

What are the three main disadvantages of globalisation?

Structural unemployment

1. globalisation encourages countries to specialise in fewer goods and services
2. this means that some industries will decline as we could import those goods and services instead
3. for example, the UK now imports steel from China
4. this causes structural unemployment

Environmental damage

1. another consequence of globalisation is environmental damage
2. globalisation can lead to more economic growth and more trade
3. this leads to higher levels of transportation, energy usage, and packaging costs
4. this leads to more waste and more pollution

Over-dependence

1. globalisation encourages countries to specialise in fewer goods and services
2. this means that countries are more vulnerable to economic shocks
3. for example, if there is a sudden change in the exchange rate or new protectionist measures, this means that imports become more expensive
4. this means that businesses and consumers face higher costs of production
5. this causes cost-push inflation

What is a multinational corporation (MNC)?

An MNC is a large business that operates in more than one country.

What is foreign direct investment (FDI)?

FDI is when an MNC invests in factories in a new country.

What are exchange rates?

Exchange rates are the price of one currency in terms of another.

What are 3 factors that can affect exchange rates?

Interest rates

1. lower interest rates means lower return on saving
2. more hot money flows out of the UK as people want to take advantage of higher interest rates elsewhere
3. lower demand for the pound
4. pound depreciates

Increase in exports

1. more demand for UK goods and services
2. Foreign consumers need to buy the pound in order to buy UK goods and services
3. increase in demand for the pound
4. pound appreciates

Increase in imports

1. more demand for Chinese goods
2. UK consumers need to sell the pound to buy foreign currency
3. increase in supply of the pound
4. pound depreciates

What is the impact of a currency depreciation?

Current account

1. the currency is weaker
2. imports become more expensive and exports become cheaper
3. this means exports increase and imports decrease
4. the current account would improve
5. this leads to more economic growth

Cost-push inflation

1. imports become more expensive
2. costs to import raw materials like oil increase
3. this leads to cost-push inflation

What is the impact of a currency appreciation?

Current account

1. the currency is stronger
2. imports become cheaper and exports become more expensive
3. imports increase and exports decrease
4. the current account worsens
5. this leads to slower economic growth

Costs of production

1. imports become cheaper
2. costs to import raw materials like oil decrease
3. firms can increase output and reduce prices