Lower prices Specialisation Over-dependence Assumptions One advantage of globalisation and free trade is lower prices. Globalisation is the increased integration and interdependence of countries around the world. This is likely to involve countries forming trade agreements, which allow trade to be unrestricted. The diagram below shows the effect of

Allocatively inefficient Dynamically efficient Productively inefficient Economies of scale A monopoly is unlikely to achieve allocative efficiency. Allocative efficiency can be achieved when firms are producing at the point where price = marginal cost (AR = MC). This is beneficial because, if firms are producing at this point, society can benefit from

Monopolistic competition consists of low barriers to entry, and there is slight product differentiation between firms. This means that most firms face a relatively elastic average revenue (AR) curve; if firms raise prices, quantity demanded is likely to fall by a larger proportion due to the number of close substitutes

Perfect competition consists of infinite buyers and sellers, homogenous products, perfect information, and no barriers to entry and exit. Each firm is a price-taker so they each face a perfectly elastic average revenue (AR) curve. This means that marginal revenue is also constant. Firms aim to maximise profits, so

Profit maximisation Revenue maximisation Sales maximisation Satisficing There are two main reasons why profit maximisation is usually the most important business objective. Firstly, profit is the entrepreneur's reward for taking the risk to own a business. This risk involves any opportunity cost involved with owning a business. For

Imperfect information Asymmetric information Bounded rationality Bounded self-control Rules of thumb Anchoring Availability bias Social norms Altruism Explain how imperfect information can lead to market failure. Imperfect information occurs when an economic agent does not have all the information needed to make an optimal decision, and poor information contributes

Expansionary fiscal policy Expansionary monetary policy One way to prevent deflation is the use of expansionary fiscal policy. This is when the government increases spending or decreases taxes to influence the level of aggregate demand in the economy. One example is the government reducing income taxes. This allows consumers to

Training schemes Infrastructure One way to reduce structural unemployment is through increased spending on education and training schemes. Structural unemployment is a form of long-term unemployment where there is a mismatch between the location or skills of workers and the available jobs. Increased spending on education and training can

Contractionary monetary policy Contractionary fiscal policy One way to reduce the inflation rate is the use of contractionary monetary policy. This involves the central bank raising interest rates, in order to influence the level of aggregate demand (AD) in the economy. AD = C + I + G + (X-M) and higher interest

Training schemes Infrastructure Lower corporation tax Lower income tax Cut in welfare payments One way to increase potential growth is through interventionist supply-side policies like increased spending on training schemes. Potential growth, also known as long-run economic growth, is when there's an increase in the productive

Expansionary fiscal policy Expansionary monetary policy One way to reduce cyclical unemployment is the use of expansionary fiscal policy. This is when the government increases spending or decreases taxes to influence the level of aggregate demand in the economy. One example is the government reducing income taxes. This allows consumers

Deflationary spiral Increase in real value of debt Sign of strong supply-side Increase in competitiveness Deflation can be damaging as it can trigger a deflationary spiral. Deflation occurs when there is a fall in the average price level. When prices are falling in the economy, rational consumers form an

Worse living standards Wage-price spiral High economic growth Reducing national debt High inflation can be damaging to individuals as it can worsen their living standards. Inflation is when there is an increase in the average price level. A high rate of inflation means it is likely that prices are

Increase in demand Decrease in demand Decrease in supply Increase in supply The diagram below shows how the free market responds to an increase in demand. This is due to the invisible hand of the market (the functions of the price mechanism). Initally, the market is at equilibrium with a

Factors affecting demand (PIRATES) Population Income Related goods Advertising Trends Expectations Seasons One cause of a price change is a change in population. When the population increases, this would lead to an increase in the demand for milk, as consumers would be willing and able to buy more milk at

Free market: efficient allocation Free market: inequitable outcomes Intervention: correcting market failure Intervention: risk of government failure One advantage of providing services like bus travel through the free market is that scarce resources are allocated efficiently due to the functions of the price mechanism. This was the argument of Adam

Maximum prices Subsidies Provision of information State provision A-Level Economics Model Paragraph — Analysis One way to correct the market failure in the market for rented housing is through maximum prices. A maximum price is a price above which it is illegal to sell, and a maximum price should be

Minimum prices Indirect taxes Pollution permits Provision of information (Consumption) Provision of information (Production) A-Level Economics Model Paragraph — Analysis One way to correct the market failure in the market for alcohol is through minimum prices. A minimum price is a price below which it is illegal to sell, and

Maximum prices One way to correct the market failure in the market for rented housing is through maximum prices. A maximum price is a price above which it is illegal to sell, and a maximum price should be set below the free-market equilibrium to have any effect on the

Minimum prices One way to correct the market failure in the market for alcohol is through minimum prices. A minimum price is a price below which it is illegal to sell, and a minimum price should be set above the free-market equilibrium to have any effect on the market.

Provision of information One way the government could intervene in the market for cycling is through provision of information. The market for cycling has positive externalities in consumption, as cyclists under-value the full benefit of their choice, both to their own health and to wider society through reduced traffic

Complete market failure Complete market failure occurs when the free market fails to provide a good entirely, resulting in a missing market. This happens in the case of public goods, which are goods that are both non-rival and non-excludable. These characteristics cause the free-rider problem to occur.

Types of externality Positive externality in consumption Negative externality in consumption Positive externality in production Negative externality in production Positive externalities in consumption are when there is a positive impact on a third party from a transaction. The third party refers to anybody apart from the buyer or the seller.

Expansionary fiscal policy Expansionary monetary policy One way to promote economic growth is the use of expansionary fiscal policy. This is when the government increases spending or decreases taxes to influence the level of aggregate demand in the economy. One example is the government reducing income taxes. This allows consumers

Contractionary fiscal policy Contractionary fiscal policy can be another measure to reduce a country's current account deficit. It occurs when the government either increases taxes or decreases spending to influence the economy. One example is increasing income taxes. As disposable incomes fall, spending decreases. This is costly, but