AQA GCSE Economics Notes

Exam Technique

3.1.1 Economic foundations

  • The central purpose of economic activity: the production of goods and services to satisfy needs and wants
  • The key economic decisions are: what to produce, how to produce, and who is to benefit from the goods and services produced
  • The main economiic groups: consumers, producers and government
  • The factors of production: (CELL) capital, enterprise, land, labour.
  • Capital: machinery. Enterprise: business ideas. Land: natural resources. Labour: workers
  • The basic economic problem: unlimited wants, limited resources.
  • Opportunity cost: the cost of the next best alternative e.g. if i buy an apple, i could have bought a chocolate instead.

3.1.2 Resource allocation

  • Market: a place where buyers and sellers meet to decide price
  • Markets help to allocate scarce resources e.g. if there are not enough mangoes, price of mangoes goes up to reduce excess demand.
  • Factor markets: derived demand (e.g. labour)
  • Primary sector: produce or extract raw materials
  • Secondary sector: manufactures goods
  • Tertiary sector: services
  • Specialisation is when each region completes a specific task in a large production process. Division of Labour is specialisation when each worker completes a specific task in a large production process.
  • Pros: higher output, better quality of output, greater variety of goods produced, opportunities for economies of scale, more competition and therefore lower prices, lower average costs.
  • Cons: work is repetitive and workers lose motivation, structural unemployment (occupational immobility), possible lack of variety, employees leave regularly, non-renewable resources run out in a region, over-dependent/ reliance on certain resources and the weather, lack of competition arguably.

3.1.3 How prices are determined

  • Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given period of time.
  • A demand curve shows the inverse relationship between price and quantity demanded. (As pΩzrices fall, goods become more affordable and so demand is higher). Price changes cause contractions/ expansions in demand.
  • The demand curve can also shift to the left or right due to its factors (PIRATES): population, income, related goods, advertising, tastes and fashions, expectations (price etc), season.
  • Supply is the quantity of goods and services that a producer is willing and able to supply at a given price level, in a given period of time.
  • Price and supply have a direct relationship. If prices increase, firms supply more due to the profit motive for both existing firms and new entrants.
  • Movements along the curve show expansion/ contraction and they are caused by price changes.
  • Shifts can be caused by (PCTWINS): productivity, costs of production, technology, weather, indirect taxation, number of firms, subsidies.
  • Equilibrium price and quantity is where demand meets supply. At this quantity, price has no tendency to change. It is the market-clearing price.
  • When demand is not equal to supply, we have disequilibrium.
  • When demand is more than supply, there is excess demand. There is a shortage of supply causing prices to push up to ration supply. This causes demand to contract, to create a new, higher equilibrium price.
  • When supply is higher than demand, there is excess supply. This causes firms to lower prices to sell their goods. When supply clears, the market returns to equilibrium.
  • Revenue = price x quantity.
  • Complements: if one good becomes too expensive, the demand for both goods falls e.g. Xbox and Xbox controller.
  • Substitutes: if one good becomes too expensive, the demand for the other good increases e.g. Xbox and playstation.
  • PED – the degree of responsiveness of quantity demand following an initial change in price.
  • (SANDPIT) factors can affect PED: substitute goods, addictiveness, necessity, durability, proportion of income spent on good, time.
  • Equation: the percentage change in quantity demanded, divided by the percentage change in price
  • Importance: if demand is inelastic, firms can raise prices and exploit customers because they will still buy the good.
  • PES – the degree of responsiveness of quantity supplied following an initial change in price.
  • Factors (SECTS): substitutability of factors, entry barriers, spare capacity, time, level of stocks.
  • Equation: the percentage change in quantity supplied, divided by the percentage change in price.
  • Importance: if supply is inelastic, the firm will struggle to increase supply when prices are high.

3.1.4 Production, costs, revenue and profit

  • The main business objective is profit maximisation, but firms can also grow sales or aim to increase market share (revenue).
  • Profit importance: shareholders get dividends, and it can be reinvested for innovation e.g. if the iPhone 4 didn't make profit, the iphone 14 wouldn't exist.
  • Profit: total revenue - total costs. Reward for entrepreneurship.
  • A firm can increase profits by reducing average costs or increasing revenues.
  • Supply is upward slowing because igher prices imply higher profits and that this will increase the incentive for producers to expand production.
  • Total revenue: price x quantity
  • Average revenue: price (total revenue/ quantity)
  • Total cost: total fixed cost + total variable cost.
  • Average cost: total cost/ quantity.
  • The motivations of producers may conflict with ethical and moral interests, e.g. charity/ environment/ high quantity and low price of merit goods.
  • Production: a process of converting factors of production into a final product.
  • Productivity: output per worker or output per hour etc.
  • Factors affecting productivity: the speed, skill, motivation and training of workers, technology (capital).
  • Benefits of productivity: more output, cheaper, more variety.
  • Economies of scale are when average costs of production fall as output increases.
  • Types (RFMTMP): risk-bearing, financial, managerial, technological, marketing, and purchasing.
  • Diseconomies of scale occur when output exceed a certain point (CCC): control (monitor how productive a large workforce is), coordination (managing individual workers), communication (workers feel alienated).

3.1.5 Competitive and concentrated markets

  • Competitive markets: many buyers and sellers, price takers, identical products, perfect information, no barriers to entry and exit.
  • Non-competitive markets: few sellers, price makers, unique product (product differentiation), imperfect information, high barriers to entry.
  • Pure monopoly: sole seller.
  • Monopoly power: majority market share.
  • Oligopoly: only a few firms in the market.
  • Labour market: a place where employees and employers meet to exchange labour.
  • Wage discrimination: when workers get paid different amounts for the same job e.g. due to gender, ethnicity etc.
  • Wage differentials: when workers get paid different amounts for different jobs e.g. teachers vs footballers
    • often due to value measured through the job; hard to measure the value a teacher offers, but easy to calculate the revenue a footballer adds.
  • Gross pay: before deductions.
  • Net pay: after deductions e.g. tax, national insurance, student finance.

3.1.6 Market failure

  • Market failure: a misallocation of resources.
  • Externalities: a cost or benefit to a third party outside the market (anyone except the buyer or the seller e.g. the healthy taxpayer who has to contribute to the NHS visits of others.
  • Externalities are the difference between social costs/benefits and private costs/ benefits.
    • Private cost: price you pay for chocolate
    • External cost: the taxpayer paying towards nhs
    • Social cost: private cost + external
  • Positive externalities: when merit goods are under-consumed e.g. vaccinations, fruit, textbooks.
  • Negative externalities: when demerit goods are over-consumed e.g. tobacco, alcohol, fast food.
  • Government intervention: required when there is a potential market failure
    • tax: an extra cost of production, so supply shifts left.
    • subsidy: a payment made to help a firm, so supply shifts right.
    • regulation: bans or enforces consumption e.g. must go to school, under 18 cannot buy alcohol.
    • minimum price: a price below which it is illegal to sell goods.
    • maximum price: a price above which it is illegal to sell goods.

3.2.1 Introduction to the national economy

  • Interest rates: cost of borrowing or rewarding for saving.
  • High interest rates incentivises savings and low interest rates incentivises borrowing, for producers and consumers.
  • Interest rates are adjusted every month by the Bank of England, depending on the state of the economy.
  • Sources of UK government revenue: direct taxes e.g. income tax, national insurance, indirect taxes e.g. VAT.
  • VAT is paid by consumers despite being imposed on the producer.
  • Areas of UK government spending: healthcare, education, defence, welfare.
  • Progressive taxation: as income goes up, the percentage of income taxed goes increases.

3.2.2 Government objectives

  • Four main macroeconomic objectives: economic growth, low unemployment, steady inflation, balance of payments (trade).
  • Other government objectives: inequality, environment.
  • Conflicting objectives: economic growth and low unemployment usually cause inflation.
  • Economic growth: increase in real GDP.
  • Real GDP: total value of goods and services produced in the UK.
  • Real: adjusted for inflation, which helps us compare things over time e.g. house prices in 1970s and house prices now.
  • Per capita: per person (divide by population)
  • Causes of economic growth: an increase in aggregate demand or supply.
    • AD: lower interest rates, greater confidence, more disposable incomes
    • AS: better education, lower income tax (encouraging work)
  • 😄: higher incomes, lower unemployment, higher disposable income, better living standards
  • 😦: high inflation, greater inequality, environmental damage
  • Policies to achieve economic growth: fiscal, monetary, supply-side.
  • Unemployment: the number of people willing and able to work who cannot find a job.
  • Frictional unemployment is when workers are between jobs.
  • Structural unemployment occurs when there is a decline in demand for goods and services in a particular industry.
  • Seasonal unemployment occurs during particular times or seasons.
  • Cyclical/ demand-deficient unemployment is caused by a lack of aggregate demand in an economy, during a recession.
  • 😦: inequality, low disposable income, poor living standards, crime, anxiety.
  • Policies to reduce unemployment: fiscal, monetary, supply-side policy.
  • Inflation is a rise in average price level.
  • Deflation is a fall in average price level.
  • Disinflation is a fall in the rate of inflation, above 0%.
  • Demand-pull inflation is caused by an increase in aggregate demand.
  • Cost-push inflation is caused by an increase in costs of production or a decrease in short-run aggregate supply.
  • High inflation is bad when consumers pay higher prices but stay on low incomes. Firms may raise wages but may raise prices again after, or cut staff.
  • Deflation is bad as people know goods will be cheaper next month so they will delay purchases. Then,
  • Supply-side deflation is good for the economy, as it means lower costs.
  • Balance of Trade: value of exports - value of imports.
  • Balance of Payments on Current Account: balance of trade and the balance of income flows and transfers e.g. sending money back home/ interest from foreign banks.
  • Policies to influence the balance of payments: interest rates, supply-side policy.
  • Income: flow of money.
  • Wealth: stock of assets (income accumulated over time).
  • Causes of inequality: education and health, tax and benefits system.
  • 😦: poor standards of living, unemployment, low tax revenue, social unrest.
  • Policies to reduce inequality: inheritance tax, progressive income tax, welfare payments e.g. unemployment benefits, education and training, NHS.

3.2.3 How the government manages the economy

  • Fiscal policy: use of government spending & taxation to influence aggregate demand.
  • A balanced budget: when government spending equals tax revenue in a year.
  • A budget deficit: difference between government spending and tax revenue.
  • A budget deficit is bad because it causes national debt to increase, which means future generations have to cut spending (austerity).
  • A budget surplus is bad because less government spending and high taxes means that there may be low economic growth, deflation, unemployment.
  • Expansionary fiscal policy is when there is an increase in government spending or a decrease in taxation. This leads to an increase in aggregate demand in an economy (and vice versa).
  • Government spending can be on welfare benefits/ pensions, education and health systems, and defence.
  • National debt is the accumulation of the net budget deficit over a number of years.
  • Holding high levels of debt can lead to problems paying money back. This can lead to loss of trust from lenders, refusal to lend money in the future, or extremely high interest rates, or spending cuts in the future e.g. NHS.
  • Monetary policy is the use of interest rates (BoE) to influence aggregate demand.
  • Interest rates: cost of borrowing or the reward for saving.
  • If there is a recession, loweing interest rates would encourage people to borrow rather than save, and therefore spend, which means that aggregate demand would increase in the economy.
  • Supply-side policies: policies that increase the capacity of the economy e.g. education and training, infrastructure, lower income tax, lower corporation tax, privatisation.
  • They lead to improvements in quality, quantity or cost across the workforce.
  • Supply-side policies is the only way to improve economic growth without causing inflation.
  • Externalities: costs/ benefits to a 3rd party (anyone except the buyer or seller).
  • Merit goods like fruit/ textbooks have positive externalities in consumption. They are under-consumed so the gov. could provide subsidies/ maximum prices/ free provision.
  • Demerit goods like fast food/ tobacco have negative externalities in consumption. They are over-consumed so the gov. could implement taxes/ bans/ provide information/ minimum prices.

3.2.4 International trade and the global economy

  • Benefits of trade: more quality, variety, quantity, lower cost.
  • Consequences of trade: if we are less competitive than other countries, we lose aggregate demand and this leads to unemployment and decline. Also, if we are over-reliant, economic shocks e.g. natural disasters in other countries can cause economic shocks in our economy (cost-push inflation).
  • Exchange rate: price of one currency in terms of another.
  • Exchange rate is determined purely by supply and demand of the currency (which is determined by demand for imports and exports).
  • Free trade: the act of trading without any protectionism.
  • Tariffs: tax on imports. Embargoes: ban on imports. Quotas: limit.
  • Free-trade agreements e.g. EU. allow free trade for members, and tariffs for trade with non-members.
  • Globalisation is the growing integration of the world’s economies into a single, international market.
  • Globalisation is caused by trade liberalisation, increasing presence of trading blocs, the growth of MNCs, technological advancement, and increased mobility of labour and capital.
  • Globalisation involves free movement of capital and labour and free interchange of technology.
  • Globalisation can lead to lower prices due to competition, greater employment, economies of scale, free movement of labour and capital, technological transfers and greater innovation.
  • On the other hand, globalisation may cause greater inequality, structural unemployment, environmental problems, trade imbalances (e.g. US with China), and losses of identity/ cultural diversity.
  • Money is a medium of exchange, store of value, measure of value, and a standard of deferred payment.
  • Money is acceptable, portable, durable and divisible.
  • Money can be defined as more than the amount of banknotes and coins in circulation.
  • The main agents in the financial sector are: the Bank of England, commercial banks and building societies
  • Bank of England: influence interest rates and ensure financial stability (e.g. lend to commercial banks, maintain inflation at 2%).
  • High street banks: facilitates saving and borrowing of money.