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AS and A Level: Markets & Managing the Economy
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How do markets work?
- 1 Economics is the study of the allocation of resources so understanding how prices are set and the amount of resources used for any particular product is important.
- 2 Most resources are allocated by the free market. Adam Smith called this ‘the invisible hand’ as no one is in charge of it. It just happens through the interaction of millions of individual buyers and sellers, all working in their own best interest.
- 3 The price and amount produced are determined where the amount supplied equals the amount demanded. This is known as market equilibrium or the market clearing output.
- 4 Any changes to the supply of a good e.g. costs change, weather disrupts production or any change in demand e.g. a product goes into or out of fashion will cause a change in the equilibrium point and so lead to a change in price and output.
- 5 When discussing this, always start with the change in supply and demand and talk about the change to price and output this causes. Not the other way round.
What is market failure?
- 1 Markets do not work perfectly all the time. Several things can and do go wrong with its operation. One of these is market power. If individuals or groups of producers (or consumers to a lesser extent) have too much power, they can distort the market.
- 2 Externalities – The production and consumption of many goods has an external cost e.g. pollution that is paid by other people than those who consume or produce the product. To determine how much of this product should actually be produced or consumed for the greatest benefit to society, this cost should be taken into account as well.
- 3 Public goods – Some goods would not be produced at all by the free market as it is impossible to stop other people benefiting from them (the free rider problem). Examples include defence, light houses and street lights.
- 4 Merit goods – Some goods would be under-consumed if it was left to individuals to decide how much they wanted to spend on them. This is because they have external benefits to society beyond the private benefits e.g. we all benefit from an educated workforce.
- 5 Make sure you are comfortable with the market failure graphs and some of the other reasons for market failure e.g. information problems, immobility of the factors of production.
Five key facts about price elasticity of demand
- 1 Elasticity matters because it determines the importance of shifts in the demand and supply curves and helps with our understanding of how markets operate. In theory all demand and supply curves have different elasticises at different points along them. We are interested at their elasticity where they intersect.
- 2 Price elasticity of demand measures the responsiveness of demand to a change in price. The formula is the percentage change in quantity demanded divided by the percentage change in price.
- 3 Demand for a product is elastic if the percentage change in demand is greater then the percentage change in price e.g. a 10% price rise causes a 20% reduction in demand.
- 4 Demand for a product is inelastic if the percentage change in demand is less than the percentage change in price e.g. a 10% price rise causes a 5% reduction in demand.
- 5 Remember the formulae for income and cross elasticity of demand and price elasticity of supply. Q always goes on the top in the formula. We always ‘queue up’.
- Marked by Teachers essays 10
- Peer Reviewed essays 11
However, more relevant to this question are his two main principles. The first is the liberty principle which asserts that ?each person has an equal claim to a fully adequate scheme of equal basic rights?, and this is lexically prior to the second principle. However, it is the second principle, known as the ?difference principle? which gives us the greatest insight into Rawl?s beliefs on economic distribution in a just society. Under the difference principle, inequalities in distribution are allowed only if they work to the advantage of all, and, attached to positions and offices open to all.
- Word count: 1260
Discuss whether the elasticity of supply of manufactured goods is likely to be greater than the elasticity of supply of agricultural goods 
Beyond this, recent improvements in storage technologies such as refrigeration and freezing have allowed for most agricultural products to be stored for very long period of time, with refrigerated apples lasting up to 2 years and frozen produce last multiple years. All of these further increase the ability of agricultural products to be stocked and as such help increase the price elasticity of supply. Moreover, improvements in farming techniques such as pesticides and fertilizers, combined with improvements in education have vastly increased the occupational mobility of the factors of production land and labour in the farming process, all of which
- Word count: 1018
One potential benefit of the implementation of subsidies to farmers can be in helping domestic producers compete with lower priced imported agricultural goods. As a result of free trade, many economies may find their domestic farmers outclassed by farmers producing in other countries, either due to lower minimum wages, better infrastructure, economies of scale or substantial subsidies in that specific country. This in turn is likely to lead to an increased demand for imported goods which, on the one hand can cause a trade deficit, and on the other, can cause a fall in demand for the domestically produced counterpart.
- Word count: 1042
Discuss the policies that businesses might adopt to maintain sales when incomes are falling and consider which is most likely to be successful. 
the percentage change in the quantity demanded in relation to the percentage in the price of the product, if its value exceeds 1, then the increase in the quantity demanded wold be disproportionately higher than the fall in the price of the product, thus causing an increase in total revenue. Thus, through decreasing the price of their product in a period of falling real incomes, a firm could help maintain the same, or even higher levels of sales revenue. This policy is by no means perfect however, while a drop in the price may be highly effective at increasing revenues,
- Word count: 1034
Therefore, to compensate, and to attract workers, the market in the dustbin industry is not perfectly competitive as the firms need to ensure that in order to attract workers, not only a high pay is needed, but also longer leisure times, and holiday times are needed in order to attract workers. Therefore, jobs that are not-desirable including anti-social hours may be argued to be imperfectly competitive due to not possessing workers that are willing to work at a given wage level, and instead, non-monetary factors need to be considered as a result.
- Word count: 1908