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AS and A Level: Markets & Managing the Economy

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How do markets work?

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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’.

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  1. Discuss the extent to which buses can be seen as a sustainable method of transport.

    The main company in the market is Stagecoach and is still running and providing a service. Compared to other modes of transport such as privately owned vehicles such as cars, buses provide a service that allows less carbon emissions to be produced and more people to travel in one vehicle. This means that buses (if they are being used at full capacity) are helping prevent the negative externalities that arise from cars. Cars produce pollution and congestion and buses help reduce both of these. Social costs arise from using cars such as the vulnerability to fuel price increases and as to whether world oil price rises.

    • Word count: 777
  2. The Limits on Economic Resources

    This is called the opportunity cost. Also we are starting to question if what we are doing to the world is contributing to global warming and finding ways of making things more efficient and less damaging to the environment. If these new measures are not put into place it could affect the future generations inhabiting the world and if we use too many resources we will not leave enough for them. Even basic human needs such as water could be used as the demand for household and commercial use continues to grow each year Production is limited by factors such as Land and Labour, companies strive to produce the most competitive product and get a decent profit.

    • Word count: 538
  3. Persuasive essay - why we shouldn't support Walmart

    The famous blue vests of associates and low prices are not only common symbols in the United States, but also in nine foreign countries around the world. tonight we're going to learn how Walmart forces small businesses out of business, sends jobs overseas to countries like China while abusing human rights, pay its associates poverty level wages and lastly i want to point out why we Americans should not support walmart. so first, let's talk about how walmart forces small businesses out of business.

    • Word count: 1055
  4. What criteria should be applied in judging whether monopolies are acting in public interest? (25)

    an utmost efficiency in the allocation of resources). However, the monopolies often fail to achieve a efficiency in the allocation of resources. Figure 1 Refer to figure 1. The monopoly faces a downward sloping demand curve since the firm is an industry and quantity demanded increases as prices falls. The monopoly can either fix price and let market forces determine the equilibrium output, or fix the output and let market forces determine the price. Very often, the profit-maximising monopoly will set the quantity to be sold at marginal revenue equals to marginal cost (MR=MC)

    • Word count: 1292

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