- Join over 1.2 million students every month
- Accelerate your learning by 29%
- Unlimited access from just £6.99 per month
AS and A Level: Markets & Managing the Economy
Meet our team of inspirational teachers
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
Explain and illustrate the roles played by profit in allocating scarce resources within the economy over time.5 star(s)
Hence, firms would allocate their resources to increase output till this point as reflected in the diagram A. As shown in Diagram A, producing at output level, Q1 would result in a profit earned reflected by the blue border box. However, the firm is not producing at the optimal output level of Q2 which generate the highest possible profit as reflected by the red border box. Hence, profit-driven firms would be motivated allocate more scarce resources to increase their output level to Q2 to maximize profits. Therefore, this shows that potential profit is able to drive allocation of scarce resources to achieve profits maximisation.
- Word count: 954
The market average increase in sales over this period was 4.4%. Tesco hold an 'actual monopoly' over the industry, with 30.7% market share. The industry is currently worth �146.3bn and is predicted to grow to �175.9bn by 2014 according to 'UK Grocery Retail Outlook 2009 - Repositioning for Growth' Market share The market in which Tesco operates is supermarkets. Although this is a highly competitive one Tesco holds a disproportionate amount of power. The figures below indicate that Tesco holds over a third of the market share, and even double the amount of Asda's market share, the second leading supermarket.
- Word count: 3335
means of transport such as the train or tube, or they may simply think twice about using their car if it isn't necessary. The London congestion charge has, for example meant that congestion in the extended zone has decreased by 20% and there are 8-12% less vehicles being used on a daily basis that before the charge. Showing that road pricing has decreased congestion. The hypothecation of road pricing has meant that the �120 million raised per year can be spent on improving public transport services.
- Word count: 1868
A free market is an economic system where the prices of goods and services are determined by unrestricted competition between privately owned businesses.4 star(s)
Unlike public goods, merit goods are excludable. With merit goods such as healthcare, only those with sufficient income would be able to access the service and those who have insufficient income would not be able to access the good/service. This leads on to the next limitation of a free market, unequal distribution of income. In a free market economy, there is large unequal distribution of income because the income of most labourers is driven down by the high level of competition in the market. Those whose businesses are profitable and not forced down by competition are those with great wealth.
- Word count: 986
Deflationary demand-side policies decrease aggregate demand in the event of aggregate demand running ahead of aggregate supply and posing inflationary risks or leading to an unsustainable deficit on the balance of payments. An example of when reflationary demand-side policies would be used is when aggregate demand is too low, so for instance when taxes are high and interest rates are high. The policies that would be used in order to shift out the aggregate demand curve would be lowering taxes and government spending, fiscal policy, and decreasing interest rates, monetary policy.
- Word count: 810
Explain how the equilibrium level of output is determined in perfect competition. Both for the whole market and one firm within the market4 star(s)
There is also perfect information for the consumers and producers. Most importantly, in a perfectly competitive market, the firms aim to maximize profits, firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. Following on from above, an important idea from which equilibrium output is determined in perfect competition is that the firms main aims are to maximize profits. So, price taking from the firms guarantees, that when the firms maximize profits, by choosing the quantity they wish to produce and the combination of factors of production to produce it with, the market price will be equal to marginal cost.
- Word count: 1303
In this market structure it is also assumed profits are maximised and there is consumer rationality. Traditionally monopoly is thought to be a potentially harmful market structure with unwelcome consequences for the consumer and the economy. Competition has always therefore been seen to be desirable. It could be said therefore to be against the public interest. However there are arguments not only against monopolies but also for their existence. One of the main arguments against monopolies is that they raise prices, restrict output and therefore exploit consumers.
- Word count: 1068
So they want people to consume where the pink lines meets the green line. MSB = MSC (5 a day). Below 5 a day both the MSC and MPC are below MPB and MSB. So both society and the individual wants to consume the good. Above 10 a day the MSC and the MPC are above the MSB and the MPB so neither the individual or society wants more than 10 cigarettes a day. However in between 5 and 10 cigarettes a day, the MSC is above the MSB so society does not want to have that many cigarettes.
- Word count: 1026