Edexcel Economics - Theme 1: Introduction to markets and market failure
Topic outline
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This theme focuses on microeconomic concepts. Students will develop an understanding of:
● nature of economics
● how markets work
● market failure
● government intervention -
a) Thinking like an economist: the process of developing models in economics, including the need to make assumptions
b) The use of the ceteris paribus assumption in building models
c) The inability in economics to make scientific experiments-
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a) Distinction between positive and normative economic statements
b) The role of value judgments in influencing economic decision making and policy -
a) The problem of scarcity – where there are unlimited wants and finite resources
b) The distinction between renewable and non-renewable resources
c) The importance of opportunity costs to economic agents (consumers, producers and government) -
a) The use of production possibility frontiers to depict:
- the maximum productive potential of an economy
- opportunity cost (through marginal analysis)
- economic growth or decline
- efficient or inefficient allocation of resources
- possible and unobtainable production
c) The distinction between capital and consumer goods-
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a) Specialisation and the division of labour: reference to Adam Smith
b) The advantages and disadvantages of specialisation and the division of labour in organising production
c) The advantages and disadvantages of specialising in the production of goods and services to trade
d) The functions of money (as a medium of exchange, a measure of value, a store of value, a method of deferred payment) -
a) The distinction between free market, mixed and command economies: reference to Adam Smith, Friedrich Hayek and Karl Marx
b) The advantages and disadvantages of a free market economy and a command economy
c) The role of the state in a mixed economy -
- Rational decision making
- Demand
- Price, income and cross elasticities of demand
- Supply
- Elasticity of supply
- Price determination
- Price mechanism
- Consumer and producer surplus
- Indirect taxes and subsidies
- Alternative views of consumer behaviour
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a) The underlying assumptions of rational economic decision making:
- consumers aim to maximise utility
- firms aim to maximise profits
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a) The distinction between movements along a demand curve and shifts of a demand curve
b) The factors that may cause a shift in the demand curve (the conditions of demand)
c) The concept of diminishing marginal utility and how this influences the shape of the demand curve-
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a) Understanding of price, income and cross elasticities of demand
b) Use formulae to calculate price, income and cross elasticities of demandc) Interpret numerical values of- price elasticity of demand: unitary elastic, perfectly and relatively elastic, and perfectly and relatively inelastic
- income elasticity of demand: inferior, normal and luxury goods; relatively elastic and relatively inelastic
- cross elasticity of demand: substitutes, complementary and unrelated goods
e) The significance of elasticities of demand to firms and government in terms of:- the imposition of indirect taxes and subsidies
- changes in real income
- changes in the prices of substitute and complementary goods
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a) The distinction between movements along a supply curve and shifts of a supply curve
b) The factors that may cause a shift in the supply curve (the conditions of supply)
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a) Understanding of price elasticity of supply
b) Use formula to calculate price elasticity of supply
c) Interpret numerical values of price elasticity of supply:- perfectly and relatively elastic, and perfectly and relatively inelastic
e) The distinction between short run and long run in economics and its significance for elasticity of supply -
a) Equilibrium price and quantity and how they are determined
b) The use of supply and demand diagrams to depict excess supply and excess demand
c) The operation of market forces to eliminate excess demand and excess supply
d) The use of supply and demand diagrams to show how shifts in demand and supply curves cause the equilibrium price and quantity to change in real-world situations -
a) Functions of the price mechanism to allocate resources:
- rationing
- incentive
- signalling
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a) The distinction between consumer and producer surplus
b) The use of supply and demand diagrams to illustrate consumer and producer surplus
c) How changes in supply and demand might affect consumer and producer surplus -
a) Supply and demand analysis, elasticities, and:
- the impact of indirect taxes on consumers, producers and government
- the incidence of indirect taxes on consumers and producers
- the impact of subsidies on consumers, producers and government
- the area that represents the producer subsidy and consumer subsidy
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