1. Free market economy Advantages: Disadvantages:

1. Free market economy Advantages: Disadvantages:
Completely free market economies (i.e. no government intervention) Market economies have little of no government input, which means the allocation of resources replies solely on the demand and supply of consumers and producers. All resources and raw materials are privately owned by people and firms in a market economy, this means each business will aim to make as much profit as possible Advantages: Wide variety of goods and services available Lots of competition leading to better products and cheaper prices Market quickly responds to consumers wants Disadvantages: Labour only employed when profitable to do so Market may fail to provide important goods and services as they are not profitable Consumption of harmful goods is encouraged.

2. Planned Economy Advantages: Disadvantages:
Economies plan what, how and who to produce goods and services for. All resources owned and managed by the government Aim is not profit, it is to provide sufficient goods and services to everybody Market forces unable to set prices of goods and services Advantages: Prices are set at low levels so everyone can afford the necessities Distribution of goods tends to be more fair than market economy Low level of unemployment Elimination of waste produced by possible competition Disadvantages: Consumers wants rarely produced, only governments Very little competition leading to shortages in supply No consumer choice Lack of profit motive may lead to firms becoming inefficient Time and money wasted in communication instructions from government

2. Mixed Economy Advantages: Disadvantages:
A mixture between a free market economy and a planned economy allowing the best of both economic systems to be in one economy. Allocation of resources done through the wants of consumers with some government intervention to provide goods and services to those in need. This economy works best as it relies on what the consumers want however prevents failure with the help of government intervention. Disadvantages: Taxes may be high, reducing incentive in workers, leading to less money for consumers to contribute to economy Public sector provision may be inefficient, poor quality goods may be produced Government spending may be politically motivated instead of concentrating on the consumers Advantages: Governments may intervene to correct serious market failures Wide variety of choice for consumers Competition enables better quality goods and better prices

Market Failure This happens when the resources have not been allocated sufficiently and fairly in a free or mixed economic system This is usually because of one of these three things: Goods and services are over consumed Goods and services are under consumed Some necessary goods and services are not produced

Examples of Market Failure
Market dominance by monopolies leading to high prices and low quality goods. Merit goods are under-produced and de-merit goods are over-produced due to the profit incentive. Negative externalities, causing social cost of production to exceed private cost Positive externalities, when the social benefit exceeds the private (i.e. hospitals & education) In free markets private sector cannot profitably supply public goods to meet people’s wants

Comparison of 2010/11 and 2007 Social protection is still the highest sector of expenditure, because this looks after the public. Health is also still the second highest, as it is very important to look after the population- so they are healthy to work etc. Unfortunately debt has gone up by £12bn, mean the county is spending even more money than it has. Education is the 3rd highest like in But it has gone up by £11bn. This is very important because future and current generation depend on it to create a better future for the country. Overall expenditure has seen an increase of £107bn

The government gets most its money from:
Income tax, which on average we pay 20% from our income- £150bn National insurance (which they start charging from the age of 16)- £99bn Vat – which is constantly inflating- £81bn Total governments receipts are £548bn, compared to its total spending of £696bn

Conclusion: we can see that government is spending £148bn more than it is receiving in receipts.
SO where is this extra money coming from?!?!? This shows that the country is spending more money than it is receiving from the population, there for it could result in possible debt.

An increase in the economy’s production potential
Trend rate growth – the long run average increase in GDP To increase govt. need to Raise capital investment Expand size of labour Increase level of R&D

Limitations of GDP Regional variations in income & spending
Leisure value is ignored Doesn’t take into account the quality improvements Inequalities of income/wealth Comparing income between countries Doesn’t take into account of non-working parents

Short-run growth is an increase in AD
Lower interest rates Increased wages Increased government spending

Advantages of economic growth
Population increase range of luxury goods (reduces relative poverty) Increase output = increase real GDP More money in economy Increasing tax revenue Spent on population to reduce absolute poverty (education / training) Subsidise merit goods

Disadvantages of economic growth
Widen gap between rich and poor Pollution (higher)  rapid growth at expense of natural resources May lead to demand-pull inflation if supply-side policies are not implemented If demand-side policies are not implemented alongside a shift in LRAS – economic growth may lead to YFE moving further therefore making unemployment

C I R U L A F O W N M E Expenditure Injection Withdrawal

The Economic problem What is the economic problem? In all societies there are limited resources but people have infinite wants. This leads to scarcity where there are not enough resources to go round. The economic problem is how to allocate these scarce resources.

Factors of Production Any business will have to combine the 4 factors of production in the most efficient way for it to produce the good. Therefore, the business tries to get the maximum output from its resources by reducing waste. The 4 factors of production: Land, Labour, Entrepreneur, Capital.

Production in the economy
Primary>Secondary>Tertiary Adding value: In economics we calculate the contribution of each sector by its value added. This is how much more is the product or service sold by compared to what it cost the firm. The business does this by changing the product or service into something more useful, or by adding a brand. Interdependence: All four types of business are reliant on each other for demand and supply of goods and services. Many firms are involved in more that one stage in production.

The Public & Private Sectors
(Approaches the economic problem) The private sector is where organisations are owned and run by private individuals or groups. Their main objectives are to make a profit. The public sector is where organisations are owned and run by the government. Their objectives maybe to provide a service or product that the private sector may fail to provide or fail to provide at an affordable cost. These products may have positive externalities or be merit goods or public goods.

Economic Systems (1) System Arguments FOR the economic system
Arguments AGAINST the economics system Market economy (An economic system where market forces are allowed to guide the allocation of resources-no public sector) Prices automatically give signals to guide resource allocation. Consumers ultimately decide what is made through their demand for products (consumer sovereignty). Profit act as an incentive to producers to be efficient. Lower prices and more choice. There are incentives for individuals to work hard (No taxes= keep all the money you’ve earned. The poorest and most disadvantaged in society will be at a disadvantage (e.g. No benefits) Decisions are made on immediate needs; there may be insufficient information to plan for long-term needs. Merit and public goods may be underprovided. Externalities will be ignored. Benefits and costs that cannot be priced are ignored.

Economic systems (2) System Arguments FOR the economic system
Arguments AGAINST the economics system Centrally planned economy - Government run (An economic system where decisions about resource allocation are guided by the state) Incomes can be distributed more equitably (fair) Everyone has a job, no unemployment. The government can plan for long-term needs. Benefits and costs that cannot be priced can be accounted for (merit and public goods can be provided) Resource allocation may be slow (due to planning) There is no consumer sovereignty. Could be no incentive for producers to be efficient or no incentive for individuals to work hard.

Economic systems (3) System Arguments FOR the economic system
Arguments AGAINST the economics system Mixed economy (Resources are allocated partly through price signals and partly on the basis of direction by the government) Most goods provided by free economy (therefore we get choice, quality, efficiency) Public and merit goods can be provided by government. Government can intervene to stop markets failing and manage the economy. HOW MUCH should the government provide? Need for tax system and administrators.

Specialisation Benefits Problems Benefits Problems
Lack of motivation in the work force Increased efficiency- Lower average costs Specialised workers get paid more Can get repetitive & boring If the job no longer exists, can the worker transfer to another job? Co-ordination problems The Firm The Worker Faster production times Can specialise in what you enjoy Interdependence- if one task stops, everything stops. Increased quality (and standardisation)

The Circular flow of income
Leakages Injections Savings Households Investment Rent, salaries/wages, dividends Imports (Goods and services purchased from other countries) Land, Labour, Capital Exports (goods and services from the UK purchased by people or businesses in other countries Goods and services Payment Taxation Government spending (e.g. Hospitals, educations, services...) Investment abroad Businesses

Other definitions to note:
Economics: the study of how to allocate scarce resources in the most effective way. Benefit: the advantage of a choice. Cost: the expense of a choice. Goods: in economics, we classify goods as ‘tangible’ products, examples might include food, drinks, cars, TV’s. Services: services are sometimes known as ‘intangibles’, education and healthcare are 2 important services and tourism, business consultancy, cleaning and home insurance are all examples. Needs: something that is essential to survive-food, water, warmth, clothing & shelter. Wants: something you would like to have but is not essential for survival. Opportunity cost: The benefit lost from the next best alternative forgone when we make a choice. Resources: something used to produce output.

Definitions: The economic problem
Infinite wants: People’s wants are never ending, someone will always want more or something. Limited resources: Resourced are finite- this means there are only so many of them. Finite resources: commodities that are exhaustible: they will run out. Renewable resources: are commodities such as solar energy, oxygen, fish stocks or forestry that are inexhaustible or replaceable over time. Resource allocation: making a decision as to how resources are used. It requires an economic choice.

Definitions: Factors of production
Land: The land and the raw materials a business uses. Land receives rent. Labour: The human input into the production process. The skills that each unit of labour possesses is called human capital. More human capital leads to increased productivity. Labour receives wages. Entrepreneur: The person who has the business idea and takes the risk. Enterprise receives the reward of profit. Capital: Capital refers to the goods that are used to make other goods. Capital receives the rate of interest. Firm: an organisation that brings together the factors of production in order to produce output.

Definitions: Production in the economy
Sectors of economic activity: Sectors of production in the economy; production of goods and services take place in different sectors, when added together they give us a figure for a nation’s gross domestic product (GDP) Primary sector: This involves extraction of natural resources e.g. Agriculture, forestry, fishing, quarrying and mining. Secondary sector: This involves the production of goods in the economy i.e. Transforming materials produced by the primary sector e.g. Manufacturing and the construction industry. Both consumer and capital goods are made. Tertiary sector: The tertiary sector provides services such as banking, finance, insurance, retail, education, and travel and tourism. Quaternary sector: The quaternary sector is involved with information processing e.g. Education, research and development. Interdependence: This is when the different sectors of the economy rely on each other. De-industrialisation: this is the change from employment in the manufacturing sector to employment in the service sector.

Definitions: The Public and Private Sectors
The private sector: When organisations are owned and run by private individuals or groups. The public sector: When organisations are owned and run by the government. Public good: A good that cannot be priced and so cannot be provided by the private marker at all. This is because it is non- excludable and non-rival, e.g. The police force, street lights. Externalities: Effect on a third party not involved in the purchasing or selling of a good or service. The private market will not take into account these externalities. Merit good: A good that has more benefits to the individual than the individual realises. This good will be under consumed if left to the private market.

Definitions: Economic Systems
(1) (2) Definitions: Economic Systems (3) Economic system: is the way in which a country organises its resources and allocates goods and services throughout the national community.

Definitions: Specialisation
Specialisation: is concentrating on one task or process. An individual can concentrate on one task, a firm or country can concentrate on producing one complete product or service.

Demand & the demand curve
At a high price, customers will buy less. At a lower price customers will buy more. The line is more or less steep depending on how sensitive customers are to changes in price. Price Contraction P Extension/expansion Demand Q Quantity

Determinants of demand
The assumption of ceteris paribus is essential because it leads to 2 key ideas: The price is the relative price (relative to prices of other products) Any other change than price shifts the curve Determinants of demand Demand is a function of: The products own price Incomes Price of other goods* Tastes and fashion Advertising Consumer confidence Cost and availability of credit *Other goods: 1) Complements: Goods that are demanded jointly (e.g. Cars and petrol) 2) Substitutes: Similar alternative products

Increase and decrease of demand
Price Quantity Demand Price Quantity Demand Demand 1 Demand 1 In the diagram demand has increased. At a certain price more will now be demanded by customers. Demand1=new amount of demand. In the diagram demand has decreased. At a certain price less will now be demanded by customers. Demand1=new amount of demand.

Steepness of the demand curve
Price Quantity Price Quantity demand demand If the demand curve is steep, if the price of the product rises, demand will change very little. If the demand curve is flatter, if the price of the product rises, demand will change a lot.

Supply & the supply curve
The higher the price, the more people will supply it. The assumption of ceteris paribus is essential because it leads to 2 key ideas: 1) The price is the relative price 2) Any other change then price shifts the curve extension Price Quantity Supply contraction The Supply curve shows the relationship between supply and price. Any increase in price will result in an extension of supply. Any decrease in supply will result in a contraction of supply.

Determinants of supply
Supply is a function of: The products own price Productivity and costs of production Indirect taxes and subsidies Number of firms and competition Technology Subsidies

Steepness of the supply curve
Price Quantity Price Quantity Supply Supply Example: tube tickets between 7 & 9 in the morning. Cannot suddenly change the amount of tickets for sale. Example: a farmers potatoes. If the price of potatoes goes up, he will supply a lot more potatoes. The supply curve indicates the willingness and ability of suppliers to react to a change in price, i.e. If the price goes up, how able are they to increase the amount they offer for sale.

Increase & decrease of supply
Price Quantity Price Quantity Supply 1 Supply Supply Supply 1 In this diagram, supply has increased from Supply to Supply1 In this diagram, supply has decreased from Supply to Supply1

Supply & Demand diagram
Price Quantity Surplus Supply e P Equilibrium (e) Demand Shortage e Q

Markets & Equilibrium Taxes & Equilibrium
Firms pay indirect taxes to the government. An indirect tax is paid by the firm to the government and usually charges to the consumer by the firm. What types of products do we add tax to? -Most products (in the form of VAT) - Duties (e.g. Alcohol, cigarettes) A tax is an extra cost to the first, so shifts the supply curve to the left...

Taxes SPECIFIC TAX AD VALOREM TAX Price Quantity Price Quantity S1 S1
1 e Q Q 1 e Q Q The curve moves parallel to the original, S1 represents supply with specific tax. The price has changed from Pe to P1, and the quantity has changed from Qe to Q1. The equilibrium has also moved from e to e1. The ad valorem tax reduces supply to s1. Now there is a new equilibrium of S1 with Q1 bought at a price of P1. The customers burden of tax is P to P1.

Subsidies and equilibrium
A subsidy if paid to the firm (by the government) Subsidies could be given for any of the following reasons: 1) To lower the price of an essential good that may be a merit good or have positive externalities. 2) To increase the supply of an essential good that may be a merit good or have positive externalities. 3) To encourage a firm to locate in an area of deprivation. 4) To help firms produce in a more environmentally friendly way. A subsidy causes the supply curve to move to the right.

Definitions: Demand & the demand curve
Demand: the willingness and ability to buy a product. Demand curve: this shows the relationship between the quantity demanded and the price of a product (called a ‘curve’ but is actually a straight line). Demand schedule: the data that is used to draw the demand curve for a product. Notional demand: this is how much would be bought if we had the money to buy everything we want. Effective demand: this is notional demand backed up by the money to buy it. Extension/expansion of demand: a rise in the quantity demanded due to a price fall. Contraction of demand: a fall in the quantity demanded due to a price rise.

Definitions: Determinants of demand
Ceteris paribus: all other things remaining constant.

Definitions: Supply & the supply curve
Supply: the number of goods and services offered for sale at a particular price. It’s the quantity suppliers are able and willing to offer for sale.

Definitions: Supply & Demand
Equilibrium: the point where supply and demand meet and ceteris paribus the market will show no tendency to change.

Definitions: Taxes Ad valorem tax: a tax placed on a good which is a percentage of the price (for example, VAT) Specific tax: a tax placed on a good or service by a specific amount per unit (e.g. £2 per bottle of wine)

Objectives of The Government
Maintaining full employment Means everyone who is able and willing to work has a job. Workforce includes only those who are working plus the unemployed looking for a job . Government dose not aim for 100% as some people are in-between , when there is high employment and low unemployment increase the welfare of society Economic Growth Refers to growth of output in the economy. Value of output will be equal to value of workers and owners of factors of production . Government is aiming for a richer economy government would like a steady rate of growth .Avoiding cyclical changes in GDP . Government like to avoid recession Objectives of The Government Balancing Exports and Imports Government aimed for balance of exports and imports over time. Doesn't mean value of exports should match imports but deficits should be matched by surpluses in other years . Achieving price stability Means keeping price stability low. Inflation – the rise in general price level. Inflation can have serious disadvantages for the economy . Government aims for 2% per annum

Government polices fiscal policy
Aimed at changing the level of total demand through changes in taxation through changes in taxation and governments own spending. If objective is to achieve more employment and economic growth ,the government will operate a fiscal policy to raise demand but if the objective is to achieve a lower rate of inflation and reduce imports/increase exports, it will operate a fiscal policy to reduce total demand. Interest rate policy Aimed at changing the level of total aggregate demand in the economy through changes in interest rates. This policy is operated by the bank of England. If the objective is to achieve more employment and economic growth , than bank of England will reduce interest rates to increase demand. If the objective is to achieve a lower rate of inflation and reduce imports/reduce exports. It will raise interest rates to reduce total demand. Government polices Combining government policies Government can use a combination of polices to achieve its objectives . If the government wants to raise employment and reduce unemployment it can increase government spending and lower taxes thorough a fiscal policy . Bank of England can reduce interest rates at the same time. Both policy will increase total demand in the economy also the government could use a supply side policy in education and training to help people gain employment. Supply side policy Aim to increase the economy's capacity to produce more goods and services .policy's help government to achieve its objectives.(Education and training to improve the quality of the work force )

Environmental costs- Greater output and consumption can lead to more pollution of the land, air, sea and fresh water. For example as output increases so does the transportation of these goods, which means more pollution being created. Quality of life does not depend on material possessions and consumption. It includes leisure time and quality the environment in which we work and live. Economic growth -Economic growth is growth of the country's output over time. Out put is usually measured as GDP. This is the same as the total incomes of the people of the country in a year . Total value of output becomes incomes for those who produce it. Inequalities of income and wealth- The benefits of growth are unevenly spread. This means some become better off while others stay the same. Economic growth is measured by the value of the country's out put and calculates the rate at which it has increased (if in year 1 the GDP was £500 billion, and in year 2 it was £510 billion it was grown by 2% . The economic growth rate was 2%) GDP-the total value of goods and service produced in a country in a year Loss of non-renewable resources- Economic growth uses resources that can't be replaced, including oil, natural gas, metals and other minerals. As some of resources are home to animals they may become endangered and some may face extinction. GDP per capita –GDP divided by the total population. Causes of economic growth Congestion- Economic growth is often concentrated in certain urban areas, cause over crowding and congestion. more pressure on services(hospital) and roads become more congested and travelling times increased. Economic Growth Investment -spending on capital goods (premises and equipment). More investment means the economy has the capacity to produce more goods and services in the future. Benefits of economic growth Inflation- Sometimes the economic growth is too fast to respond without a rise in the general price level. Changes in technology –technical progress means the quality of capital goods improves and more output can increase. A rise in material living standards- If GDP rises faster than the population rises, GDP per capita increases. This means everyone, on average, has more output available to consume than before. They are materially better off. Costs of economic growth A larger workforce- more works there is the more that can be produced. There can be a natural increase in population or immigration. A rise in the welfare of the population- As the capacity of the economy to produce more grows. government is able to devote more resources to services such as education /health. can improve the general welfare of the country. A rise in employment and a fall in unemployment- As output rises, more workers will be required to produce it, therefore unemployment falls. Education and training-- effects the quality of the workforce .more educated, trained and skilled the workforce the greater the output A reduction in poverty- As output and incomes rise , the government is able to take more in taxes from the higher-income groups and use the revenue to raise the living standards of those with lower incomes, for example by providing benefits. Evaluating causes of economic growth. Means trying to judge which of the causes is most important for particular case e.g.. Natural resources- Kuwait's economy and capital investment – china's economy. Natural resources- discovery of a natural resource can be a stimulus to economic growth. Government policies – effectiveness on government policies can significant response on the economy.

Employment and unemployment
Unemployment can be measured by the government using the claimant count and labour force survey Claimant count- measures unemployment according to the number of people claiming unemployment related benefits. Labour Force Survey- survey a sample of house holds, counting people as unemployed if they are actively seeking work but do not have a job . Unemployment- when workers who are able and willing to work are unable to find work Full employment is where all those able and willing to work are in paid employment at current wage rate. Types and causes of unemployment Social problems- As well as lowering living standards, the unemployment may suffer from a loss of status and self-esteem. It can lead to an increase in crime Voluntary – when people choose not to work Seasonal –only being employed certain time each month Excluded workers- Some people are unemployed for so long they become excluded from the workforce. They become unemployable. Employment and unemployment Frictional-workers moving between jobs. There are time lags between workers leaving their job and starting a new one. Costs to taxpayers- The unemployed are entitled to Jobseeker's Allowance or other benefits. The more unemployed people there are the greater the cost to taxpayers. A raise in taxes is likely. consequences of unemployment Structural- caused by long term changes in structure of industry e.g. they have the work skills/qualifications for other jobs. Labour resources are wasted- The economy is it not using all of its resources that are available, therefore wasting them. technological -caused by capital taking the place of labour. means that workers lose their jobs. This has been common in manufacturing industries, for example use of robots on car assembly lines Regional problems- Unemployment is unlikely to spread evenly throughout the country. In times of high unemployment some locations tend to suffer much more than others, and may become 'depressed areas'. A budget deficit- As well as the rise in spending , the government will lose tax revenue from workers that become unemployed, for example income tax will have a much smaller revenue than from before. Lower living standards- Workers and their families suffer a lower standard of living as unemployment causes their income to fall. Cyclical--caused by a fall in total demand in the economy. If the demand for goods and services falls, then fewer workers are needed to produce output and some will be laid off. These unemployed now have lower incomes and will spend less lowering total demand, which will lead to more unemployed.

Inflation Causes of inflation
Inflation- a sustained rise in the general price level over time Wage-price spiral- As the price level rises workers aim for wage rises. When these are given, this results in prices rising even more and leads to more inflation. This may continue in a cycle were inflation can become very high Demand-pull inflation- This is caused when the total (aggregate) demand in the economy rises. The supply of the goods and services cannot compete without the amount demanded, therefore stimulating a rise in price or causes the prices to be pulled up to reduce to demand. Demand-pull inflation- usually occurs when the economy is near to full employment. Price stability – the general level of prices is kept constant or grows at an acceptably low rate over time Rate of inflation- the rate at which the general price level rises over time Cost-push inflation- This is caused when costs of production rise and cause the price level to rise. This is because if production increases the producer will need to make more money in order to afford the production and sustain the same level of profit. inflation is measured mainly by Consumer Prices Index (CPI). This is the official measure of the rate of inflation for the UK government and governments of other European Union countries. Inflation Hyper inflation. Cost of inflation Unemployment- High inflation reduces the confidence of businesses and so they invest less leading to unemployment as total demand falls. Shoe leather costs- If prices are not stable , consumers and firms spend more time 'shopping around' to find a reasonable price. This extra time and effort is known as 'shoe leather costs'. The government finds out the spending pattern of average families in the country. It records the prices of everything the families buy each month. This is done across the country. So if prices rise from one month to the next it is recorded in the CPI. Goods and services that usually take a higher proportion of the spending are more important when measuring inflation. Balance of payments problems- This will happen when a country which we trade with has a higher inflation rate than our own. Their competitive will decrease and prices drop so more consumers and firms will import goods and so will lead to a trade deficit. Menu costs- Firms have to adjust their price lists more often when there is inflation, for example restaurants increasing the prices on their menus Income redistribution problems- Some people (especially debtors) may gain from inflation. Workers with a strong trade union may be able to achieve wage rises that keep up with inflation. But many people on low, fixed incomes may face hardship as their income fails to keep up with the prices. Labour market problems- Workers will want wage rises to keep up with inflation ,cause the employer to struggle with the increase in labour costs, can lead to conflict between employers and employees and this can cause strikes. benefits of price stability/a low rate of inflation- a low rate of inflation may act as an incentive for businesses to invest as they will be able to increase prices and profits. Price stability makes it easier for relevant prices to adjust

Government spending Main area of government spending
Social protection- system of social security benefit Indirect tax- tax on spending, often defined as a tax on goods and services Heath- the NHS provide range of healthcare and production for the population. Huge employer Direct tax- a tax on income or wealth Governments main source of income is taxes Law and order- police, courts ,prisons Indirect tax Defence- Army, Air force, Navy Excise duties- Taxes on specific range of goods (tobacco, alcohol). Government spending debt interest- government has borrowed money has to pay back interest VAT- 20% tax on all most goods and services apart from food. Direct tax Education- most children educated in public (government) sector also higher education Income tax- Any income you make you pay an amount of it to the government, the more you earn the more you pay. Economic effects of changes in indirect tax – effect Patten of demand , consumers usually lower consumption of the goods with high taxes. Indirect tax is good in case of demerit goods Inheritance tax- A tax on inheritance. Corporation tax- A tax on the profits of companies. Demerit good I a good or service which is considered unhealthy or has a bad effect on the consumer National insurance contributions -paid by both employers and workers much like income tax Economic effect on changes in direct tax- help reduce inequalities of income .often said to harm incentives, very noticeable when deducted From pay packets.

Redistribution of income
Distribution of income – how incomes are shared out among the people of the country why income and wealth is unevenly distributed Wages- people have different wages that pay different amounts, those in jobs with low supply of workers will get paid more and those jobs with high supply workers typically get paid less. Redistribution of income- a policy to reduce the inequalities of income so that incomes are distributed more evenly Some people have assets. Some people rent land Some people reply on benefits form state Redistribution of income the consequences of redistribution measures. Reduce inequalities redistribution of income and wealth can be achieved through taxation Disincentive effect-no point of working over time if more money goes toward tax Progressive tax- takes a greater proportion of income from higher incomes or a smaller percentage of a lower income Regressive tax – takes a greater proportion of income from lower incomes, or takes a smaller percentage of a higher income. Proportional tax -takes the same proportion of income from all income levels Benefits – children – transfer payment

Correcting Market failure
Laws and regulation- banned use of lead in petrol and smoking in public places to reduce Externalities. Production Externalities - when production takes place ,can affect people in society who are not part of the production process .such as pollution. Market failure – when the market fails to allocate resources in best interest as society as a whole Consumption Externalities- e.g. driving cars, causes air and noise pollution danger to pedestrians and passengers also litter from fast food external cost Correcting Market failure Provision of merit goods-government directly provides goods and services that have positive externalities. Health and education services Positive Externalities- e.g. vaccinations against diseases (merit good) Subsidies- government could encourage produces or consumers to alter their behaviour. If there was cheap reliable public transport people would be more obliged to use it. Taxes and charges- reduce external cost through taxation e.g. VAT on petrol as price increase consumptions may fall. Also tolls and congestion charge.

Fiscal policy Supply-side policy
Fiscal policy- It uses taxation and government spending to achieve the government's objectives. If the government wishes to reflate or expand the economy it will aim for a budget deficit. This aims at achieving economic growth and more employment. Fiscal policy If the government wish's to contract or deflate the economy. then it will aim for a budget surplus. A budget surplus aims at reducing both inflation and a balance of payments deficit. Effects- If government reduces taxes to raise disposable incomes w then people will spend more but how much? Be a multiplier effect fiscal measures take time to put into effect during which time the economy will be changing .conflict between objectives Education and training- a well educated and trained workforce is able to produce more goods and services. Reducing benefits- people may loose an incentive to work if they can get the same income of benefits Supply-side policy- polices that increase the ability of the economy to supply more goods and services. Reducing direct taxes- cut in income tax may give an incentive to work Supply-side policy Encourage enterprise- new business can benefits form a variety of tax allowances and relief which could cut tax bill Effects of supply side policy- can target particularly markets or parts of the economy- take a long time to put into effect. Some polices face resistance from groups within the economy. Reducing monopoly power- government can control monopoly power. Can prohibit merges Encourage new technology and innovations- government introduces capital allowance schemes to encourage investment into new technology.

Monetary and interest rate policy
Money- anything that is generally acceptable as a medium of exchange Interested rates- the reward for saving and the cost for borrowing Interest rate policy- the use of interest rate to achieve the governments economic objectives. Monetary and interest rate policy effects of interest rate policy- time lags the momentary policy committee meet every month so reasonably quick to respond to data. Interest rate policy is quicker too react than fiscal but still takes time for the effects of interest rate policy to make its way through the economy. Different rates of interest Saving verses borrowing- general rule the interest rate from saving will be lower than rate of borrowing Competition- between banks and building society's. How interest rate policy work (why total demand will fall) -saving ,more rewarding .save more consume less, -borrowing is more expensive for consumers. -borrowing more expensive for firms -mortgage interest payments -make imports cheaper and help reduce inflation. Interest will be higher if -greater minimum deposit for the account- longer moneys been tied up – when saver is committed to saving plan-also committed to another type of account.in same bank.

Basic Economic Problem
There are scarce resources for unlimited wants which leads to the need for choice.

Factors of Production Land- includes all of the natural physical resources – for example The raw materials used including oil etc Labour- is the human input into the production process. Capital- Capital goods can be used to produce other consumer goods and services in the future. Capital includes machinery, equipment, new technology, factories and other buildings. Entrepreneurship- an individual who seeks to supply products to a market for a rate of return (i.e. to make a profit). Entrepreneurs will usually invest their own financial capital in a business and take on the risks. Their main reward is the profit made from running the business. Factor Endowment- A country’s stock of factors of production (Quality & Quantity)

Specialisation Specialisation is when we concentrate on a particular product or task. Division of labour is a particular type of specialisation where the production of a good is broken up into many separate tasks each performed by one person or by a small group of people. It raises output per person, thereby reducing costs per unit because lower skilled workers are easily trained and quickly become proficient through constant repetition of a task.

Allocating Resources Free Market Economy- Resources are allocate through the market mechanism of demand and supply. Decisions are made by millions of people and thousands of firms on the allocation of resources Command Economy- The government has a central roll in the allocation of resources. Mixed Economy- Both the public and private sectors play a role in the allocation of scarce resources. Decisions involve an interaction between firms, labour and the government, mainly through the market mechanism.

Opportunity Cost Opportunity cost measures the cost of any choice in terms of the next best alternative foregone. Work-leisure choices: The opportunity cost of deciding not to work an extra ten hours a week is the lost wages foregone. If you are being paid £6 per hour to work at the local supermarket, if you choose to take a day off from work you might lose £48 from having sacrificed eight hours of paid work. Government spending priorities: The opportunity cost of the government spending nearly £10 billion on investment in National Health Service might be that £10 billion less is available for spending on education or the transport network. Investing today for consumption tomorrow: The opportunity cost of an economy investing resources in new capital goods is the current production of consumer goods given up. We may have to accept lower living standards now, to accumulate increased capital equipment so that long run living standards can improve. Making use of scarce farming land: The opportunity cost of using arable farmland to produce wheat is that the land cannot be used in that production period to harvest potatoes. Opportunity cost can be looked at through the use of a Production Possibility Curve.

Production Possibility Curve
A production possibility frontier (PPF) is a curve or a boundary which shows the combinations of two or more goods and services that can be produced whilst using all of the available factor resources efficiently.

Combinations of output of goods X and Y lying inside the PPF occur when there are unemployed resources or when the economy uses resources inefficiently. In the diagram above, point X is an example of this. We could increase total output by moving towards the production possibility frontier and reaching any of points C, A or B. Point D is unattainable at the moment because it lies beyond the PPF. A country would require an increase in factor resources, or an increase in the efficiency of factor resources or an improvement in technology to reach this combination of Good X and Good Y. If we achieve this then output combination D may become attainable.

Demand Demand is defined as the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period. Price £ This shows that the lower the price, the more is demanded, and vice versa. D Quantity demanded

Factors affecting Demand
Income Fashion/Trends Price of Substitutes Price of Compliments Population

Consumer Surplus Consumer Surplus is the difference between the price a consumer is willing to pay and the price they actually pay (Market Price) D Area of Surplus P Q

Supply Supply is defined as the quantity of a product that a producer is willing and able to supply onto the market at a given price in a given time period. Price £ S D D1 Quantity supplied

Factors Affecting Supply
Cost of Production- Including Taxation Advances in technology Availability of Finance Changes in the price of other goods e.g. by- products & alternatives Subsidies

Area of Produce Surplus
Producer surplus Producer surplus is the difference between the price producers are willing to supply at and the price they actually receive. S Area of Produce Surplus

Market Equilibrium Equilibrium means a state of equality or a state of balance between market demand and supply. Without a shift in demand and/or supply there will be no change in market price. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market.

PED PED measures how responsive the quantity demanded is with respect to a change in price. It is measured: % change in quantity demanded % change in price Always a negative number due to inverse relationship between price and Quantity demanded Elastic= < -1 Inelastic= > -1 Unitary= -1

Factors of PED The number of close substitutes for a good / uniqueness of the product – the more close substitutes in the market, the more elastic is the demand for a product because consumers can more easily switch their demand if the price of one product changes relative to others in the market. The huge range of package holiday tours and destinations make this a highly competitive market in terms of pricing – many holiday makers are price sensitive The cost of switching between different products – there may be significant transactions costs involved in switching between different goods and services. In this case, demand tends to be relatively inelastic. For example, mobile phone service providers may include penalty clauses in contracts or insist on 12-month contracts being taken out The degree of necessity or whether the good is a luxury – goods and services deemed by consumers to be necessities tend to have an inelastic demand whereas luxuries will tend to have a more elastic demand because consumers can make do without luxuries when their budgets are stretched. I.e. in an economic recession we can cut back on discretionary items of spending The % of a consumer’s income allocated to spending on the good – goods and services that take up a high proportion of a household’s income will tend to have a more elastic demand than products where large price changes makes little or no difference to someone’s ability to purchase the product. The time period allowed following a price change – demand tends to be more price elastic, the longer that we allow consumers to respond to a price change by varying their purchasing decisions. In the short run, the demand may be inelastic, because it takes time for consumers both to notice and then to respond to price fluctuations Whether the good is subject to habitual consumption – when this occurs, the consumer becomes much less sensitive to the price of the good in question. Examples such as cigarettes and alcohol and other drugs come into this category

YED YED measures the sensitivity of quantity demanded with respect to a change in consumer income. It is measured: % change in quantity demanded % change in incomes Normal Good= + Inferior Good= - Elastic= > 1 Inelastic= < 1

XED XED measures the sensitivity of demand for one product with respect to the change in price of another. It is measured as: % Change Quantity Demanded X % Change in Price of Y A positive XED above 0 means that the products are close substitutes, positive XED below 0 means that they are Complements. The further away the number is from 0 the closer the relationship An XED of 0 means that the two products are unrelated.

PES PES measures the sensitivity of quantity supplied with respect to a change in price. It is measured as: % Change in Quantity Demanded % Change in Price When Pes > 1, then supply is price elastic When Pes < 1, then supply is price inelastic

Factors of PES (1) Spare production capacity
If there is plenty of spare capacity then a business should be able to increase its output without a rise in costs and therefore supply will be elastic in response to a change in demand. The supply of goods and services is often most elastic in a recession, when there is plenty of spare labour and capital resources available to step up output as the economy recovers. (2) Stocks of finished products and components If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand quickly by supplying these stocks onto the market - supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher and unless stocks can be replenished, supply will be inelastic in response to a change in demand. (3) The ease and cost of factor substitution If both capital and labour resources are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily and quickly be switched (4) Time period involved in the production process Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets for example, the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the overall production yield.

Allocative Efficiency
AO1: Definition: Where scarce resources are used to produce the goods which consumers want (Price=Marginal Cost) A03: Increased competition= Increase in allocative efficiency, firms need to use the resources to make what the consumers want. If they don’t consumers will go elsewhere. Within a competitive market the customer has the power, therefore consumers will buy from those who meet their needs. If it fails to do this then in a competitive market the firm will fail. AO4: Does not apply to monopolies because they can charge there prices high as they are the only supplier in the market. Research and Development is needed to find out what consumers want. Market research is needed to also establish needs of a consumer. Innovation is ,however, difficult unless in a monopoly because money needs to be spent to create new and improved products.

Market Failure When markets do not provide us with the best outcome in terms of efficiency and fairness, then we say that there exists market failure. A market will fail when there are postive & negative externalities, Information failure and Public Goods

Externalities They occur when a third party (someone with nothing to do with the economic action of an economic decision) is effected by the economic decisions of others. Private Costs are those costs, which are paid by an individual economic unit for example the consumer or the firm ( The First Party) Social Costs are all the related costs associated with an action, both the private costs and the costs to the rest of society ( External Cost)

Negative Externalities
These occur when the Social Costs are greater than the private costs. E.g. Smokers ignore the unintended but harmful impact of toxic ‘passive smoking’ on non-smokers, Acid rain from power stations in the UK can damage the forests of Norway, Air pollution from road use and traffic congestion, The social costs of drug and alcohol abuse.

Positive Externality Occur when the Social Benefit is greater than the private benefit. E.g. Social benefits from providing milk to young school children, External benefits from vaccination / immunisation programmes, Social benefits from restoration and use of historic buildings.

Why do they cause Market Failure?
If only the private costs were reflected in the price of the product then it would not accurately reflect the true cost, therefore it will lead to either over or under production. Negative externalities- Overproduction Positive Externalities- Underproduction- There true social benefits are ignored.

Merit Good They have positive externalities
Information failure- failure to see the full social benefit of their actions- they fail to appreciate the benefits associated with the consumption of the good/service and therefore it is under consumed Examples: Museum, library, education, inoculation

Demerit Good Negative externalities
Information Failure- failure to see the full social costs of their actions- they fail to appreciate the costs associated with the consumption of the good/service and therefore it is over consumed Examples: Drugs, Cigarettes, alcohol, fast food.

Public Goods Are examples of Market Failure resulting from missing markets. Pure public goods are not normally provided at all by the private sector because they couldn’t supply then for a profit. It is therefore up to the Government to decide what output of public goods is appropriate for society. To do this, it must estimate the social benefit from the consumption of public goods. Putting a monetary value on the benefit derived from street lighting and defence systems is problematic. Non-excludable- Once provided then no one can be excluded/prevented from consuming the goods. The benefit is that it cannot be confined to only those who have actually paid for it. Non payers can enjoy the consumption. However, this can lead to a ‘free rider’ problem where people continue to consume without paying. Non- Rival- Consumption of a good by one person does not reduce the availability of the good to everyone else, therefore we all consume the same amount of good even though our tastes and preferences may differ.

Quasi-Public Good A quasi-public good is a near-public good i.e. it has many but not all the characteristics of a public good. Quasi public goods are: Semi-non-rival: up to a point, extra consumers using a park, beach or road do not reduce the amount of the product available to other consumers. Eventually additional consumers reduce the benefits to other users. Beaches become crowded as do parks and other leisure facilities. Semi-non-excludable: it is possible but often difficult or expensive to exclude non-paying consumers. E.g. fencing a park or beach and charging an entrance fee; building toll booths to charge for road usage on congested routes

Government Intervention
The government may choose to intervene in the price mechanism largely on the grounds of wanting to change the allocation of resources and achieve what they perceive to be an improvement in economic and social welfare. All governments of every political persuasion intervene in the economy to influence the allocation of scarce resources among competing uses The main reasons for policy intervention are: To correct for market failure To achieve a more equitable distribution of income and wealth To improve the performance of the economy

Indirect Taxation An indirect tax is imposed on producers (suppliers) by the government to reduce the overconsumption of demerit goods and therefore reduce the negative externalities. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax. A tax increases the costs of a business causing an shift left in the supply curve, leading to a movement along the demand curve, decreasing the quantity demanded, therefore overconsumption is corrected.

Evaluation of Taxation
Inflation increase due to tax increase, therefore UK export lose their international competitiveness as goods become more expensive and so a decrease in demand for exports leads to unemployment. For taxation to be effective it needs to be on a global scale since firms will just relocate to a low-tax country for exports.

Regulation The use of laws accompanied by fines introduced by the government in an attempt to influence individual behaviour. The fines act as a deterrent to individuals not to break the law. E.g. smoking ban, using mobile phone whilst driving, dropping litter Once a law has been passed then an individual must modify their behaviour in order to comply with the law, otherwise they will be fined. The fine is an incentive for individuals and firms to keep within the boundaries of the law. The higher the fine or punishment the more likely it is to modify the individuals behaviour. Demand curve shift Left when regulation is put in place addressing overconsumption

Evaluation of Regulation
+ Simple and quick to introduce + Easy to introduce - Difficult to fix an appropriate level of regualtion/fine- maybe too lax or too strict - Difficult to Enforce as it is impossible to catch all those breaking the law - There is a possibility of a shadow market being created in response to regulation

Tradable Permits The government sets a limit on the amount of pollution permitted. They then allocate permits to individual firms which are then traded for money between polluters. E.g. EU Emissions Trading Schemes A Market for pollution permits is established with market price of the permits being determined by the supply and demand. This therefore acts as an incentive for polluters to invest in new technology reducing their pollution levels and raise money through the sale of permits. It also means that those who do not reduce their pollution levels will have to pay a higher cost through the purchase of more permits. Shift Left on the supply curve as increased cost of production

Evaluation of Tradable Permits
+ Firms have a financial benefit from reducing emissions as they can raise funds through the sale of permits. + With other forms of correction there is only a punishment dealt to firms rather than a method of raising funds to pay for new technology which will reduce emissions. - Enforcement issues, If permits are to be successful then they need to be policed and inspected regularly. This is expensive and will involve an opportunity cost. - What should the level of permits be to begin with. This is vital as the market price of the permits will be determined in part by the amount of supply. If there are too many permits it will be an ineffective system. - Permits will only be effective is introduced on a global basis as firms will otherwise switch production from one country to another. Will not reduce pollution and increase unemployment.

Subsidies A financial investment paid by the government to businesses to encourage the production of a good that is under consumed/produced. E.g. Rural Bus Routes A subsidy reduces the cost of production for a firm which enables them to increase supply. This leads to a shift right on the supply curve, a movement along the demand curve increasing quantity demanded and thus market failure has been corrected.

Subsidy Evaluation What size should the subsidy be? It should be set to the size of the external benefit but this is difficult to measure. Too large a subsidy could lead to over production and a too small subsidy would still result in Market Failure (under production) Any subsidy involves opportunity cost. Firm may decide to use the subsidy elsewhere e.g. to increase there profit margins and so demand will not increase as price will remain the same.

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