Slide show 1 Economic Methodogy [Auto-saved]
Economics A Level
Mr Moore
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Economics A Level
Mr Moore
Economics A Level
2 Modules of work over year 12 and 13
Year 12 Module 1 Markets and Market Failure (Micro Economics)
Year 13 National and International Economics (Macro Economics)
All assessment at end of year 13 = 3 Exams
Economics A level
Expectations – Handbook.
Proactive
Complete all class, Prep, Homework and assessments.
Take a wider interest in the subject news and blogs.
Economics A Level
Assessment is 3 Exam papers
Paper 1 – Markets and Market failure 35%
Paper 2 National and International Economics 35%
Paper 3 Economic principles and Issues 30%
All papers are 2 hours long.
Economics A Level
Markets and Market Failure
What is Economics?
Economics is a social Science –a study of how people choose to use resources on Micro and Macro Level.
Resources include the time and talent people have available, the land, buildings and equipment, and other tools to combine them to create useful products and services.
What is Economics?
Economics considers how people are expected to behave versus how they actually behave.
Economics uses a range of theories which are represented as Models.
Models are used to simplify complex economic situations which may be influenced by a number of variables.
Models can be used to predict what is likely to happen
What is Economics?
In order to get a better understanding of Economic theory it is worth spending time understanding business……..
What is Economics?
Businesses provide goods and services to satisfy or meet demands
People work in business and they provide jobs
Why else do they provide
Economic and Business
A business is an organisation that offers a product or service in return for remuneration with the objective of making a profit .
Over 90% of all businesses in the UK are small businesses employing fewer than 10 people.
Businesses can be created by the government or privately.
Economics and Business
Therefore it is important to realise that Business and business behaviour are very important to understanding economic concepts on a local and national level.
Consider the following businesses – other than the products that they sell, give one way in which they differ. Clue consider how they benefit the customer.
Tesco and Aldi
Boots and QE2 Hospital
Sky and BBC
The ‘basic economic problem’
Understanding the fundamental problem that underpins economics
Economic Decisions & Predictions
Predicting the future or what is likely to happen is a major function of the economist. Predictions fall into 2 main categories
Positive Statements – Fact based judgement – using objective measurements as far as possible e.g. unemployment is predicted to increase by 5% if taxes increased (objective)
Normative statements – ‘value or gut feel judgements’ stating what should or ought to happen (subjective)
The ‘basic economic problem’
Scarcity (lack of sufficient resources) is the basic problem for society today – as a society we have ‘infinite’ needs and wants and ‘limited amounts’ or ‘scarcity’ of resources.
Why is there scarcity?
Lack of resources materials, limited supply of land labour.
Lack of finance – uneven distribution of wealth
Lack of people with the right skills
Theses are all ‘Factors of Production’
Exercise - Frogs and Cats
The exercise require you and one other person to make some paper animals. All your resources were scarce – how?
Labour
Land
Materials (capital)
Enterprise
Business v Economics (cats and Frogs Ex)
What were the business outcomes from the production of cats and frogs?
What are the economic outcomes from the production of cats and frogs?
Business v Economics
The business outcomes of making the cats and frogs were calculated by working out the cost of the paper and the selling prices for each animal (information that was not available at the start of the exercise)
The economic outcomes focus on the best allocation of the use of the resources - your time, the paper, your desk space which were all limited and therefore scarce.
Measuring Scarcity - Financial cost & Opportunity cost
The task involving the production of Cats and Frogs
- Making frog had a financial cost – how much money/profit – making black frogs made the most profit
–Making a frog also had the cost of in terms of what was not being made ie NOT making a cat. This is referred to as the opportunity cost of making a frog
-
Measuring Scarcity - Opportunity costs
From the exercise last week which required to make green brown and black cats and frogs identify 3 different opportunity costs.
Opportunity costs examples
Making a yellow frog – opportunity cost of not making a yellow cat
Making a brown frog – opportunity cost of not making a brown cat
Making a green frog – opportunity cost of not making a green cat
In each case if you made one, you had to forego something else.
Modelling with opportunity cost
During the 12 minute exercise you were asked to produce 12 cats and 6 frogs(irrespective of colour)…
In order to simplify the exercise which was to make cats and frogs is there a way to represent the allocation of resources to frogs relative to cats and vice versa
Modelling with opportunity cost
Assuming all 12 cats and 6 frogs were made …
For every cat that your team made how many frogs were you not able to make?
For every frog that the person made how many cats were not made?
Modelling with opportunity cost
Assuming all 12 cats and 6 frogs were made …
For every cat that your team made how many frogs were you not able to make? 1 cat : 0.5 frog
For every frog that the person made how many cats were not made? 1 frog : 2 cats
Illustrating the use of resources
In addition to the opportunity cost we can represent the use of resources in your teams by using a Production Possibility curve
The Production possibility curve shows the choices that you made when using the resources (factors of production) to make the cats and frogs
Assuming that all cats and frogs were made with the available resources this can plot Frogs v Cats
Frogs
Cats
Production Possibility Curve (PPC) for Cats and Frogs
Any point along this curve represents a choice of whether to allocate resources to cats or frogs
3 frogs
B
B = ?
A
C
Frogs
Cats
Production Possibility Curve (PPC) for Cats and Frogs
If less than 12 cats and 6 frogs were produced we would represent this by operating below the red line eg point D
3 frogs
B
A
C
D
Frogs
Cats
Production Possibility Curve (PPC) for Cats and Frogs
If you could have produced more than 12 cats and 6 frogs we would represent this by operating above the red line eg point E
3 frogs
B
A
C
E
Using opportunity cost practise examples
Susan and Andy are making cats and frogs – 2 exercises to represent the use of resources …… use the PPC and calcaualte the Opportunity costs
Exercise Findings (Look at the figures and consider)
Susan is better than Andy at making cats and frogs
It therefore appears that there is no need for Andy.
However this is not the case as
- Susan can only do one thing at a time
- Andy has the same amount of time available as Susan and he can make more of the same product at the same time as Susan.
An Absolute Advantage
An Absolute advantage occurs when someone can make more than one thing faster than another person
Susan has an ‘absolute advantage’ in terms of the production of both frogs and cats and bracelets – she can make both faster and therefore at lower unit cost.
…..BUT it will take longer to manufacture both the cats and frogs if only Susan makes them. So it is better to use Andy even though he is slower.
Allocating resources and Opportunity costs
The opportunity cost is the cost of the next alternative action forgone. When a firm allocates resources to make a product they have foregone the production of something else.
In the case of allocating peoples’ time it needed to be expressed in terms of what they are forgoing.
The concept of opportunity cost allows you to measure the cost of a decision when allocating resources.
The person with the lowest opportunity cost should be allocated to that particular job.
Use of Opportunity Cost when Allocating resources
Therefore using opportunity cost is an effective way of deciding who should produce a product based on the amount of resource that they would use on the product that they are not making.
…..this is the Theory of Comparative Advantage that was used to explain the need for global trade by economist David Ricardo in 18th Century
Productivity and Productive Efficiency
To understand the term Productivity, how it differs to production, how to improve it and its importance to a business.
Production or Productivity?
There are 2 builders - Fred and Jo.
Fred can lay 1000 bricks per hour and he works for 6 hours per day.
Jo can lay 8100 bricks over a 9 hour day.
Who is the most productive and who has the highest level of production per day.
What does ‘being Productive’ mean
Production = How much of something that is made or how much of a service that is provided.
Productivity = how much of a product that is made (output) or service that is provided per unit of input (usually labour) .
You can calculate productivity by
= Amount Produced/ Number of workers or time
The difference between Production and Productivity.
Productivity is more useful than Production because it measures how much is made per person.
You can compare production, BUT productivity allows us to get a more meaningful figure which enables comparison of different people different businesses and different countries.
Why is productivity so important?
A productive business uses its resources better than an unproductive one.
Investors will invest in productive businesses/countries eg Germany is 3 times more productive than the UK.
Companies will move to countries where they know that workers will be more productive. Eg. Germany
Productive workers help to grow the country’s economy.
How do you become more productive?
Can you think of ways in which you can become more productive at school. List 4 suggestions.
How do you become more productive?
Education
Training
Practise
Work with better tools and materials
Plan
Productivity and costs per item
(a) In which year was there the highest level of production & (b) In which year was there the lowest cost of production per unit
Productivity and costs per item
Productive Efficiency for a business means – keeping costs per unit at the lowest possible level – producing as much as possible at the Lowest Average Unit Cost.
NOTE Cost is different to Price
Productive Efficiency for a business or Country
Productive Efficiency for a business often means getting better at making a product or service at the ‘lowest possible cost per unit of output’.
This requires a business to minimise the costs of inputs materials and people ….. whilst maintaining or increasing the level of output.
Changes in productivity and rates of return
The objective of the economy as a whole is to increase productivity – increased productive efficiency. If productivity is not increasing the economy is not improving
Productivity compares the level of outputs to the inputs as previously stated.
The rate of change of inputs relative to the rate of outputs has to be examine to identify the rate at which productivity is changing.
Productivity and rates of return
Work out the figures below to state between which years productivity a) increases b) decreases and remains constant (from the previous year)
Productivity and rates of return
Use the figures for input to output to state between which years productivity a) increases b) decreases and remains constant (note you are looking at the productivity year on year
Productivity and rates of return Ex 2
Use the figures for input to output to state between which years productivity a) increases b) decreases and remains constant (note you are looking at the productivity year on year
Productivity and rates of return Ex 2
Use the figures for input to output to state between which years productivity a) increases b) decreases and remains constant (note you are looking at the productivity year on year
Summary of main points.. So far …
Basic Economic Problem is ‘Scarcity’
Scarce resources have to be used efficiently – both Allocatively and Productively
Allocative Efficiency = use resources to satisfy all consumers
Productive Efficiency= use resources to make the product at the lowest unit cost
Economic Efficiency
Considering economic efficiency of 3 sources – individuals, businesses and countries
Economic Efficiency
What is it?
Economic Efficiency = Allocative + Productive Efficiency Efficiency
A business needs to work on both to be Economically Efficient.
Allocative or productive efficiency?
A) Ford use a new computer software to speed up the design of the latest model of the Fiesta and reduce average cost.
B) Since the problems of Covid supply has returned to normal levels and everyone gets what they want to buy.
C) Apple have produced enough I phones to satisfy the total world consumer demand for the next 12 months
D) A local Farmer is using the latest Tractor to plough his field at the lowest possible cost.
Allocative Efficiency and Trade off
Trade offs occur as a result that not all wants can be satisfied from scarce or limited resources.
Decisions have to be made as to how to allocate scarce resources. The decision to allocate resource to one product will mean that the same resource is no longer available for another product or service
By working on the products which they have the lowest opportunity cost resources can be allocated as efficiently as possible.
Allocative and Productive efficiency
Country A and B make cars and trucks
Which country has an absolute advantage
Which country should make trucks and which country should make cars
Allocative and Productive Efficiency
In this case, country B has an absolute advantage in producing both products.
It can produce more cars and trucks than country A with the same level of resources & it is therefore more productively efficient
Allocative and Productive Efficiency - Comparative Advantage
Country A
Cars to Trucks
Trucks to cars
Country B
Cars to Trucks
Trucks to cars
Comparative Advantage
Country A
Cars to Trucks 1C:0.2T
Trucks to cars 1T:5C
Country B
Cars to Trucks 1C:0.6T
Trucks to cars 1T:1.6C
Country A should make Cars and B make Trucks – it is most allocatively efficient
Comparative advantage and allocation of resources
For opportunity cost to work, it has to be assumed that all other factors of production are the same. In other words nations have the same basic resources.
The principle of comparative advantage was developed by economist David Ricardo in the 1800s and gave reason for Britain to trade with less developed nations. Ricardo recognised the importance of using resources efficiently across nations to encourage trade between countries.
Comparative advantage and allocation of resources
Whilst Opportunity Cost is undoubtedly a worthy theory for encouraging trade there are other practical issues that affect trade. These include:
Weather – only certain crops (eg bananas in warm climates) can be produced.
Labour skills – some countries don’t have the necessary skills – mainly due to their economic development.
Actions of the Government – the type of economy that they want in their country.
Location – proximity between nations
Allocation of resources and Production Possibility Frontiers
When decisions are made to redirect resources in an economy the PPC or PPF will change. A country may decide to allocate less available resource to one product or service and more to another.
The decision to reallocate existing resources is shown in the following diagram
Note Capital goods are high value investment goods eg roads, hospitals Consumption goods are goods and services that are short term and give immediate benefit eg more nurses in hospitals, computers in schools etc
Allocation of resources (capital goods)
The allocation of resources in the UK is significantly influenced by the UK government. The government are allocating factors of production to the following
- HS2 railway from London to Birmingham cost of £100 bn - ready 2031.
Repairing schools that have been built with low grade concrete available)
- Building 3rd runway at Heathrow airport£200 million (needs approval)
£1000 million to develop an app to track and trace people with suspected COVID (£5 billion spent)
Economic Efficiency and Types of Economies
Consider the different types of economies in different countries
An Economy
Definition: An economy is usually considered as a country or region in terms of the production and consumption of goods and services and the supply of money.
There are different types of economy and they all operate differently with regards to achieving economic efficiency.
For today…
5th Hour of work - research and come up with responses for the different industrial sectors.
Graph finished
a) describe the trends for each sector and
b)have at least one reason for the extent of the change of each sector.
The Economy and Industrial Sectors
The UK economy consists of 4 main industrial sectors – Primary, Secondary, Tertiary and Quaternary sector.
Primary Sector consists of business that extract raw materials eg mining farming, drilling forestry.
Secondary Sector consist of manufacturing (add value to the resources)
Tertiary Sector consists of service based businesses (selling)
Quaternary sector – knowledge based businesses (highly skilled, research based and very highly paid)
The Economy and Industrial Sectors
The balance of the sector has changed over the last 100 years and is likely to continue to change.
The UK economy is very dependent on the Tertiary sector. ( Why has this happened?)
The Economy and Industrial Sectors
The majority of UK businesses are tertiary sector – they are able to buy in cheap goods from other countries and sell at a high price.
The secondary sector has decreased as the UK has stopped manufacturing its own products like clothes etc
The Primary sector is significantly smaller– all the coal mines have closed but there is still farming forestry and fishing.
The quaternary sector is a focus for economic growth – ‘good quality jobs’
Economic Sectors
How countries manage their economies
Allocation of resources in the UK Economy (a Mixed Economy)
National allocation of resources between public and private sector organisations
Public Peter and Private Paula Sector characteristics
Public Sector
Private Sector
Planned Market Economy (Public Peter)
The Allocation of resources is planned by the country’s government (sometimes called a ‘command economy)
All decisions about the use of land, labour and what jobs people do is all controlled by the Government.
Examples of countries which have Planned Market Economies – North Korea and China (to a lesser extent)
Free Market Economy (Private Paula)
This is the complete opposite to a Planned Economy – where the Government has no influence on how resources are allocated or used.
No single country is truly ‘Free’ but some smaller individual Markets, within nations, do exhibit ‘Free Market’ Characteristics.eg London Stock Exchange
In reality most countries have a MIXED Market Economy eg UK.
The Economy & Economic Systems
For an individual or a business to be Economically Efficient depends on the type or nature of a country’s economy
There are 3 main economic systems
Planned Economy (Command)
Free Market Economy
Mixed Economy – which contains elements of Planned and Free
The UK Today
Decisions about how to allocate the resources (which affects the size of the public and private sectors) depends on the political nature of the Government (‘agents’ in terms of allocating resources) – they have plans which state what size they want the Public and Private sectors to be.
Conservative – Large Private sector v small public sector
Labour - Large Public sector v small private sector
Public or Private sector organisations ?
BBC Royal Mail (letters)
Royal Mail (parcels) Bank of England
National Lottery Monk’s Walk School WGC Hospital
Tesco HSBC KFC
WGC Fire Station Marks and Spencer British Telecom BT
Sky TV National rail (railways) Eton School
Channel 4 Welwyn Library BUPA (health care)
Public and Private Sectors UK
The size of the public and Private sector
The size of the 2 sectors matters because both involve the allocation of the same scarce resources
If more of the scarce resources are allocated to the public sector there is less for the private sector and vice versa.
When too much resource is allocated to the public sector it restricts private firms from growing – this is called ‘crowding out’.
Representing Economic efficiency using PPC
A PPC can be used to represent Economic Efficiency
Production Possibility Curve PPC
It shows the maximum capacity of production (productivity) in a country’s economy at a point in time
There is a choice between capital goods and consumer goods is any point along the PPC curve (allocative efficiency)
Capital goods
Consumer goods
Production Possibility Curve
Any point below = under capacity (not productively efficient)
Any point on the curve IS productively efficient but NOT allocatively efficient
Capital goods
Consumer goods
Production Possibility Curve
The area below the PPC is the total value of all the goods and services made – it is the Gross Domestic Product GDP.
Capital goods
Consumer goods
Shifting the Production Possibility Curve
Underutilising Factors of Production and PPC
PPC at full capacity
PPC below full capacity
The PPC may be below its full capacity for a range of reasons:
Avoidable – lack of investment, poor planning, lack of training education Government intervention
Unavoidable – natural disasters, bad or extreme weather or unable to access raw materials
Gross Domestic product and PPC
The Gross Domestic Product is the total value of all goods and service produced within a country = the area under the PPC
If the economy is underperforming it’s GDP can be improved short term by using factors of production more effectively
If the Economy is to grow outward beyond its full capacity - it needs to be done by longer term investment and supply side policies ( genuine increase and sustainable productivity)
Growth of economy and PPC
If the economy grows the PPC will shift outwards – this may be temporary or permanent.
For a permanent increase in productivity it requires a sustainable change in the productivity of a country – usually brought about by Supply side Policies (term 2 Year 12)
If temporary, this may be brought about by the a short term improvement that is unlikely to be sustainable eg unusually good conditions for growing crops on a farm which may not happen in the following year.
Plenary
The Basic Economic Problem is infinite wants with limited or scarce resources
Opportunity cost is important when considering allocative efficiency of resources and how to maximise output for higher welfare
The efficient allocation of resources in highly dependent on the type of economy favoured by the government
The Production Possibility curve is used to represent the efficiency of a country’s economy
