Edexcel AS/A Level Economics revision

The Philips curve  The Philips curve suggests a tradeoff between unemployment and inflation - to decrease unemployment, inflation has to rise. This creates a conflict between two macroeconomic objectives - targeting inflation at 2% (in the UK) and decreasing unemployment. 

Perfect competition  Assumptions of perfect competition  1. All firms produce homogenous products. All products are perfect substitutes for each other - meaning a perfectly elastic demand curve.  2. All firms are profit maximisers ( MC = MR ) 3. There are no barriers to entry or exit. Firms can move into and out of the market freely.  4. There is perfect information between firms, between consumers and between firms.  5. There is a large number of buyers and sellers - each firm is a 'price taker'  (6. All factors of production are perfectly mobile - perfect geographical and occupational mobility)  (7. No externalities)  Characteristics Firms are price takers  AR = MR  Due to products being homogenous, there is a high number of substitutes and so the demand curve is perfectly elastic.  Normal profits are made  AR = AC  Due to there being no barriers to entry or exit, firms can only make normal profits in the LR.  In the SR, supe

Efficiency   Allocative efficiency  Output at which the marginal utility, or benefit, of a good to a consumer is the same as equal to the marginal cost of producing it.  This is seen on demand/supply curves, where D = S, output is produced as demand = marginal utility and supply = the sum of firms' marginal costs in an industry. On an individual scale, it is where:  AR = MC  Output is where the demand curve cuts the MC curve.   NB: technically occurs where MSB = MSC (if you consider externalities)  Occurs in perfect competition.  Eval - PC markets achieve allocative efficiency where there are no externalities.  LR equilibrium is where P = MPC, so if MSC > MPC, then there is an allocative inefficiency which leads to overproduction and consumption.  Productive efficiency  Output at which a good is produced at the  lowest possible average cost for a firm. This occurs at the minimum point of the AC curve.  AC = MC at this point, because w

Absolute and relative poverty  Absolute poverty - the inability of a household to afford a basic standard of living/meet basic needs.   Threshold irrespective of the economy being looked at, so few people in the UK are in absolute poverty due to the support systems in place (e.g benefits)  WB defines extreme poverty as the % of population living off of less than $1.90 a day (PPP adjusted)  Relative poverty - when a household has an income considerably lower than that of others in their country. In the UK the threshold for this is when income is 2/3 lower than the median income.  This means that if you are in relative poverty you aren't necessarily in absolute poverty. People in the UK who are in relative poverty are not in absolute poverty as if they were in Zambia for example they would not be in poverty at all with their current income.  Poverty is usually measured by looking at incomes. It could also be measured by seeing what basic household items

Demergers   A demerger is the breaking up of a firm into separate firms.  e.g Sports Direct selling off Dunlop in 2016. PepsiCo splitting off foods businesses (KFC, Taco Bell, etc.) into a separate corporation, Yum Brands. Later Yum Brands demerged into Yum China and Yum Brands. Reasons for demergers Diseconomies of scale - the opposite of economies of scale, where average costs begin to rise as output increases. May occur due to it being difficult to retain control on the expanding business - principal-agent problem may arise. Also less co-operation by employees who feel more alienated and as a result less productive - they feel less of a connection to the business.  May also be hard to co-ordinate and communicate between locations and employees when a firm is large. Miscommunication can again lead to costs rising.  To focus on core businesses to streamline costs and improve profits. The firm may have expanded into different markets and experience disadvantages due to t

Business objectives Profit maximisation Means the highest possible profit for the risk-taker, usually the owner. Dominant goal of private enterprise. Balance of minimising costs and maximising revenue.  Profit maximisation occurs at MR = MC Sales revenue maximisation Gaining the maximum possible revenue from selling a product. A firm may do this to gain greater market share, or monopoly power in order to increase supernormal profits in the LR. Higher revenue/sales may make it easier for the firm to borrow.  Revenue maximisation occurs at MR = 0 , so where the MR cuts the x-axis.  Were the firm to produce before this point, it would be losing out on additional output that would increase revenue (as MR above 0). Were it to produce where MR dipped below the x-axis, TR would decrease.  MR = 0 at the midpoint of AR, which is why revenue is maximised at unit elasticity.  Sales volume maximisation Selling as many products as possible, without making a loss. This means the fi