Edexcel AS/A Level Economics revision

Terms of trade  An index number which shows value of country's exports relative to imports.  In absolute/comparative advantage theory refers to the barter exchange rate that two trading partners exchanged their goods at. Improvement in ToT for one country means their exports are valued at more than the other's.  A nation's living standards improve if its ToT improve because it is able to consume more imports for the work it puts into producing its exports.  Terms of trade = index of export prices/index of import prices x 100   The lower the terms of trade, the higher the price competitiveness of the country.  Price competitiveness can be measured in these terms.  Factors influencing a country's terms of trade  Factors affecting the price of a country's exports (same as factors influencing price competitiveness)  e.g productivity, unit labour costs, NMW, etc.  Factors affecting price of country's imports  Prebisch-Singer hypothes

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

Business growth  There are two types of growth.  Organic (aka internal)  e.g. UnderArmour/LEGO  Organic growth is the internal expansion of a company - no other companies are involved.  This is  the most common type of growth , as most firms are small or medium-sized, so don't have the resources necessary for external growth.  Can be done in various ways:  through advertising and reaching out to more consumers, hence building customer base by expanding into new markets/introducing new products expanding existing production through investment in capital such as building factories, acquiring new machines, etc.  Advantages:  Cheaper, more cost-effective.  Easier and less complicated.  Less risky.  Disadvantages: Growth usually takes a long time.  It is hard to expand internationally without making acquisitions as different countries have different legal rules, etc. This could also hold true for expanding into different markets.  Inorganic

Normal profits, supernormal profits and losses  Profit maximisation  Occurs at: MC = MR  where MC cuts MR from below (as where it cuts from above is point of profit minimisation)  This is because past this point MR < MC , and each additional good is costing the firm more than it is making. Before that point MR > MC so the firm can increase profit by producing more.  NB - point of prof max can be found using TC and TR:  Normal and supernormal profit and losses Normal profit is profit that covers the opportunity cost of capital and is just sufficient to keep the firm in the market.  Supernormal/economic profit are profits that exceed normal profits.  When AC lies below AR at the point of output, the difference between AR and AC is the supernormal profit on that unit output. The overall supernormal profit is the difference times the quantity sold (Q2 in the above).  Likewise, when AC lies above AR at the point of output, the company makes s

Economies and diseconomies of scale  Economies of scale occur when an increase in a firm's scale of production leads to a lower LR average cost.  Diseconomies of scale occur when an increase in a firm's scale of production leads to a higher LR average cost.  Constant returns to scale occur when LR average cost remains constant with an increase in output  i.e output and costs rise at the same rate.  Found at the minimum of the LRAC.  Types of economies and diseconomies of scale  External economies of scale - economies of scale that arise from the expansion of the industry in which a firm is operating.  i.e as a sector expands, firms are able to choose from a larger pool of skilled workers, and may be able to forgo expenses on training, advertising, etc.  Internal economies of scale - processes that a firm can benefit from as they increase their own scale of production in order to reduce their LRAC.  These can be divided into technical and non-technical .