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.

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Business Growth

Why do businesses grow? Profit motive Businesses grow to make more profit by increasing revenue. Selling more to more people often means profits increase. The valuation of a company's share is often influenced by how it is expected to do in the future (ie how much profit it is likely to make). When it is projected to do well, share prices increase, and it is valued more highly on the stock market. This provides incentive for companies to increase profits, doing well on the stock market increases investment and raises more money. Cost motive - economies of scale When firms are larger, relative costs are smaller. This is because some costs are fixed, so if you are a larger company, producing larger output, the cost per unit will decrease. e.g. If a T-shirt factory's main cost is the £10,000 to rent to factory each month, and it produces only 1000 shirts a month, each shirt costs £10 to make. But if it scales up and produces 100,000 shirts a month, ...

Output gaps and the business cycle

Output gaps and the business cycle The fluctuation of real GDP around an underlying trend is a phenomenon known as the business cycle. Output gap - difference between the actual output of an economy and its potential output. There are two types of output gap, trend and potential. Trend growth is the estimated rate of growth of an economy. Trend output gaps: Business cycle diagram A negative trend output gap is when real GDP is below trend GDP. The economy is producing below its trend. e.g If real GDP is £1.8 trillion and trend GDP is £2 trillion then the negative output gap is £0.2 trillion. Here the economy is in a bust period. This is characterised by an expansion in GDP, high employment and high confidence. Price levels often rise, meaning inflation occurs. A positive trend output gap is when real GDP is above trend GDP. Here the economy is i...

3.3.4 Normal profits, supernormal profits and losses

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)....

Edexcel AS/A Level Economics revision

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