AS Micro: Introductory Economic Concepts

Session 1
7:49:36
Resource Allocation and the
Price Mechanism in
Competitive Markets

Resource allocation
What is the fundamental economic problem?
7:49:36
Unlimited wants,
limited resources
Scarcity…
Choices…
What? How? For
Whom?

Different needs/wants
What are the different needs/wants of employees in the
construction industry, the construction companies and the
Government (with regards to construction within the UK)?
Workers Construction Companies The Government
Good pay
Safe environment
Maximised Profit
Timely completion
Environment
Quality

Trade-offs
3:11:33
Because of scarcity… choices
have to be made…
Every choice made, means
another choice NOT made:
So a trade-off
OPPORTUNITY COST: the
value of the next best
alternative foregone
Resource allocation

3:11:33
OPPORTUNITY COST: the
value of the next best
alternative foregone
Opportunity Cost
The risk of government
INACTION has a cost to it
too!

Production Possibility Diagram
3:11:57
PPF1
Indicate on the
diagram:
a)The opportunity cost
of building more
‘capital goods’
b)Where the economy
is working below its
capacity
c)Where the
production of both
consumer and capital
goods becomes more
efficient
X
YZ
PPF2
Capital Goods
Consumer
Goods
What does a PPF show?
Alternative combinations of
g/s that can just be attained
if all factors of production
are efficiently used in a
given period of time.
W

PPF
Production Possibility Diagram
3:11:57
Which one of the
following statements is
correct?
The opportunity cost
of producing one
garden chair is
A. greater at X than at
Y.
B. lower at X than at Y.
C. the same at both X
and Y.
D. zero at both X and
Y.
X
Y
Garden Chairs
Garden
Tables
Why? Diminishing marginal
returns…

3:11:57
How to distribute
them?
Unlimited wants,
limited resources
Scarcity…
Choices…
What? How? For
Whom?

How to distribute resources?
A free market
economy…

The Price Mechanism
3:11:57
In an economy like that of the UK, many decisions on how to
resolve the issues of opportunity cost and trade-offs are resolved
by prices.
The Price Mechanism acts as a signal for consumers to purchase or
as a means of excluding some consumers (and rationing the scarce
resource).

Xbox One
7:49:36
On November 22nd 2013,
Microsoft launched the
latest generation of its
Xbox game console
(entitled Xbox One). It
replaces the Xbox 360 –
however the Xbox 360
remains on sale for the
time being and versions of
new games will be created
for Xbox 360 users for at
least a further two years.

Xbox One
7:49:36
D
Price of
Xbox
One
Games
QD
Xbox One
Games
S
P
Q
Price of
Xbox
360
Games
QD
of Xbox 360 Games
D
S
P
Q
Label axes
(meaningfully!)
Label equilibria
ACE diagrams

Xbox One
7:49:36
Why are prices higher for Xbox One games compared to those for
the Xbox 360?
Reflection of demand – more people want the new games as
they are better than the old games
Reflection of supply – new games cost more to develop
because of newer technology

Markets in Action: Gas and Electricity
Prices in the UK
3:15:09
0
20
40
60
80
100
120
140
160
180
200
2005 2006 2007 2008 2009 2010 2011 2012
IndexValue
UK Consumer Price Index Gas and Electricity
Components (2005 = 100), 2005 - 2012
Gas
Electricity
Source: Department of Energy and Climate Change

Prices in the UK
3:15:09
Fuel prices move when there are changes in one or more of the conditions of
supply and demand. Complete the table and illustrate each of the market
changes using supply and demand diagrams.
Change in Market Conditions for
Gas
Shift in Demand or Supply?
Severe winter weather conditions
Change in Government Tax on Fuel
Increase in exchange rate between
the UK and supplier of gas
Demand
Supply
Supply

Prices in the UK
3:15:09
Price of
Domestic
Gas in
the UK
Quantity
Demanded
of UK Domestic Gas
D
S
P
Q
Severe winter weather
conditions
D1
P1
Q1
During periods of
severe weather
conditions
households will
require more fuel
to heat their
homes
Explain why
Refer to YOUR
diagram to
support your
written text
Data reference
Demand for gas
has increased
from D to D1
ACE diagrams

Prices in the UK
3:15:09
Price of
Domestic
Gas in
the UK
Quantity
Demanded
of UK Domestic Gas
D
S
P
Q
D1
P1
Q1
Explain why the equilibrium
will changeExcess
demand
A-B
Price
mechanism:
allocating;
rationing;
signalling;
profit
incentive
A
B
ACE diagrams

Prices in the UK
7:49:36
Price of
Domestic
Gas in
the UK
Quantity
Demanded
of UK Domestic Gas
D
S
P
Q
Change in Government Tax
on Fuel
If Government
increase level of
tax on fuel, it will
make it more
expensive to
supply fuel at any
given level.
S1
P1
Q1
Increase in tax
Higher costs of
production… shifts S curve
left/up from S to S1…
Creates excess demand…
Price rises… to new
equilibrium to ration this
out… until market clears…
A B

Prices in the UK
7:49:36
Price of
Domestic
Gas in
the UK
Quantity
Demanded
of UK Domestic Gas
D
S
P
Q
Increase in exchange rate
between the UK and
supplier of gas
S1 Increase in
exchange rate
makes foreign
gas less
expensive
leading to lower
prices
P1
Q1
A
B
Excess supply… QS > QD
ACE diagrams
Excess stock signals to firms
to lower prices… until S1 = D

Assessment Objectives
7:49:36
• Knowledge
• UnderstandingAO 1
• ApplicationAO 2
• AnalysisAO 3
• EvaluationAO 4

Demonstrating Knowledge
7:49:36
Phrase Definition
Opportunity Cost
Specialisation
Diseconomies of scale
The value of any choice in terms of the
next best alternative foregone.
Write succinct definitions for these phrases:
A method of production where a business
or person area focuses on a specific task, or
a specific product
Increase in long-run average cost from an
increase in the scale of production

A B C D E F
1
2
3
4
5
Economics Grid Reference
In your booklet you have been given 10 definitions
of Economic concepts. In pairs, you have 3 minutes
to name the 10 Economic concepts and then
identify where they lie on the grid that you are
about to be shown.
7:49:36

A B C D E F
1
2
3
4
5
Indirect tax
Positive
externalities
Inelastic
demand
Normative
statements
Private
benefit
Productivity
Division of
labour
Minimum
price
Diminishing
returns
Free
market
Social
benefit
Profit
Substitutes
Equilibrium
Derived
demand
Government
spending
Land
Monopoly
Market
failure
Subsidy
Price
elasticity
of demand
Merit good
Effective
demand
Economic
efficiency
Diversification
Production
possibility
frontier
Economy
of scale
Information
failure
Normal
goods
Excess
demand
7:49:36

No. Definition Concept Grid Reference
1
When the author expresses an opinion about what
ought to be.
Normative
statements A4
2
When the competitive outcome of markets is not
efficient from the point of view of the economy as a
whole.
Market failure D4
3
When people have inaccurate, incomplete, uncertain
or misunderstood data and so make potentially
‘wrong’ choices.
Information failure F3
4
Payments by the government to suppliers that reduce
their costs.
Subsidy D5
5
Goods which have a positive income elasticity of
demand.
Normal goods F4
6
Reductions in long-run average cost from an increase
in the scale of production.
Economy of scale F2
7
Only when a consumers' desire to buy a product is
backed up by an ability to pay for it.
Effective demand E3
8
Goods in competitive demand and act as
replacements for another product.
Substitutes C3
9
The rewards to individuals, firms or consumers from
consuming or producing goods and services.
Private benefit A5
10
The demand for a product X might be strongly linked
to the demand for a related product Y.
Derived demand C57:49:36
Examples of these?

AS Micro: Introductory Economic Concepts

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AS Micro: Introductory Economic Concepts