Economics Transition Learning

Instructions

In order to be as ready for the course as possible, it is advised that you complete this entire pack, however only specific sections are compulsory while the remaining are considered extension tasks. All of sections 1 and 2 are compulsory, as well as the first two parts of section 3 (Factors of Production and Types of Economic System) and the first part of section 4 and Gross Domestic Product…).

Contents

1. Introduction

2. The Basics What is Economics? Two Branches of Economics Resource Allocation and Choices Economic Schools of Thought

3. Microeconomics Factors of Production Types of Economic System The Objectives of Firms Market Structures Market Structure - Monopoly

4. Macroeconomics Gross Domestic Product, Economic Growth and the Economic Cycle Unemployment Measuring Development

Introduction

Welcome to the Economics department! In this booklet you will be given the tools to get ahead in preparation for your A level Economics course, and have the opportunity to engage in some exciting economic concepts that are hot topics in the news today.

First, you will be introduced to some important key concepts that you will need to have a good grasp of in order to gain a deep understanding of the course material you will study over the two year period. We will then dive deeper into parts of the syllabus by learning about a few concepts and topics that are highly relevant in the world we live in today, divided into microeconomic and macroeconomic concepts.

So, let’s get started!

The Basics

What is economics?

Economics is a social science, which means it is the study of human behaviour. Unlike natural sciences (like Biology or Chemistry), it is not based on controlled laboratory experiments, where only one variable is changed at a time. Instead, we use methodology involving different tools such as data and observations to make conclusions in economic theory, as well as simplifying assumptions to limit the number of variables in an investigation. To get around the problem of the existence of multiple variables in an economy, economists use the assumption known as ceteris paribus, which is Latin for ‘all other things remain equal’.

Like many concepts, there is more than one way to define economics.

Task 1: Find three different definitions of economics by three different people/sources. ​

Definition 1:

Definition 2:

Definition 3:

Two Branches of Economics

There are two branches of Economics which make up the two halves of the course. You will sit three exams at the end of the two years, one on Microeconomics, one on Macroeconomics and one last paper which includes content from both halves of the course.

Task 2: What is the difference between macroeconomics and microeconomics? (100 words) ​

Resource Allocation and Choices

The Economic Problem is that desires/wants of consumers are unlimited but resources are limited in supply (i.e. they are scarce). Because of this problem, individuals have to make choices (they can’t have everything they want!). Economics is the study of how human beings make choices on what to produce, how to produce and for whom to produce, in a world in which most of the resources are limited (i.e. scarce).

All economic agents have to make choices due to scarce resources. For example, you need to choose to study a limited number of A level subjects because of your limited recourse that is time.

So, wherever there is scarcity we are forced to make choices. If we have £20, we can spend it on an economic textbook, or we can enjoy a meal in a restaurant. Economists like to say “there is no such thing as a free lunch.” In other words, every choice involves a cost. Even if something appears to be free, someone eventually bears the cost.

Opportunity cost is another important concept in the study of Economics and is defined as: The cost of the next best alternative forgone. In other words, it’s what is given up when we make a choice.

Task 3: Opportunity Cost ​

Watch and take notes on the following video: https://www.youtube.com/watch?v=SA16Qw09bXM

Notes:

Task 4: Complete the following table with potential opportunity costs to the given business decisions

Economic Schools of Thought

Task 5: Research task: investigate the following schools and answer the following questions: ​

1. Neo-classical Economics

i) What economists are associated with this school of thought?

ii) In what era did this school of thought prevail?

iii) What assumptions are made in this school of thought?

iv) What role does the government have to play in economics according to neoclassical economics?

v) Explain two criticisms of neoclassical economics.

2. Keynesian Economics

i) What economists are associated with this school of thought?

ii) In what era did this school of thought prevail?

iii) What role does the government have to play in economics according to Keynesian economics?

v) Explain two criticisms of Keynesian economics.

3. Behavioural Economics

i) What economists are associated with this school of thought?

ii) In what era did this school of thought prevail?

iii) What role does the government have to play in economics according to Behavioural economics?

v) Explain two criticisms of Behavioural economics.

Microeconomics

Factors of Production

What individual firms use to produce their products are called factors of production. These factors of production (also known as factor inputs) can be categorised into four:

Task 6:

Can you think of any examples of each category of factors of production?

Type of FoP Examples

Land

Labour

Capital

Enterprise

Task 7: Multiple-Choice Quiz

1. Which one of the following is an example of land?

A. Farm animals B. Laptops C. Barrels of oil D. A field of wheat

2. Which of the following does not fall within the category of land as a factor of production?

A. A building B. Trees C. Coal D. Water

3. What is the best explanation of factors of production? A. Raw materials used to produce products

B. Labor and materials

C. Money and financing

D. Resources used by a company to produce good and services

4. Which of the following is a factor of production?

A. The payment of interest on a bank load B. Profit declared by a company in its annual report C. The skill of the managers of a business D. The taxes paid to the government

5. Human capital can be described as:

A. The tools used by workers to enhance productivity B. A persons inherited abilities C. The stock of expertise accumulated by a worker D. Education

Types of Economic Systems

Economists have concluded that for societies to survive with their limited resource (land, labour, capital and enterprise), they must answer three basic questions:

1. What to produce 2. How to produce 3. For whom to produce

Throughout history, societies have come up with different systems to answer these three questions. We will look at three examples.

Traditional Economies

In traditional economies, the three questions are answered by tradition, meaning these decisions are made by repeating decisions of previous generations. If you have seen a documentary on a primitive culture, then you have also seen a traditional economy in action. In many primitive societies, in order to survive and have enough food, societies developed a division of labour based on gender. Women would perform the food gathering and men would perform the hunting. The food would then be shared with the whole community. In this type of system, security and continuity are favoured over innovation and change, hence life hums along in quite a predictable way.

Command Economies

In this type of economy, the three questions are answered by an authority figure that makes the decisions. The key characteristic of the command economy​ is centralized decision-making - one leader (or a group of powerful individuals) makes the key economic decisions for the entire society.

As hunter-gatherer societies grew and eventually exhausted their natural food supplies, some survived by becoming sedentary farmers. With the advent of farming came a need for an organized system of planting, harvesting and storing crops. This required a greater amount of structure than existed in a traditional economy. In order to ensure the survival of the society, decisions had to be made about what crops to grow and how much of the harvest to store. Over time, decision-making became centralized, and the command economic system developed.

Examples of command economies include most, if not all, ancient civilaizations, plus the communist countries of today. During World War II, the United States practiced command economy when the government took over factories and planned production for the war effort. Every aspect of American life was in some way influenced by government involvement in the economy. Even today the influence can be seen - the modern payroll withholding system was instituted during the war to provide the government with a steady stream of tax revenue (money received by the government from tax payers).

Market Economies

In market economies are a complete contrast to command economic systems - they are characterised by a complete lack of centralized decision-making. Individuals trying to satisfy their own self-interest answer the questions of what, how and for whom to produce. Private citizens, acting on their own free will as buyers and sellers, trade their resources or finished products in the market in order to increase their own well-being. Individuals and businesses make the decisions; price determines how goods and services are allocated (more on this in the course).

Although they cannot be classified as pure market systems, Hong Kong, the US, Australia and New Zealand are representative of market economies. In each you will see a greater variety of goods and services being produced than anywhere else. Markets reward innovation, productivity, and efficiency but discourage complacency, idleness, and waste.

Task 8: North Korea – The Command Economy

Watch the following YouTube video and answer the following questions… https://www.youtube.com/watch?v=2raHT0x0ldo

1) What makes the North Korean economy a command economy?

2) What is the N. Korean government’s key spending priority?

3) Describe how the command economy of North Korea affects the North Korean people (e.g. their standard of living, access to key goods and services etc.).

The UK Mixed Market: The Role of the Government

The UK is a mixed economy, which falls somewhere between these two extremes (free market and command economy), as do the economies of most countries in the world.

The UK government provides the goods and services that the private sector (i.e. the part of the economy that is run by businesses, individuals or groups) cannot, or will not, supply because they would not make a profit. These goods and services include public recreational areas such as parks, the military, universal healthcare and educational services, and support for disadvantaged people. The government gets most of the money to pay for these goods and services from the taxes that citizens and businesses must pay.

The role of the government is to provide essential services and to set economic policies for the country. The role of the organisations and individuals who make up the rest of the economy is to decide what is produced and who gets what. This is done by means of the movement of money.

In the past, more services were run by the government, including the railways, the Royal Mail and the electricity company. These were known as ‘nationalised industries’ – but all of these services have since been sold to private companies, in a process called ‘privatisation’.

Task 9:

1) What are the advantages of a nationalised industry? ​ ​

2) What are the disadvantages of a nationalised industry? ​ ​

3) Should the NHS be privatised? Explain both sides of the argument. ​ ​

The Objectives of Firms

1. Profit Maximisation

Usually, in economics we assume firms are concerned with maximising profit. Higher profit means: ■ Higher dividends for shareholders. ■ More profit can be used to finance research and development. ■ Higher profit makes the firm less vulnerable to takeover. ■ Higher profit enables higher salaries for workers

2. Sales Maximisation

Firms often seek to increase their market share – even if it means less profit. This could occur for various reasons: ■ Increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run. ■ Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries. ■ Increasing market share may force rivals out of business. E.g. supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business.

3. Growth Maximisation

This is similar to sales maximisation and may involve mergers and takeovers. With this objective, the firm may be willing to make lower levels of profit in order to increase in size and gain more market share.

4. Environmental/Ethical Business Objectives

A firm may achieve this objective by promoting social responsibility. It may incur extra expense to choose products which don’t harm the environment or products not tested on animals. Alternatively, firms may be concerned about local community/charitable concerns. Many companies who have adopted such strategies have been quite successful. This has encouraged more firms to consider these other objectives, but it may be argued that they see it as another opportunity to increase profits rather than a genuine sacrificing of profits in order to promote other objectives. ​

Task 10:

1) If you owned a firm, what objective would you adopt and why?

2) If you were a manager at a firm, what objective would you adopt and why?

3) Research: what is the principal-agent problem and how does it apply to business objectives?

Market Structures

There are several types of market structures, each characterised by different numbers of firms, ease of entry into/out of markets, different levels of power to control prices and many more characteristics. There are two extreme examples of market structure sitting on either end of the scale, while the rest sit somewhere in between these two: perfectly competitive industries (with 100s of firms) and pure monopolies (industries with just one firm holding all of the market share).

The concentration ratio in an industry can tell us the market structure. A concentration ratio is the percentage of market share (the proportion of a market owned/controlled by a firm in an industry, usually represented as a percentage) taken up by the largest firms. It could be a 3 firm concentration ratio (market share of 3 biggest) or a 5 firm concentration ratio.

Concentration ratios are used to determine the market structure and competitiveness of the market. For example, an oligopoly is defined when there is a 5-firm concentration ratio of greater than 50%

Importance of concentration ratios...

The degree of competition. If the five-firm concentration ratio rises from 40% to 60%, this is an indication of a fall in competitive pressures. It could lead to higher prices for consumers

Indicate monopoly power. In the UK, the legal definition of a monopoly is a firm with more than 25% market share. Any firm over this threshold has an important market position.

Regulatory oversight. If there is a three-firm concentration ratio of over 80%, then there is greater scope for collusion and abuse of monopoly power. In this kind of industry, the government may need to use a regulator to check monopoly power isn’t being abused. For example, the government has a regulator for railways, electricity and gas – where the market is dominated by a few small firms.

Task 11:

Market structures - Monopolies

What is a monopoly?

• A pure monopolist is a single supplier that dominates the entire market – the market has 100%​ concentration ​ • In reality – the UK Competition and Markets Authority (CMA) deems that: ​ • A working monopoly is any firm with greater than 25% of the industries' total sales ​ ​ ​ ​ • A dominant firm is a firm that has at least 40% market share ​ ​ ​ ​

What is monopoly power?

● Exists when firms are able to control the price they charge for their product in a market. ​ ​ A firm without monopoly power does not have power over their pricing - prices are decided by market forces (demand and supply - more on this in the course!) ● In many markets, there is a number of firms which have monopoly power.

Sources of monopoly power:

● Barriers to entry - the harder it is for firms to enter the market to compete with firms already in the market, the more likely the firms in the market will be able to maintain and increase their market share. ● Product differentiation (and the number of near competitors) - the more unique a firm’s product, the less likely competitors will be able to compete and steal market share. ● Economies of scale (more on this in the course)

Examples:

Public services like the railways are provided by the government. Hence, they are a monopolist ​ ​ in the sense that new partners or private Companies are not allowed to run railways. However, the price of the tickets is reasonable so that public transport can be used by the majority of people.

Microsoft – Microsoft is a Computer and software manufacturing Company. It holds more than ​ 75% market share and is the market leader and virtual monopolist in the tech space.

Google has become a household name and whenever we don’t know any answer probably googling is the answer. The biggest web searcher controls more than 70% market share. The Company has grown into a web of services interlinked with each other like the maps, Gmail, search engine, etc. The Company has left its competitors – Yahoo and Microsoft behind with its innovation and technological advancement.

Task 12: Research: What are the costs and benefits of monopolies?

The Competition Markets Authority

The CMA was launched in April 2014 in the UK. The CMA is now the UK’s key competition ​ regulator.

The role of the CMA is to:

- Investigate mergers which could restrict competition - Undertake market studies and investigations where there may be competition and consumer problems - Investigate where there may be breaches of UK or EU law against anti-competitive agreements and abuses of dominant positions - Bring criminal proceedings against individuals who commit a cartel offence - Enforce consumer protection legislation to tackle practices and market conditions that make it difficult for consumers to exercise choice - Co-operate with sector regulators (such as Ofcom) and encouraging them to use their competition powers considering regulatory references and appeals

Task 13: Can you find three examples of recent mergers or acquisitions that the CMA stopped? ​ Explain their reasoning. (Hint: There are many on the CMA website).

Macroeconomics

Gross Domestic Product (GDP), Economic Growth and the Economic Cycle

Gross domestic product (GDP) is important as an overall indicator of economic performance, ​ and measures the total value of all final production that occurs within a country during the course of a year. GDP is also a measure of annual spending on new domestic production and a measure of income earned from domestic production. Economic growth means an increase in ​ ​ real GDP.

National output, expenditure and income measure the flow of new output produced in the economy in three different ways:

● National Income = The value of income paid by firms to households in return for land, ​ ​ ​ ​ ​ labour or capital. ​ ​ ​ ● National Output = The value of the flow of goods and services from firms to households ​ ​ ​ ​ ​ ● National Expenditure = The value of spending by households on goods and services. ​ ​ ​ ​ ​

Since they are three different ways of measuring the same things (the flow of new output), it follows that:

National Income = National Output = National Expenditure

… these all represent GDP.

The Economic cycle refers to the cyclical nature of economic growth. Typically the economic cycles involve a period of rapid growth followed by slower growth or in some cases a recession.

Below is the economic cycle as a diagram - the arrows showing the curve going up and down represent the movement of the economic cycle. The boxes surrounding the diagram explain the different phases of the economic cycle:

Task 13: Research the costs and three benefits of economic growth and list three costs and three benefits below.

Task 14: Research and explain three different criticisms of GDP as a measure. ​

Criticism 1:

Criticism 2:

Criticism 3:

Task 15: Watch and take notes on the following video... ​ https://www.youtube.com/watch?v=4-2nqd6-ZXg

Notes:

Unemployment

In order to understand unemployment as an economic concept, you must understand the following definitions:

Unemployment Rate - This is the % of people in the labour force without a job but registered ​ as being willing and available for work

Labour Force (The Active Population) - Those people holding a job or registered as willing ​ and able to work Therefore this is the number employed plus number unemployed (but actively seeking work)

The Inactive Population - People of working age who do not work and are not seeking work ​ e.g. students, parents who stay at home to look after their children, those who are unable to work due to sickness or disability and retired people within the age bracket

Participation Rate - The % of the population of working age declaring themselves to be in the ​ Labour Force. This will exclude groups such as long-term disabled, women bringing up children and students

Governments attempt to achieve full employment in their economies.

Some governments are also committed to reducing inactivity rates. This increases recorded GDP and so increases growth rates and also tax revenues. It can also reduce welfare benefits (where people are living in low income households). Three main groups tend to be targeted: i) Women - tend to have lower activity rates than men in rich industrialised economies ii) Older workers, particularly over the age of 60, who have lower activity rates. Governments in Europe have been raising the retirement age in order to reduce the amount of government spending on pensions. iii) Those unable to work due to a disability - reducing politically sensitive unemployment rates by reclassifying some of the long-term unemployed as being unable to work due to disability.

Task 16: What are the costs and benefits of unemployment? ​

Costs Benefits

Measuring Development

Economic development is a broader concept than economic growth. Development reflects social and economic progress and requires economic growth. Growth is a vital and necessary condition for development, but it is not a sufficient condition as it cannot guarantee development.

The extent to which a country has developed may be assessed by considering a range of narrow and broad indicators, including per capita income, life expectancy, education, and the extent of poverty.

The Human Development Index (HDI)...

The HDI was introduced in 1990 as part of the United Nations Development Programme (UNDP) to provide a means of measuring economic development in three broad areas – per ​ ​ capita income, heath and education. The HDI tracks changes in the level of development of countries over time. The introduction of the index was an explicit acceptance that development is a considerably broader concept than growth, and should include a range of social and economic factors.

The HDI has two main features:

1. A scale from 0 (no development) to 1 (complete development). 2. An index, which is based on three equally weighted components: a. Longevity, measured by life expectancy at birth b. Knowledge, measured by adult literacy and number of years children are enrolled at school c. Standard of living, measured by real GDP per capita at purchasing power parity ​ What the figures mean:

● An index of 0 – 0.49 means low development – for example, Nigeria was 0.42 in 2010. ​ ​ ● An index of 0.5 – 0.69 means medium development – for example, Indonesia was 0.6. ​ ​ ● An index of 0.7 to 0.79 means high development – for example, Romania was 0.76. ​ ​ ● Above 0.8 means very high development – Finland was 0.87 in 2010. ​ ​ The HDI is a very useful means of comparing the level of development of countries. GDP per capita alone is clearly too narrow an indicator of economic development and fails to indicate other aspects of development, such as enrolment in school and longevity. Hence, the HDI is a broader and more encompassing indicator of development than GDP, though GDP still provides one third of the index.

Life expectancy...

A variety of factors may contribute to differences in life expectancy, including:

- The stability of food supplies - War - The incidence of disease and natural disasters

According to World Bank figures, life expectancy at birth in developing countries over the past 40 years has increased by 20 years. However, these increases were not evenly distributed. Indeed, in many countries in sub-Saharan Africa, life expectancy is falling due to the AIDS epidemic.

Adult literacy...

The percentage of those aged 15 and above who are able to read and write a simple statement on their everyday life.

More extensive definitions of literacy include those based on the International Adult Literacy Survey. This survey tests the ability to understand text, interpret documents and perform basic ​ arithmetic. GDP per capita...

GDP per capita is the most common indicator of material standards of living, and hence is included in the index of development. GDP per capita is found by measuring Gross Domestic Product in a year, and dividing it by the population.

Below is some data on Zambia showing the total real GDP in comparison to data on real GDP per capita:

Task 17:

Task 18:

Task 19: Investigation ​

Question 1: How do you think Covid-19 has impacted economic growth and why? ​

Question 2: How do you think Covid-19 has impacted economic development and why? ​

Solutions

Task 4

Task 6

Answers to quiz: A, A, D, C, C

Task 11 and 12

Task 17

Task 18