As Economics - Market And Market Failure

Candidates should understand that the central purpose of economic
activity is the production of goods and services to satisfy needs and
wants. They should appreciate that economists take a broad view of
production and consumption activities including, for example, self
provided goods and services and the benefits derived from the natural
environment.

Candidates should understand the economists’ classification of
economic resources into land, labour, capital and enterprise.

Candidates should understand the normal maximising assumptions
upon which traditional economic models are based.
Note: candidates do not need to know the rule for consumer
equilibrium and at AS they do not need to understand the profit
maximising rule (MC=MR). They should know that economic agents
may have a range of possible objectives.

Candidates should appreciate that the decisions of individuals and
organisations are likely to be influenced by both economic and
non-economic considerations.
Candidates should know that the environment is an example of a
scarce resource, which is affected by economic decisions.

Candidates should understand production possibility diagrams and be
able to use this basic model to illustrate the different features of the
fundamental economic problem.

Candidates should be able to distinguish between positive and
normative statements. They should understand how value
judgements influence economic decision-making and policy.

Candidates should know that the demand curve shows the
relationship between price and quantity demanded, and understand
the causes of shifts in the demand curve.
Note: candidates are not expected to have an understanding of utility
theory or indifference curve analysis.

Candidates should be able to calculate elasticities of demand and
understand the factors that influence elasticities of demand. They
should also understand the relationship between price elasticity of
demand and total revenue.

Candidates should be aware that, other things being equal, higher
prices imply higher profits and that this will provide the incentive to
expand production. They should understand the causes of shifts in
the supply curve.
Note: AS candidates do not need to understand the relationship
between marginal costs and supply.

Candidates should be able to calculate elasticity of supply and
understand the factors that influence elasticity of supply.

Candidates should understand how the interaction of demand and
supply determines equilibrium prices in a market economy.

Candidates should understand the significance of elasticities of
demand and supply in influencing the extent of any fluctuations in
market prices

Candidates should be able to apply their knowledge of the basic
model of demand and supply to markets, such as commodity markets,
agriculture, health care, housing, sport and leisure

Candidates should be aware that changes in a particular market are
likely to affect other markets. They should, for example, be able to
explore the impact of the introduction of a new product and a new
supplier in a competitive market.
Candidates should understand the implications of composite demand,
derived demand and joint supply.

Candidates should understand the rationing, incentive and signalling
functions of prices in allocating resources and co-ordinating the
decisions of buyers and sellers in a market economy.
They should also be able to use the economists’ model of the market
mechanism to assess the effectiveness of markets in allocating
resources.
Note: candidates are not expected to know the formal model of
perfect competition and the associated diagrammatic analysis. This is
assessed in Module 5.

Candidates should understand that monopolies have market power
and that the basic model of monopoly suggests that higher prices,
inefficiency and a misallocation of resources may result.
Candidates should understand the potential benefits from monopoly,
for example, economies of scale and possibly more invention and
innovation.
Note: candidates are not expected to know the formal model of
monopoly and the associated diagrammatic analysis. This is assessed
in Module 5.

Candidates should understand the benefits of specialisation and why
specialisation necessitates an efficient means of exchanging goods and
services.

Candidates should understand the meaning of productivity (including
labour productivity) and the factors that determine productivity.

Candidates should be able to give examples of economies of scale,
recognise that they lead to lower unit costs and may underlie the
development of monopolies.

Candidates should understand that any point on the production
possibility boundary is productively efficient but that allocative
efficiency is only achieved when the goods and services produced
match people’s needs and preferences.

Candidates should understand that externalities exist when there is a
divergence between private and social costs and that negative
externalities are likely to result in over-production.
Note: candidates do not need to analyse the reasons for the
misallocation of resources using the marginalist approach or the
associated diagrams.

Candidates should understand that public goodss are non-rival and
non-excludable and recognise the significance of these characteristics.
Candidate should understand the difference between a public good
and private good.

Candidates should understand that the classification of merit and
demerit goods depends upon a value judgement and that such
products may also be subject to externalities.

Candidates should understand that the existence of monopolies, the
immobility of factors of production and imperfect knowledge are
likely to result in a misallocation of resources

Candidates should understand that, in a market economy, an
individual’s ability to consume goods and services depends upon
his/her income and wealth and that an unequal distribution of income
and wealth may result in an unsatisfactory allocation of resources.
Note: it is not necessary at this stage for candidates to study the causes
of inequalities in the distribution of income and wealth. This is
assessed in Module 5.

Candidates should understand the reasons for government
intervention in a market economy.

Candidates should be able to use basic economic models to analyse
and evaluate the use of indirect taxation, subsidies, price controls,
buffer stocks, pollution permits, state provision and regulation to
correct market failure.

Candidates should appreciate that government intervention does not
necessarily result in an improvement in economic welfare.
Governments may create rather than remove market distortions.
Inadequate information, conflicting objectives and administrative
costs should be recognised as possible sources of government failure.

Candidates should be able to apply economic models to assess the
role of markets and the government in areas such as health care,
housing, agriculture and the CAP, transport and the environment.