O Level Economics: Microeconomic Decision Makers — Revision Notes

Condensed for the final weeks. For the full explanation, use the Microeconomic Decision Makers study guide.

Five decision-maker categories — one question each

1. Banks — how to support the economy (central bank: monetary policy; commercial banks: deposits, loans, payments). See “Money and banking” below for the functions and characteristics of money.
2. Households — spend, save or borrow? Driven by income, rate of interest, confidence.
3. Workers — which job, and how hard to bargain for pay?
4. Trade unions — how to represent workers’ interests? See “Trade unions” below.
5. Firms — how to grow, what to produce, by what method? See “Firms and production (3.6)” below.

Money and banking (3.1)

The syllabus covers the forms, functions and characteristics of money without attaching a fixed number to “the functions of money” — don’t invent one. Money’s functions commonly discussed include acting as a medium of exchange (avoids the double coincidence of wants problem of barter), a measure of value / unit of account (lets prices be compared), a store of value (can be held and spent later without losing its usefulness, inflation permitting), and a standard for deferred payment (lets debts be agreed now and settled later). For money to perform these functions it needs characteristics: general acceptability, durability, portability, divisibility, scarcity (limited supply) and difficulty to counterfeit.

Workers — the largest sub-topic, four parts

• Choice of occupation: wage factors (pay, benefits) vs non-wage factors (security, conditions, progression).
• Wage determination: demand/supply in the labour market, bargaining power, minimum wage policy.
• Earnings differences: demand/supply, bargaining strength, discrimination, government policy — applied across skilled/unskilled, sector, gender, private/public.
• Division of labour: advantages/disadvantages for workers, firms and the economy.

Trade unions (3.4)

A trade union is an organisation of workers that engages in collective bargaining with employers over wages, working hours and working conditions, protects members’ employment, and seeks to influence government policy. Its strength depends on factors such as the proportion of the workforce it represents (union density), the state of the economy and labour market, and the degree of employer and government support for union activity. Its effects must be weighed from three separate viewpoints — workers, firms and government — since the same union action (e.g. a successful pay claim) can be a benefit from one viewpoint (higher pay for workers) and a cost from another (higher costs for firms).

Advantages of trade union activity can include higher pay and better conditions for members, and a collective voice that balances an individual worker’s weaker bargaining position against an employer. Disadvantages can include higher costs for firms (potentially raising prices or reducing employment), and the risk of industrial action disrupting production.

Firms and production (3.6)

Three linked ideas sit between firms’ growth (3.5) and firms’ costs and revenue (3.7):

• Demand for factors of production: driven by demand for the firm’s product, the price of different factors relative to each other, their availability, and their productivity.
• Labour-intensive vs capital-intensive production: whether a firm relies mainly on labour or mainly on capital (machinery) depends on the relative cost of each factor, the nature of the product, and the scale of production.
• Production vs productivity: production is the total quantity of output, while productivity is output per unit of input (e.g. output per worker) — a firm can increase production without increasing productivity, and vice versa.

Firms’ costs and revenue — the calculation-heavy table

Term	Definition
Total cost (TC)	Fixed cost + variable cost
Fixed cost (FC)	Doesn’t change with output
Variable cost (VC)	Changes directly with output
Average total cost (ATC)	TC ÷ output
Average fixed cost (AFC)	FC ÷ output
Average variable cost (AVC)	VC ÷ output
Total revenue (TR)	Price × quantity sold
Average revenue (AR)	TR ÷ quantity sold

Marginal cost and marginal revenue are NOT required at this level — don’t import them from a higher-level course. Practise moving between raw figures and these labels fluently; this is calculation-heavy content that can be tested on Paper 1.

Mergers — three types, know which is which

• Horizontal: same stage, same industry.
• Vertical: different stage, same industry.
• Conglomerate: unrelated industries.

Market structure — stick to named characteristics only

Competitive markets (many firms) vs monopoly (single firm dominates) — the syllabus explicitly does not require full perfect/imperfect competition theory or its diagrams. Keep answers to named characteristics and effects.

Firm objectives and mergers — not mutually exclusive

Firms’ possible objectives — survival, social welfare, profit maximisation and growth — are not mutually exclusive and can change depending on circumstances: a struggling firm may prioritise survival above all else, while an established, financially secure firm may prioritise growth instead. Mergers are one route to growth, and questions often ask you to identify which type of merger a described scenario represents before explaining its advantages and disadvantages. A supermarket chain buying a rival supermarket chain is horizontal (same stage, same industry); a supermarket chain buying a farm that supplies it is vertical (different stage, same industry); a supermarket chain buying an unrelated electronics retailer is conglomerate (unrelated industries).

Why Topic 3 follows Topics 1 and 2 in this order

Topics 1 and 2 of Cambridge O Level Economics establish scarcity, opportunity cost and the price mechanism as abstract tools. Topic 3 puts those tools to work by asking who actually makes economic decisions in a real economy, examined through five decision-maker categories: banks, households, workers, trade unions and firms. Keeping this framing in mind while revising — that Topic 3 is applying earlier theory to real decision-makers, not introducing entirely new abstract concepts — makes it easier to connect a Topic 3 answer back to demand, supply or opportunity cost where a question rewards that link.

Exam traps

• Importing marginal cost/marginal revenue analysis the syllabus doesn’t require.
• Confusing horizontal, vertical and conglomerate mergers.
• Treating firm classification questions as requiring internal organisational structure detail (not required).
• Forgetting trade union effects must be weighed from three separate viewpoints — workers, firms, government.

Economies and diseconomies of scale

As firms grow, both internal and external economies and diseconomies of scale affect a firm or industry. Internal economies of scale arise from the firm’s own growth (e.g. bulk-buying discounts, specialised management, spreading fixed costs over more output); external economies of scale arise from the growth of the whole industry in a local area (e.g. a shared pool of skilled labour, specialist suppliers locating nearby). Diseconomies work the same way in reverse — internal diseconomies from problems specific to a firm growing too large (e.g. communication breakdown, coordination difficulty), external diseconomies from the whole industry growing too large in one area (e.g. local congestion, rising local wages as firms compete for the same workers). Keep the internal/external distinction straight, since exam questions often ask you to classify a described cause into the correct category rather than just naming the general concept of “economies of scale.”

Linking the decision-makers together

Exam answers score highest when they show how the decision-makers interact rather than treating each in isolation. A firm’s decision to increase output (a producer decision) changes the quantity of labour it demands (a worker decision from the other side of the labour market). Government is not one of Topic 3’s five decision-makers (it belongs to Topic 4, Government and the macroeconomy), but Topic 4 policy such as a minimum wage or a subsidy changes the incentives facing both the firm and the worker, so it is worth noting as context here even though it is not itself a Topic 3 decision-maker. Practise tracing this kind of chain through a single scenario, since Paper 2’s compulsory Section A data-response question is built around exactly this kind of interconnected reasoning rather than isolated definitions.

Self-test

1. Name the three named influences on household spend/save/borrow decisions.
2. What is the formula for average total cost?
3. Distinguish a horizontal from a vertical merger.
4. Are marginal cost and marginal revenue required at this level?
5. From which three viewpoints should trade union effects be assessed?

Answers: 1. Income, rate of interest, confidence. 2. TC ÷ output. 3. Horizontal = same stage, same industry; vertical = different stage, same industry. 4. No, explicitly not required. 5. Workers, firms, government.

Official syllabus

Cambridge O Level Economics (2281) syllabus for examination in 2026 (Version 2, December 2025) — official syllabus PDF.