OCR A-Level Economics: Microeconomics (H460)

This guide covers Component 1 Microeconomics, examined as H460/01, one of three equally weighted components (each 33.33% of the award) in OCR A Level Economics (H460), for first teaching from 2019. From a base of microeconomic theory, this component develops students’ ability to discuss and evaluate how well microeconomic theories explain the behaviour of economic agents in the real world.

Where this fits in H460

Microeconomics builds understanding of markets, market structures and business objectives from first principles, while developing the quantitative and evaluative skills – interpreting data, considering the limitations of evidence, and weighing moral, ethical and sustainability issues – that are assessed throughout the paper.

Syllabus coverage

OCR A-LEVEL ECONOMICS (H460) — COMPONENT 1 MICROECONOMICS

• 1. Introduction to microeconomics — the economic problem (scarcity, choice, needs and wants), positive and negative statements, the role of economic agents and the factors of production, the allocation of resources across market, planned and mixed economic systems, and opportunity cost with production possibility curves
• 2. The role of markets — specialisation and the division of labour, money as a medium of exchange, and demand
• 3. Business objectives — how businesses set and pursue objectives within a market context
• 4. Market structures — how the degree of competition in a market affects the behaviour of firms
• 5. The labour market — how wages and employment are determined in labour markets

How to approach it

Introduction to microeconomics (Section 1) sets the reasoning pattern for the whole component – scarcity forces choice, and every choice carries an opportunity cost – so make this logic automatic before moving on, since it is assumed without re-explanation in every later section. The role of markets (Section 2) is the most diagram-heavy section: fluency in drawing and correctly labelling demand and supply diagrams, and explaining shifts along and of the curves, underpins almost everything that follows in Sections 3-5. Because the paper explicitly rewards evaluation of real-world economic behaviour, not just description of theory, practise applying each microeconomic model to a real or plausible market example and critically reflecting on the model’s assumptions and limitations.

Official syllabus

OCR A Level Economics (H460) specification, for first teaching from 2019 — ocr.org.uk.

Demand, supply and the price mechanism

Demand slopes downward because of the income and substitution effects; supply slopes upward because higher prices make production more profitable and cover rising marginal costs.

Distinguish carefully between a movement along a curve, caused only by a change in the good’s own price, and a shift of the curve, caused by anything else — income, tastes, substitutes and complements, population for demand; costs, technology, taxes, subsidies, number of firms for supply.

The price mechanism performs three functions: it signals where resources are wanted, it incentivises producers to respond, and it rations scarce goods to those willing to pay.

Elasticity

PED = % change in quantity demanded / % change in price
YED = % change in quantity demanded / % change in income
XED = % change in quantity demanded of A / % change in price of B
PES = % change in quantity supplied / % change in price

PED is negative; determinants are substitutes, necessity, proportion of income, and time. Its practical value is the link to revenue: where demand is inelastic, raising price raises total revenue; where elastic, it lowers it.

YED distinguishes normal goods (positive), luxuries (greater than 1) and inferior goods (negative). XED is positive for substitutes and negative for complements.

Market failure

Market failure occurs when the free market misallocates resources.

• Externalities — costs or benefits falling on third parties. Where negative externalities in production exist, marginal social cost exceeds marginal private cost and the market over-produces. Where positive externalities in consumption exist, as with education or vaccination, the market under-consumes.
• Public goods — non-rival and non-excludable, so the free-rider problem means they are not provided at all by the market.
• Merit and demerit goods — under- and over-consumed because of imperfect information about long-term effects.
• Information gaps and monopoly power complete the standard list.

Government intervention and its limits

Indirect taxes internalise external costs, subsidies encourage positive externalities, regulation and minimum or maximum prices constrain outcomes directly, and tradable permits create a market in the externality itself.

Every one of these carries the risk of government failure: imperfect information, unintended consequences such as black markets under a maximum price, administrative cost, and regulatory capture. A strong evaluation always weighs the intervention against this possibility rather than assuming it works.

Worked example

A good has PED of -0.4. A firm raises price by 10%. What happens to revenue?

% change in Qd = PED x % change in P = -0.4 x 10 = -4%

Price   +10%
Quantity -4%
Revenue changes by roughly +10 - 4 = +6%

Demand is inelastic, so the price rise more than offsets the fall in quantity and revenue increases — which is why firms selling necessities, and governments taxing them, behave as they do.

Common mistakes

Describing a change in the good’s own price as shifting the demand curve. Omitting the minus sign on PED, or misreading it as elastic. Confusing merit goods with public goods — merit goods are both rival and excludable. Saying a negative externality means the market “produces too little”. Recommending intervention without evaluating government failure.

Quick revision checklist

• Explain the shape of demand and supply curves and distinguish movements from shifts.
• State the three functions of the price mechanism.
• Calculate and interpret PED, YED, XED and PES, and link PED to total revenue.
• Explain each type of market failure with a diagram showing the welfare loss.
• Evaluate interventions, including the risk of government failure.