OCR GCSE Economics: Introduction to Economics — Revision Notes

Condensed for the final weeks. For the full explanation, use the Introduction to Economics study guide.

The economic problem

Unlimited wants, limited resources. Therefore choices, and therefore opportunity cost — the next best alternative forgone.

Factors of production: land (rent), labour (wages), capital (interest), enterprise (profit). Capital means machinery and equipment, not money.

Production possibility curves: on the curve = efficient; inside = unemployment or inefficiency; outside = unattainable. An outward shift is economic growth.

Main economic groups — consumers, producers and the government — are interdependent: consumers buy from producers and supply labour to them; producers pay wages and supply goods; government taxes both and provides public services and regulation in return.

The three fundamental questions every economy must answer: what to produce, how to produce it, and for whom. A market economy leaves these to the price mechanism; a planned economy leaves them to the state; a mixed economy — what almost every real economy actually is — combines both.

Demand and supply

A change in the good’s own price moves you along the curve; anything else shifts it. That distinction decides more marks than any other single point.

Conditions of demand: income, substitutes, complements, tastes, population, advertising, expectations. Conditions of supply: costs, technology, taxes, subsidies, number of firms, weather.

Equilibrium is where they meet. Above it, excess supply pushes price down; below it, excess demand pushes price up.

The four-step answer to “explain the effect of X on this market”: which curve shifts, which direction, the new equilibrium, and the effect on price and quantity. Answering about price alone forfeits half the marks.

Specialisation and exchange. Specialisation raises output through practice, mechanisation and economies of scale, but creates interdependence, which requires exchange. Without money, trade needs a double coincidence of wants — each party wanting exactly what the other offers — which barter rarely delivers. Money solves this by acting as a medium of exchange, a measure of value, a store of value, and a means of deferred payment.

Elasticity

PED = %change in quantity demanded / %change in price

PED	Raising price will
Inelastic (<1)	Increase revenue
Elastic (>1)	Decrease revenue

Determinants: availability of substitutes (the most important), necessity or luxury, proportion of income spent, addictiveness, and time.

This explains why tobacco and fuel duties raise so much revenue — demand is inelastic — and why, for exactly the same reason, they change behaviour so little.

Markets and competition

Competitive markets give lower prices, more choice, better quality and more innovation. Monopoly brings higher prices and less choice, but may achieve economies of scale and fund research — so evaluate rather than condemn.

Economies of scale reduce average cost as a firm grows. Total costs still rise; it is cost per unit that falls.

Market failure

Failure	Result
Negative externality	Third parties bear costs — over-production
Positive externality	Third parties gain — under-production
Public goods	Non-excludable and non-rival — the market provides none
Merit goods	Under-consumed; benefits underestimated
Demerit goods	Over-consumed; harms underestimated

A public good needs both properties. Street lighting and defence qualify; healthcare and education are merit goods, since they can be and are sold privately.

Intervention: taxes, subsidies, regulation, state provision, price controls, information campaigns.

• Maximum price below equilibrium → shortage, queues, black markets.
• Minimum price above equilibrium → surplus.

Both are ineffective on the wrong side of equilibrium — a maximum price set above the market price changes nothing.

Government failure — intervention leaving the outcome worse than the market, through poor information, administrative cost, or unintended consequences. Mentioning it lifts an evaluation.

Exam traps

• Treating a price change as a shift.
• Calling money a factor of production.
• Answering only about price.
• Giving one property of a public good.
• Confusing merit goods with public goods.
• Drawing a price control on the wrong side of equilibrium.

Self-test

1. Define opportunity cost.
2. What causes a movement along the demand curve, and what causes a shift?
3. If PED = 0.4, what happens to revenue when price rises?
4. Give both properties of a public good.
5. What happens when a maximum price is set below equilibrium?
6. Name the three fundamental economic questions, and the three systems that answer them.
7. A country can produce 80 units of food or 40 units of machinery, or combinations between. It currently produces 50 food and 10 machinery. Is it on, inside, or outside its production possibility curve?

Answers: 1. The next best alternative forgone when a choice is made. 2. A change in the good’s own price causes a movement along; a change in any other condition of demand causes a shift. 3. Revenue rises, because demand is inelastic so quantity falls proportionally less than the price increases. 4. Non-excludable and non-rival. 5. Quantity demanded exceeds quantity supplied, producing shortages, queues and potentially a black market. 6. What, how, and for whom to produce; a market economy uses the price mechanism, a planned economy uses the state, and a mixed economy combines both. 7. The opportunity cost ratio is 2 food = 1 machinery. At 50 food, the curve allows (80 − 50) ÷ 2 = 15 machinery, but the economy produces only 10, so it lies inside the curve — resources are unemployed or used inefficiently.