WEC11 Markets in action

Lessons in WEC11

1. The nature of economics and positive and normative statements
   Economics is a social science: no controlled experiments, so we use models built on assumptions and ceteris paribus. Positive = testable; normative = value judg
2. Scarcity, choice and opportunity cost
   Scarcity: unlimited wants, finite resources, so choices must be made. Opportunity cost = next best alternative forgone. Free goods have zero opportunity cost; e
3. Production possibility frontiers
   PPF: maximum output combinations. On = efficient, inside = inefficient, outside = unobtainable. Bowed out = rising opportunity cost. Outward shift = more or bet
4. Specialisation, the division of labour and money
   Division of labour: higher productivity and lower costs, but boredom, interdependence and narrow skills. Specialists must trade, so they need money: medium of e
5. The role of financial markets
   Financial markets: facilitate saving, lend to firms and individuals, facilitate exchange, offer forward markets in currencies and commodities, and provide a mar
6. Economic systems: free market, command and mixed economies
   Free market: price mechanism, efficiency and incentives but market failure and inequality. Command: state planning, equality and priorities but information and
7. Rational decision making and behavioural economics
   Rational: consumers maximise utility, firms maximise profit. Real consumers may not, because of herding, habit, inertia, poor computational skills, the need to
8. Demand: the demand curve, utility and shifts
   Demand = willing and able to buy. Own price change: movement along. Other factors (substitutes, complements, real income, tastes, population, advertising): shif
9. Price elasticity of demand
   PED = %ΔQd / %ΔP. Elastic if |PED| > 1; inelastic if |PED| < 1. Inelastic demand: raise price to raise revenue.
10. Price elasticity of demand: calculation, values and determinants
    PED = %ΔQd / %ΔP (YED uses income, XED the price of another good). 0 = perfectly inelastic (vertical), infinity = perfectly elastic (horizontal), -1 = unitary.
11. Price elasticity, total revenue and the straight-line demand curve
    TR = P x Q. Elastic: cut price to raise TR. Inelastic: raise price to raise TR. Unitary: TR unchanged. On a straight-line demand curve PED falls from elastic to
12. Income and cross elasticity of demand
    YED: positive = normal (0 to 1 necessity, over 1 luxury); negative = inferior. XED: positive = substitutes, negative = complements, zero = unrelated. Both are a
13. Why elasticities matter for firms, consumers and government
    Firms use PED for pricing, YED for planning over the economic cycle, XED for rivals and complements. Governments tax inelastic goods for revenue, but inelastic
14. Supply: the supply curve and its shifts
    Supply = willing and able to sell. Own price: movement along. Costs, technology, taxes, subsidies, natural disasters: shifts. Specific tax: parallel shift up by
15. Price elasticity of supply
    PES = %ΔQs / %ΔP (positive). Elastic when there is spare capacity, stocks, mobile factors, no legal limits, and in the long run. Short run: a factor is fixed; l
16. Market equilibrium, excess demand and excess supply
    Equilibrium: Qd = Qs. Price too low: excess demand, price bid up. Price too high: excess supply, price falls. D right: P and Q up. S right: P down, Q up.
17. Consumer surplus and producer surplus
    Consumer surplus: willing to pay minus price paid (triangle under D, over price). Producer surplus: price received minus minimum acceptable (triangle over S, un
18. Functions of the price mechanism
    Rationing (price allocates scarce goods), incentive (profit encourages supply), signalling (price changes carry information). Works locally, nationally and glob
19. Indirect taxes and their incidence
    Indirect tax: supply shifts up by the tax, consumers pay more, producers receive less, quantity falls, government gains tax x new quantity. Inelastic demand: co
20. Subsidies and their incidence
    Subsidy: supply shifts down by the subsidy, consumers pay less, producers receive more, quantity rises, government pays subsidy x new quantity. Inelastic demand
21. What market failure is and its sources
    Market failure: resources misallocated, output too high or too low compared with the social optimum (MSB = MSC). Sources: externalities, public goods, informati
22. Externalities: private, external and social costs and benefits
    Social cost = private + external cost; social benefit = private + external benefit. Four types: external costs/benefits of production/consumption. External cost
23. Externality diagrams: market and social optimum and welfare loss
    Negative externality: MSC above MPC (or MSB below MPB), market over-produces; welfare loss triangle from Q* to Qm. Positive externality: MSB above MPB, market u
24. Public goods and the free-rider problem
    Private goods: rival and excludable. Public goods: non-rival and non-excludable. Non-excludability causes free riding, so profit-seeking firms under-provide or
25. Imperfect and asymmetric information
    Symmetric: same information. Asymmetric: one side knows more. Information gaps mean demand does not reflect true costs and benefits, so goods are over- or under
26. Moral hazard
    Moral hazard: taking more risk because someone else bears the cost. Insurance: less care, higher premiums for all; insurers use excesses and monitoring. Banking
27. Speculation and market bubbles
    Speculation: buying to sell at a higher price. Bubble: price far beyond underlying value, driven by expectations, herding and credit; it bursts when confidence
28. Government intervention: purpose, and correcting externalities with taxes and subsidies
    Purpose: correct market failure, move to MSB = MSC. Tax = marginal external cost internalises negative externalities. Subsidy = marginal external benefit raises
29. Maximum and minimum prices
    Maximum price: below equilibrium, causes excess demand, queues and black markets. Minimum price: above equilibrium, causes excess supply; buying the surplus cos
30. Pollution permits, property rights, state provision, regulation and information
    Permits: cap and trade, pollution cut where cheapest, but the cap is hard to set. Property rights let owners charge or sue. State provision for public and merit
31. Government failure
    Government failure: intervention causing a net welfare loss. Causes: information gaps, lack of incentives, unintended consequences, excessive administrative cos
32. Exam technique: the Unit 1 paper, multiple choice and short answers
    WEC11: 1 h 45 min, 80 marks: A 6 MCQ (6), B 5 x 4 marks (20), C data response (34), D one essay from two (20). About 1.3 minutes per mark. 4-mark questions: def
33. Exam technique: data response, 14-mark and 20-mark answers
    Section C (34): define 2, explain/analyse 4 to 6, examine 8 (with 2 evaluation marks), discuss 14 (KAA 8 + E 6, diagram needed). Section D essay 20: KAA 12 + E

Next exams for WEC11

• January 2027: Mon 11 Jan 2027, afternoon, 1h 45m
• Summer 2027: Thu 6 May 2027, morning, 1h 45m

From Pearson's final timetables. All exam dates. Always confirm your entries with your exams officer.