What is perfect competition?IGCSE Economics notes

Perfect Competition

A situation where there are many firms competing in the market, there is lot of competition and the firm producing the best quality goods and services at lowest price will be successful.

Characteristics of Perfect Competition

Homogeneous products

All firms produce the identical products.

Many buyers in the market

Though there are many buyers in the market they cannot control the prices. They are price takers. The prices are set through the price mechanism.

Many sellers in the market

There are many sellers in the market. There is no dominating firm. All firms are usually small and are price takers.

Perfect information

All buyers and sellers have perfect knowledge about the prices in the market.

Freedom of entry and exit

There are no barriers to entry and exit for firms. Firms are free to enter or exit the market at their discretion. If a firm is making profit other firms may enter the market tempted by the profits.

No preferential treatment

There is no preference given to any firm by government or anybody. All firms are equally treated.

Merits of Perfect Competition

• There is optimal allocation of resources in the long run.
• Maximum economic efficiency as no single firm can control prices. There is no wasteful excess capacity.
• Advertising and promotional expenses are eliminated because product is homogeneous and there is perfect knowledge among the consumers.

Demerits of Perfect Competition

• No Research and Development undertaken as the products are homogeneous.
• Prices in perfect competition are controlled by the price mechanism. It may lead to instable income and prices due to frequent change in equilibrium prices.

What is Monopoly?

Monopoly

Monopoly means a market where there is only one seller of a particular good or service.

Characteristics

• Only one single seller in the market. There is no competition.
• There are many buyers in the market.
• The firm enjoys abnormal profits.
• The seller controls the prices in that particular product or service and is the price maker.
• Consumers don’t have perfect information.
• There are barriers to entry. These barriers many be natural or artificial.
• The product does not have close substitutes.

Advantages of monopoly

• Monopoly avoids duplication and hence wastage of resources.
• A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers.
• Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly.
• Monopolies may use price discrimination which benefits the economically weaker sections of the society. For example, Indian railways provide discounts to students travelling through its network.
• Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition.

Disadvantages of monopoly 

• Poor level of service.
• No consumer sovereignty.
• Consumers may be charged high prices for low quality of goods and services.
• Lack of competition may lead to low quality and out dated goods and services.

Economics o level 2281/22 structured questions october/november-2013

Section A

Answer this question.

1 Prices rise faster than wages in the United Kingdom (UK)
          Household incomes in the UK have suffered their largest fall in three decades. Real disposable
incomes fell by 0.8% in 2010.
         Wages often rise faster than prices, but the problem in 2010 was that wage increases failed to
keep up with price increases. This meant that many people suffered effective pay cuts in real
terms. The rate of inflation, as measured by the UK Consumer Prices Index, was 4.0% in 2010.
           The Bank of England, the UK’s central bank, stated that the rate of inflation would eventually
start to fall but that, in the meantime, people could expect to continue to suffer from a fall in real
incomes for the next few years.
It was thought that the Bank of England might raise interest rates to control inflation. However,
such a measure might badly affect many people who would have to pay more for their borrowing.
(a) Define the term ‘disposable incomes’. [2]
(b) Explain how a consumer prices index is constructed. [5]
(c) Explain how individual workers can try to increase their wages above the rate of inflation. [5]
(d) Discuss to what extent a rise in interest rates would be to the advantage of UK workers. [8]

Section B

Answer any three questions from this section.

2 An entrepreneur plans to cut down timber in a rainforest. The local community, however, are
concerned that the social costs will be greater than the social benefits.

(a) Define the factor of production, enterprise. [4]
(b) Distinguish between the social benefits and the social costs involved in this example. [6]
(c) Discuss whether a resource, such as a rainforest, should be conserved rather than used.[10]

3 A person is choosing between different occupations and realises that there are both wage and non-wage factors that need to be taken into account.

(a) Describe the non-wage factors that can influence a person’s choice of occupation. [4]
(b) Explain the different forms of payment that a worker can receive. [4]
(c) Consider the likely changes in earnings over an individual’s lifetime. [3]
(d) Discuss whether a worker in the services sector is always likely to receive a higher wage than one in the manufacturing sector. [9]

4 Perfect competition is one type of market structure with a number of distinctive characteristics. It is often compared favourably with monopoly.
(a) Analyse three characteristics of perfect competition. [6]
(b) Distinguish between a firm that is a price taker and one that is a price maker. [4]
(c) Discuss whether pricing and output policies in perfect competition are more favourable to the consumer than those in monopoly. [10]
5 There are usually many different taxes in an economy and they can be divided into direct and
indirect taxes.
(a) Explain what is meant by a regressive indirect tax. [4]
(b) Using a demand and supply diagram, analyse how an increase in tax on fuel can affect the
equilibrium price and equilibrium quantity of fuel. [6]
(c) Discuss the extent to which a direct tax, such as income tax, can affect the distribution of
income in an economy. [10]

6 It is not only the size of a country’s population that concerns economists, but also its age
distribution.
(a) Describe three possible causes of the growth of a country’s population. [6]
(b) Explain how the rate of population growth may differ between a developed country and a
developing country. [4]
(c) Explain what is meant by an ageing population. [2]
(d) Discuss to what extent an ageing population is a serious economic problem. [8]
7 There are strong arguments in favour of free trade and yet many countries still use various forms of trade protection.
(a) Explain three potential benefits of free trade. [6]
(b) Distinguish between quotas and exchange controls as methods of trade protection. [4]
(c) Explain how a subsidy could be used to protect an industry from foreign competition. [4]
(d) Discuss whether the protection of a declining and inefficient industry in a country can ever be justified. [6]

IGCSE structured notes ,What is Inflation

What is Inflation

Supply of Money

Like other commodities the price of money is affected by its supply. An increase in supply will cause an increase in price level. An increase in average price is usually referred to as Inflation.

This belief that changes in the money supply causes changes in the rate of inflation is associated particularly with those economics that are referred to as Monetarists. However there are economists who do not agree to this point of view. We will discuss it later on in the causes of inflation.

Inflation is a general and sustained rise in the level of prices of goods and services over a period of time.

Types of Inflation

Mild Inflation: Low level of inflation where the prices will increase up to 5%.

Creeping Inflation: A more serious economic situation where the prices increase by 10%.

Hyperinflation:  Also known as galloping inflation. It is a serious economic condition where the prices increase at a very high rate and the value of money falls. Recent, Zimbabwe experienced hyperinflation (165000%).

IGCSE structured notes from Effects of Inflation

Effects of Inflation

Increase in production and investment: Inflation motivates producers increase production as their goods or services will earn more profits (law of supply).

Greater inequality of income: Poor people more adversely affected by inflation. Inflation widens the gap between rich and poor.

Balance of trade: Inflation will cause the prices of the goods and services to go up. It will make the country’s exports less competitive in the international market and have a negative effect on the balance of trade.

Exchange rate: High rate of inflation will affect the external value of money or the exchange rate of the country. Other countries will find the currency more expensive and hence there will be less demand for it and the value of currency will fall.

Who gains, who loses

Gainers		Losers
Businessmen gains as the prices of their products go up and so does their profits. Farmer’s cost of production will not go up drastically in the short run and thus will ain. Shareholders will get better returns as businesses will be making more profits. Governments that are in debt will also find their burden reduced. Debtors will gain as the real value of money has gone down since the time they took the loan.		Creditors lose as the principle sum received is less in terms of real income. Wage earners will find their real wages going down and thus lose. Pensioners usually have a fixed income and will lose. Students, unemployed people will lose. Bondholders, those who have purchases bonds from government and companies will lose.

How to measure inflation

Rate of inflation is measured by calculating the percentage price increase in goods and services over a period of time.

Inflation is measured through a Price Index. The economists monitor the price changes of a collection of goods & services over a period of time. Price index consists of

A basket of goods

It contains goods and services from various sectors of the economy. There prices are monitored over a period of time.

Base year

This is the first year with which the prices of subsequent years are compared. The price of each commodity is given the value of 100. The base year chosen is a typical year in the sense that there is neither very low or very high inflation, nor any extraordinary occurrences like wars.

Weights

Some commodities are more important in the economy as compared to other commodities. To find out the true effect of inflation. Weights are added to different products and services according to their importance in the society. A product which has a more serious affect is given a higher weight. For example food products which form a staple diet of the society are assigned more weightage than luxury products (perfumes). As the pattern of consumers spending changes over time so the Price Index will have to change the weights assigned to different commodities.

IGCSE economics o level notes,causes of inflation

Causes of Inflation

Demand pull inflation

One of the basis causes of inflation is the rise in the aggregate demand. When demand rises it cannot be met by a corresponding increase in supply, the general price level will increase and inflation will occur.

Cost push inflation

The rise in general price level due to an increase in the cost of production. When any of the factors of production becomes costlier, it results in higher cost of production.  Cost of production may rise due to an increase in the wage rates or expensive raw materials. This reduces the profit margin of the producers. In order to maintain their profit margins, the producers increase the selling price of the commodity which results in cost push inflation.

Monetarist view of inflation

Some economists argue that inflation is caused due to an increase in supply of money in the economy. The idea is that too much money in the economy is chasing too few goods and thus inflation occurs.

Imported Inflation

This is very common for countries which are excessively dependent on imported goods. An increase in the prices of imported goods will lead to a rise in general price level in the economy. In this case the exchange rate plays a vital role. If the currency of a country depreciates it will lead to inflation as imports will become costlier.