Summary Edexcel A-Level Economics revision notes
1.1 Scarcity, choice and potential conflicts
1.1.1 The Economic Problem
The problem of scarcity is when there are finite resources but unlimited demand.
This means that choices have to be made and resources have to be distributed and used o...
The problem of scarcity is when there are finite resources but unlimited demand.
This means that choices have to be made and resources have to be distributed and used
optimally.
Scarcity – The shortage of resources in relation to the quantity of human wants.
– Insufficient resources to supply everyone’s needs and wants.
Scarcity causes opportunity cost. Opportunity cost is the value of the next best alternative.
It relates specifically to the loss of the next best alternative, not just any other alternative.
Making an economic choice creates a sacrifice as the next alternative must be foregone.
This results in the loss of benefit (often the pleasure rather than the actual cost) that the
choice would have provided.
Opportunity Cost – cost (value) of an opportunity (highest value alternative) that has
been foregone when a choice is made
If a car was bought for £15,000 and after 5 years the value depreciates by £5,000,
the opportunity cost of keeping the car is £5,000 (which could have been gained by
selling the car), regardless of the starting price.
Opportunity cost is also important to different economic agents such as consumers,
producers and governments
Economic Agent – A person, company etc that has an effect on the economy of a country,
for example by buying, selling, or investing.
Examples of how opportunity cost is important to different economic agents is as such:
producers have to pick between buying new/more machinery or hiring more staff whilst
governments have to choose which sectors they will spend their money in.
1.1.2 Business Objectives
Business Objectives – a goal or target that a business does its best to achieve
Business objectives give businesses a purpose and/or a direction
It also allows businesses to measure their progress.
There are many different objectives and different businesses will choose differently
as their aims and motivations will differ from each other.
RETURN ON INVESTMENT (ROI)
o This is the profit that entrepreneurs make by taking risks through making
,investments.
, o The higher the ROI the more attractive the investment and can give an idea of how
profitable it is.
PROFIT MAXIMISATION
o Profit is often important to companies, and in traditional forms of business, the first
aim is often to maximise profits.
o Profit is maximised when costs are at their lowest and revenue is at its highest.
o Firms choose to maximise profits because it provides greater wages for employees
and dividends for shareholders which makes both groups happy.
o It is a cheap source of finance.
o This provides a stable price and output.
o PLCs are often keen to profit maximise because their shareholders expect high
dividends and as a result PLCs may have short run profit maximisation as an
objective.
SALES MAXIMISATION
o This is when the business aims to sell as much of its goods and services without
making a loss.
o It helps keep out competitors as well as deterring them as well as helping them earn
more profits in the long term.
o This may be one of the objectives for not-for-profit organisations
SATISFICING
Satisficing – to be satisfied with a limited amount of income that is enough for survival
and costs.
o This is when a business earns enough profits to keep their shareholders happy.
o This is often the objective for smaller firms.
o It also allows them to keep shareholders happy whilst letting them meet their other
objectives.
SURVIVAL
o This is a short-term objective for businesses trying to enter a competitive market.
o It is also used in times of economic downturn until there is economic growth again.
o Businesses aim to sell as much as possible in a short time to keep to their market
position despite the fact it may mean a loss in the short term.
MARKET SHARE
o A market share is the portion of the market controlled by a company or product.
o By having a good market share, this allows a business to survive better in the market
and can be achieved by maximising sales.
COST EFFICIENCY
o The more cost efficient a company is, the lower the average cost as they find
cheaper resources and manufacturing processes.
o This allows them to offer customers lower prices, meaning in competitive markets
they will gain customers from less efficient producers.
, EMPLOYEE WELFARE
o This is when the business tries to take care of their employees, so they are more
productive and do a better job.
o This also makes the employee more loyal to the company and less likely to leave
their job, lowering employee turnover.
CUSTOMER SATISFACTION
o To improve their competitiveness by improving their quality and therefore improving
customer satisfaction.
o They can improve either their quality or customer service
o If they have a good reputation, they may be able to charge higher prices for their
goods.
SOCIAL OBJECTIVES
o They try to focus on their Corporate Social Responsibility and try to help the
local area.
o They would try to produce goods more ethically or hire groups that
are discriminated against.
1.1.3 Stakeholders and their objectives
Stakeholders – Someone who has an interest or concern or is affected by the operations
and objectives of a business
Possible stakeholders include:
– Employees - want high wages and good working condition
– Shareholders - want high profits so they get high dividends
– Consumers - want high quality goods with low prices
– Managers - want high salaries and bonuses and other personal benefits
– The Government - want to earn corporation tax from the business’s profits
– Suppliers - want businesses to stay successful so they still have customers
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