Economics SEM 2 1st Test

Oppurtunity

Is the value of the next best alternative that you give up when you make a choice.

Law of Demand

States that, as the price of a good or service increases, the quantity demanded decreases, assuming other factors stay the same.

Law of Supply

States that, as the price of a good or service increases, the quantity supplied increases, assuming other factors stay the same.

Market Surplus

Occurs when quantity supplied is greater than quantity demanded.

Supply > Demand Usually happens when the price is above equilibrium. Businesses may respond by lowering prices to sell their excess stock.

Market Shortage

Occurs when quantity demanded is greater than quantity supplied.

Demand > Supply

This usually happens when the price is below equilibrium. Businesses may respond by increasing prices because there are more buyers than available products.

GDP

Gross Domestic Product, measures the total monetary value of all final goods and services produced within a country over a specific period, usually one year.

It is commonly used to measure the size and performance of an economy.

Nominal GDP

measures the value of production using current prices.

It can increase because, More goods and services are produced, or Prices have increased due to inflation. Therefore, does not remove the effect of inflation.

Real GDP

measures the value of production after adjusting for inflation.

This makes it more useful for measuring whether the economy is actually producing more goods and services.

Real GDP per capita

Real GDP divided by the population. Real GDP ÷ Population

It estimates the average amount of economic production per person.

Real GDP Growth Rate

[(New GDP − Old GDP) ÷ Old GDP] × 100

Living Standards

refer to the amount of goods and services people can access and consume. They are influenced by things such as: Income, Employment, Housing, Food, Consumer good, Access to services

Real GDP per capita can provide an indication of material living standards. If real GDP per capita increases, material living standards are likely to increase, assuming other factors remain similar.

Non-material Living Standards

refer to aspects of wellbeing that aren't directly measured by income or the amount of goods people consume.

Examples include, Health, Education, Safety, Happiness, Leisure time, Environmental quality, Community relationships

Limitations of GDP

GDP doesn't show how income is distributed.

A country could have a high GDP but significant inequality.

Non-Market Activities

GDP doesn't fully measure activities that don't involve market transactions.

For example, unpaid household work.

Environmental Damage

GDP can increase while pollution and environmental damage also increase.

Quality of life

GDP doesn't directly measure, Happiness, Health, Safety, Leisure, Relationships

Population Differences

A country may have a large GDP simply because it has a large population.

That's why GDP per capita can be more useful when comparing average economic output per person.

Full Unemployment

Does not mean that absolutely nobody is unemployed.

It means that people who are willing and able to work can generally find employment, apart from normal levels of unemployment such as frictional unemployment.

Labour Force

Consists of people who are:

• Employed, or

• Unemployed but actively looking for work and available to work

Unemployment

refers to people who are without a job, available for work and actively seeking employment.

Unemployment Rate Formula

Unemployment rate = (Unemployed ÷ Labour force) × 100

Frictional Unemployment

Short-term unemployment that occurs when people are between jobs or looking for a new job.

Frictional Example

Someone leaves their job and spends several weeks looking for a new one.

Structural Unemployment

Occurs when there is a mismatch between workers' skills and the skills employers require.

Structural Unemployment Example

A worker loses their job because technology has changed the industry and their old skills are no longer needed.

Cyclical Unemployment

Occurs because of changes in the business cycle, particularly during periods of economic slowdown or recession.

Cyclical Unemployment Example

A business experiences falling sales during a recession and reduces its workforce.

Seasonal Unemployment

Occurs when jobs are only available during certain seasons or times of the year.

Seasonal Unemployment Example

A worker may have employment during the tourism season but struggle to find work during the off-season.

Underemployment

A worker wants more hours than their current working hours

Underemployment Example

A casual worker recieves only one shift per week

Demand

Is the quantity of a good or service that consumers are willing and able to buy at different prices over a given period.

Factors that can change demand 1

Income:
If people's incomes increase, demand for many normal goods increases.

Tastes and preferences:
If a product becomes more popular, demand increases.

Factors that can change demand 2

Price of substitutes:
If the price of Coke increases, consumers may buy more Pepsi.

Price of complements:
If the price of gaming consoles falls, demand for compatible games may increase.

Factors that can change demand 3

Population:
A larger population can increase demand for goods and services.

Expectations:
If consumers expect prices to rise, they may buy more now.

Supply

is the quantity of a good or service that producers are willing and able to sell at different prices over a given period.

Factors that can change supply 1

Production costs:
Higher costs can reduce supply.

Technology:
Improved technology can make production more efficient and increase supply

Factors that can change supply 2

Number of producers:
More businesses producing a product can increase market supply.

Government policies:
Taxes and subsidies can affect production costs and therefore supply.

Factors that can change supply 3

Weather:
Weather can strongly affect agricultural production.

Expectations:
If producers expect prices to rise in the future, they may hold back some supply now.

Movement vs Shift

Movement = change in the price of the product itself.

Shift = non-price factor.

Market Equilibrium

Quantity demanded equals quantity supplied.

Demand increase

Right

Demand decrease

Left

Supply increase

Right

Supply decrease

Left

Economic Performance

Economic Growth, Unemployment, Inflation

Economic Growth

An increase in the amount of goods and services produced by an economy.

Usually measured using real GDP growth.

Inflation

Measures the increase in the general price level of goods and services over time.

These three indicators help assess how well an economy is performing.

Unemployment Indicator

Measures the proportion of the labour force that is unemployed.

Inflation Increase - purchasing power decrease

If wages don't increase as quickly as prices, households may experience a decrease in their real purchasing power and material living standards

Expansion

Economic activity is increasing

• GDP increases

• Employment increases

• Unemployment decreases

• Consumer spending increases

Peak

The economy reaches a high point before growth begins to slow.

Contraction

Economic activity decreases or grows more slowly.

• GDP growth slows or becomes negative

• Unemployment can increase

• Spending can decrease

Trough

The economy reaches its lowest point before beginning to recover.