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The basic economic problem
how best to allocate scarce resources to satisfy people’s unlimited needs and wants.
Economic Agents
Households, Firms and the Government
Economic Goods
Resources / Products that are limited in supply
Free Goods
Resources / Products that are unlimited in supply
Goods
Physical Items made in the production process
Private Sector
Part of the economy where private firms and individuals produce goods and services
Public Sector
Part of the economy where the government produce goods and services
Services
Non-physical products
Capital
The manufactured resources in the production process
Enterprise
The skills a person requires to successfully combine and manage the other factors of production
Factors of Production
Land, Labour, Enterprise, Capital
Geographical Mobility
The extent to which labour is willing and able to move to different locations for employment purposes
Labour
The human resources required in the production process
Land
The natural resources required in the production process
Occupational Mobility
The extent to which labour is able to move between jobs
Demerit Goods
Goods or services which, when consumed, create negative spillover effects
External Benefits
The positive side effects of production or consumption enjoyed by 3rd parties for which no money is paid by the beneficiary
External Costs
The negative side effects of production or consumption incurred by 3rd parties for which no compensation is paid
Externalities (Spillovers)
These occur when the actions of firms and/or individuals have either a positive or negative side-effect on 3rd parties
Free riders
People who take advantage of goods/services provided but the govt. but not contributed to govt. revenue through taxation
Market Failure
Occurs when market sources fail to allocate resources efficiently and so cause external cost or external benefits
Merit Goods
Goods or services which when consumed creates positive spillover effects
Private Benefits
The benefts of production and consuption enjoyed by economic agents
Private costs
The actual cost of production or consumption of an economic agent
Public Goods
Goods and services that are non-excludable and non-rivalrous, and are a cause of market failure as there is a lack of profit motive to produce them.
Social Benefits
The true benefits of consumption or production
Social Costs
The true costs of consumption or production
Formula for Social Costs
Social costs = private costs + external costs
Formula for Social Benefits
Social Benefits = private benefits + external benefits
Economic System
The way in which an economy is organised and run; how best to allocate scarce resources
Market Economy
An economic system that relies on the market forces of demand and supply, (price mechanism), to allocate resources
Mixed Economy
An economic system that combines aspects of the private and market economies
Planned Economy
An economy that relies on the government to allocate scarce resources
Aim of the Private Sector
Earn Profit
Aim of the Public Sector
To provide a service
Price Elastic Supply
Describes the supply of a product that is responsive to changes in price, usually due to there being spare capacity or large volumes of stocks
Price Elasticity Of Supply (PES)
Measure of the degree of responsiveness of the quantity supplied of a product to a change in its price
Price Inelastic Supply
Describes the supply of a product that is unresponsive to changes in price
Stocks
Are known as the raw materials, components and finished goods used in the production process
Unitary prices elasticity of supply
Occurs when the percentage change in the quantity supplied is proportional to the percentage change in the price, so there is no change in the firms’s sales revenue
Formula of PES
PES = Percentage change in quantity supplied DIVIDED BY Percentage change in price
When is PES, price elastic?
When PES > 1.0
When is PES, price inelastic?
When PES < 1.0
What happens when PES is equal to 0
The supply is perfectly price inelastic, (change in price does not affect the quantity supplied)
What happens when PES is equal to infinity?
The supply is perfectly price elastic, ( the quantity supplied is unlimited at a given price, but no quantity can be supplied at any other price.)
Determinants of Price Elasticity of Supply
Factor substitution: (the cost & suitability of switching between factors of production)
Inventory: (Stock Levels)
Rivals: (The intensity of competition in the industry)
Spare Capacity: (The greater it is, the more responsive supply can be)
Time: (To complete the factors of production)
Price Elastic Demand
Describes the demand for a product that is highly responsive to changes in price
Price Elasticity of Demand (PED)
Measures the extent to which the demand for a product changes due to a change in its price
Determinants of PED
Time: (to seek/switch alternatives)
Habits: (including addictions, fashions and tastes)
Income: (real disposable income)
Substitutes: (availability & price of alternative product)
Decrease in demand
A leftward shift of the whole demand curve due to an unfavourable change in a non-price factor that affects the demand
Decrease in Supply
A leftward shift of the whole supply curve du to an unfavourable change in non-price factors that affects supply
Increase in Demand
A rightward shift in the whole demand curve due to favourable change in a non-price factor that affects demand
Increase in Supply
A rightward shift in the whole supply curve due to a favourable change in a non-price factor that affects supply
Price Changes caused by demand factors
Real Income
Disposable Income
Fashion, Habits and Tastes
Advertising and Marketing
Price of substitutes and complements
Price changes by supply factors
Subsidies
Length of production time
State of technology
Weather conditions
Indirect taxes
Equilibrium Prices
The price at which the demand curve for a product intersects the supply curve for the product.
Excess demand
Occurs when the supply of a product exceeds its demand at certain price levels. This causes shortage of a product
Excess supply
occurs when the quantity supplied of a product or service exceeds the quantity demanded at a given price level
Contraction in Supply
This occurs when there is a fall in the quantity supplied of a product following a decrease in its price
Decrease in supply
A leftward shift of the supply curve caused by unfavourable changes in non-price factors
Extension in supply
This occurs when there is an increase in the quantity supplied of a product following an increase in its price
Increase in supply
A rightward shift of the supply curve caused by favourable changes in non-price factors
Determinants of Supply
Time
Weather
Opportunity Costs
Taxes
Innovations
Production Costs
Subsidies
Market Supply
The sum of all supply curves in the market at each given price levels
Complements
Products that are jointly demanded
Contraction in demand
This occurs when there is a fall in the quantity demanded for a product following an increase in its price
Decrease in Demand
A leftward shift of the the demand curve caused by unfavourable changes in non-price factors
Extension in Demand
This occurs when there is an increase in the quantity demand for a product following a fall in price
Increase in demand
A rightward shift of the demand curve caused by favourable changes in non-price factors
Substitutes
Products that can be used in place for one another
Determinants of Demand
Habits, fashion, taste
Income levels
Substitutes and Complements
Advertising
Government Policies
Economic conditions
Market disequilibrium
This occurs when the market price is either above or below the equilibrium price, causing excess supply or demand
Market equilibrium
When the demand = supply, and there is no shortages or surpluses
Microeconomics
the study of particular and individual markets within the economy
Macroeconomics
The study of economic behaviour and decision making of the whole economy, rather than individual markets
Key decision makers in microeconomics
Households and firms
Key decision makers in macroeconomics
Government and large multi-national companies
Efficiency on the PPC
When an economy operates on the PPC
Inefficiency on the PPC
When an economy operates within the PPC
Movement on the PCC
When the economy moves point the PPC to another, as they try to reallocate their resources
Shift of the PPC
An outward shift is when there is economic growth. An inward shift is caused by a fall in the productive capacities of the economy
Opportunity Cost
the option your for go in place of another one
analyse how the price mechanism provides answers to the key allocation decisions
What to Produce?
How to Produce?.
For Whom to Produce?
When to Produce?
distinguish between social, private and external costs and benefits
Private Costs/Benefits: Direct costs and benefits to individuals or firms.
Social Costs/Benefits: Total costs and benefits to society, including both private and external factors.
External Costs/Benefits: Costs or benefits experienced by third parties who are not directly involved in the transaction.
discuss ways government could use to correct market failure caused by demerit goods and merit goods
Demerit goods are discouraged through taxes, regulations, public awareness, and subsidies for healthier alternatives. Merit goods are promoted via subsidies, public provision, regulations, awareness campaigns, and income support to ensure access for all.
analyse the causes of shifts in the supply curve
The supply curve can shift based on numerous factors including changes in production or raw materials costs, technological progress, the level of competition, the number of producers, the number of sellers, and changes in the regulatory and tax environment.
analyse how the price mechanism provides answers to the key allocation decisions
The price mechanism allocates these goods and services to those who are willing to pay the most for them. This is because prices will rise or fall until equilibrium is reached between quantity demanded and quantity supplied.
money
an item generally accepted as a means of payment
forms of money
coins, notes and bank accounts
functions of money
medium of exchange, store value, unit of account and standard of dffered payment
medium of exchange
allows people to buy/sell products and exchange products for money
store of value
can be saved, doesn’t detoriate over time and acceptable in the future
unit of account
place value on an item and allows an agreement of worth
standard of defered payment
allows people to borrow and lend
characteristics of money : generally acceptable
not accepted as payment, it is not money
characteristics of money : limited supply
something of value with little supply, if there is a lot there is no point
characteristics of money : durable
will last some time, carried around easily, divisible, homogeneous and recognisable
commercial banks
retail/high street banks which seek to make a profit
commercial banks : current accounts deposit
Current account: Provides immediate access to money for receiving and making payments, but no interest is paid on the balance
commercial banks : deposit/time accounts deposit
Deposit or time account: Requires notice before withdrawals, pays interest, and is used for saving.
