topics 1-2.10

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.