1.1 + 1.2- How markets work

Factors affecting PES

1. how much spare capacity

2. availability of factors affecting production(raw materials)

3. stock levels

4. productivity

5. short+ long run- more elastic as firms expand capacity

Factors affecting PED

1. availability of substitutes

2. habit forming / addictive

3. necessity

4. proportion of income spent

5. brand loyalty

6. change in consumer preferences

Factors affecting supply

1. technology

2. weather

3. costs

4. number of suppliers

define indirect tax

a tax on expenditure on goods / services which is collected by producers and paid to the government

define positive statement

A statement based on facts that can be proven true or false

define normative statement

A judgement based on opinion, which cannot be tested

what are the 3 price mechanism functions

1. signal

2. rationing

3. incentives

define PPF

• production possibility frontier

  • the maximum combination of goods and services that can be produced in a period of time given availability of resources

axis of a PPF

capital goods

consumer goods

factors causing PPF to shift outwards

increase in quantity/quality/ productive efficiency

• increased labour training creates a more productive workforce

define opportunity cost

the value of the next best alternative foregone

define law of demand

there is an inverse relationship between price and QD.

When price increases, QD decreases

define the law of supply

There is a direct relationship between price and QS

When price increases, so does QS

What are rationing, signalling, and incentives called?

The three functions through which the price mechanism allocates resources

Adam smith- price mechanisms (free markets)

believed markets work best when left free from government intervention

thinks self interest and competition is efficient for when allocating resources

define division of labour

the splitting of production into different tasks, with each worker specialising in one task

define specialisation

when individuals or firms focus on producing a limited range of goods and services