4th Form Economics by Leo R

Scarcity

The condition where unlimited wants exceed finite resources, forcing choices. It's the root of the economic problem. Example: Limited land means a country must choose between housing or farming.

Opportunity Cost

The value of the next best alternative forgone when a decision is made. Example: If a student studies instead of working, the opportunity cost is lost wages.

Economic Problem

The challenge of allocating scarce resources to meet unlimited wants, answering what, how, and for whom to produce. Example: A country decides whether to produce more schools or hospitals.

Production Possibility Frontier (PPF)

A curve showing the maximum output of two goods an economy can produce with given resources. Example: A PPF shows a trade-off between producing 100 cars or 50 computers.

Efficient Production

Producing on the PPF, where resources are fully utilized. Example: An economy producing 80 cars and 20 computers on its PPF is efficient.

Unobtainable Production

Points outside the PPF, impossible with current resources. Example: Producing 150 cars and 100 computers might be unobtainable without more resources.

Economic Growth

An increase in an economy's output, shown by an outward PPF shift. Example: New technology allows more cars and computers to be produced, shifting the PPF outward.

Causes of PPF Shift

Changes in resource quantity/quality or technology shift the PPF. Example: Discovering oil shifts the PPF outward; a war shifts it inward by destroying resources.

Consumer Benefit Maximization

The assumption that consumers aim to maximize satisfaction from spending. Example: A consumer buys the cheapest phone to maximize benefit from their budget.

Why Consumers Don't Maximize Benefit

Poor information, habits, or copying others prevent benefit maximization. Example: A consumer buys an expensive brand due to trends, not value.

Producer Profit Maximization

The assumption that firms aim to maximize profit (revenue minus costs). Example: A bakery sets prices to earn the highest profit possible.

Why Producers Don't Maximize Profit

Firms may prioritize sales, customer care, or charity over profit. Example: A firm lowers prices to attract more customers, reducing profit margins.

Habit in Consumer Behavior

Consumers may stick to familiar choices, ignoring better options. Example: A person keeps buying the same coffee brand despite cheaper alternatives.

Sales Maximization

When producers focus on selling as much as possible, not profit. Example: A store offers discounts to sell more, even if profits drop.

Demand

The quantity of a good consumers are willing and able to buy at a given price. Example: At $1, consumers demand 100 apples.

Law of Demand

As price falls, quantity demanded rises, and vice versa, shown by a downward-sloping demand curve. Example: If juice prices drop, more people buy juice.

Supply

The quantity of a good producers are willing to sell at a given price. Example: At $5 per kg, farmers supply 200 kg of rice.

Law of Supply

As price rises, quantity supplied increases, shown by an upward-sloping supply curve. Example: Higher wheat prices lead farmers to supply more wheat.

Equilibrium Price

The price where quantity demanded equals quantity supplied. Example: If demand and supply for bread balance at $2, that's the equilibrium price.

Excess Demand

When quantity demanded exceeds quantity supplied, causing a shortage. Example: At $1, 100 people want tickets, but only 50 are available.

Excess Supply

When quantity supplied exceeds quantity demanded, causing a surplus. Example: At $10, producers supply 100 toys, but only 50 are demanded.

Demand Curve Shift

A change in non-price factors (e.g., income, tastes) shifts the demand curve. Example: A health trend increases demand for avocados, shifting the curve right.

Supply Curve Shift

A change in non-price factors (e.g., costs, taxes) shifts the supply curve. Example: A tax on sugar reduces soda supply, shifting the curve left.

Market Forces

Supply and demand interactions that adjust prices to clear excesses. Example: Excess demand for phones raises prices until demand equals supply.

Price Elasticity of Demand (PED)

Measures how responsive demand is to a price change: % change in quantity demanded ÷ % change in price. Example: If price rises 10% and demand falls 20%, PED is -2.

Price Elastic Demand

When PED > 1, demand is sensitive to price changes. Example: Luxury cars have elastic demand; a price rise significantly reduces sales.

Price Inelastic Demand

When PED < 1, demand is not sensitive to price changes. Example: Salt has inelastic demand; a price rise barely affects sales.

Factors Affecting PED

Substitutes, necessity, and income share affect PED. Example: Gasoline has inelastic demand due to few substitutes and necessity.

Total Revenue and PED

If demand is elastic, a price decrease increases revenue; if inelastic, it decreases revenue. Example: Lowering elastic movie ticket prices boosts revenue.

Price Elasticity of Supply (PES)

Measures how responsive supply is to a price change: % change in quantity supplied ÷ % change in price. Example: If price rises 5% and supply rises 10%, PES is 2.

Price Elastic Supply

When PES > 1, supply is sensitive to price changes. Example: Clothing supply is elastic; a price rise leads to a large supply increase.

Price Inelastic Supply

When PES < 1, supply is not sensitive to price changes. Example: Fresh fish supply is inelastic; a price rise doesn't quickly increase supply.

Mixed Economy

An economy combining market, command, and traditional systems, with public and private sectors. Example: The US has private tech firms and public education.

Market Failure

When the market fails to allocate resources efficiently. Example: Overfishing occurs because the market doesn't account for future fish stock depletion.

Public Goods

Goods that are non-excludable and non-rival, leading to the free-rider problem. Example: National defense benefits all, but individuals won't pay for it.

Free-Rider Problem

When people benefit from a good without paying, causing underproduction. Example: People use streetlights without contributing to their cost.

Role of Government in Market Failure

Governments intervene to correct market failures, e.g., by providing public goods or regulating pollution. Example: Taxes on cigarettes reduce smoking's negative effects.

Privatization

Transferring ownership from the public to the private sector. Example: Selling a state-owned airline to a private company is privatization.

External Costs

Costs of production/consumption borne by third parties, not reflected in market prices. Example: Factory pollution harms nearby residents' health.

Factors of Production

The resources used to produce goods and services: land, labour, capital, and enterprise. Example: A farm uses land (soil), labour (workers), capital (tractors), and enterprise (farmer's management).

Land

A factor of production including natural resources like soil, water, and minerals. Example: Fertile land is used to grow crops.

Labour

The human effort used in production, varying in skills and availability. Example: Factory workers assemble cars.

Capital

Man-made resources like machinery and tools used in production. Example: A bakery uses ovens as capital.

Enterprise

The ability to organize factors of production to create goods or services. Example: An entrepreneur starts a tech company.

Sectors of the Economy

Primary (extracting raw materials), secondary (manufacturing), and tertiary (services). Example: Mining is primary, car manufacturing is secondary, and retail is tertiary.

Productivity

The output per unit of input, measuring efficiency. Example: A worker producing 50 shirts per day is highly productive.

Factors Affecting Productivity (Land)

Improvements like fertilizers, drainage, irrigation, and reclamation boost land productivity. Example: Irrigation increases crop yields.

Factors Affecting Productivity (Labour)

Quality of labour, education, training, and migration impact productivity. Example: Trained workers produce more efficiently.

Factors Affecting Productivity (Capital)

Increased quantity and technological advances improve capital productivity. Example: New machines speed up factory output.

Division of Labour

Specializing tasks among workers to increase efficiency. Example: One worker cuts fabric, another sews in a clothing factory.

Advantages of Division of Labour

Increases output, skill development, and efficiency for workers and businesses. Example: Specialized car assembly lines produce more cars.

Disadvantages of Division of Labour

Monotony, skill loss, and dependency for workers; reliance on one process for businesses. Example: Repetitive tasks may bore workers.

Human Capital

The skills and knowledge gained through education and training, boosting labour productivity. Example: A trained engineer improves factory efficiency.

Fixed Costs

Costs that don't change with output, e.g., rent. Example: A shop pays $500 monthly rent regardless of sales.

Variable Costs

Costs that vary with output, e.g., raw materials. Example: A bakery's flour costs rise with more bread produced.

Total Cost

Fixed costs plus variable costs. Example: If fixed costs are $200 and variable costs are $300, total cost is $500.

Revenue

Income from selling goods, calculated as price × quantity sold. Example: Selling 100 units at $5 each yields $500 revenue.

Total Revenue

The total income from all sales. Example: Selling 200 books at $10 each gives $2,000 total revenue.

Profit

Total revenue minus total costs.

Profit

Total revenue minus total costs. Example: If revenue is $1,000 and costs are $700, profit is $300.

Break-Even Point

The output level where total revenue equals total costs, no profit or loss. Example: Selling 50 units at $10 each covers $500 costs.

Marginal Cost

The cost of producing one additional unit. Example: Adding one more chair costs $5 in materials.

Competition

Rivalry between firms, benefiting consumers with efficiency, choice, quality, innovation, and lower prices. Example: Supermarkets compete, lowering food prices.

Advantages of Large Firms

Economies of scale, market power, and risk diversification. Example: A large retailer buys in bulk, reducing costs.

Disadvantages of Large Firms

Less flexibility, higher bureaucracy, and potential monopoly power. Example: A big firm may ignore small customer needs.

Factors Influencing Firm Growth

Government regulation, access to finance, economies of scale, and desire to spread risk or take over competitors. Example: A firm grows by merging with a rival.

Reasons Firms Stay Small

Small market size, niche markets, lack of finance, or entrepreneur's aims. Example: A local café stays small due to limited customers.

Monopoly

A market dominated by one firm. Example: A single utility company supplies all electricity in a region.

Demand for Labour

Derived from demand for the final product, affected by substitutes and workforce productivity. Example: More demand for cars increases demand for car workers.

Supply of Labour

The number of workers willing and able to work, affected by population, migration, and skills. Example: Migration increases labour supply in a city.

Factors Affecting Labour Supply

Population size, age distribution, retirement age, and geographic mobility. Example: A younger population boosts labour supply.

Derived Demand

Demand for labour based on demand for the goods/services it produces. Example: More house demand increases demand for builders.

Female Participation

The involvement of women in the labour force, influenced by education and policy. Example: More educated women join the workforce.

Geographic Mobility

Workers' ability to move to different locations or jobs. Example: A worker relocates for a better job.

Minimum Wage

A government-set wage floor to ensure fair pay, impacting employment. Example: A $10/hour minimum wage raises worker income.

Advantages of Minimum Wage

Increases worker income and reduces poverty. Example: Workers earn more, improving living standards.

Disadvantages of Minimum Wage

May cause unemployment if firms cut jobs. Example: High wages lead a firm to hire fewer workers.

Taxation (Government Policy)

Taxes on negative externalities like pollution to reduce harm. Example: A carbon tax discourages factory emissions.

Subsidies (Government Policy)

Government payments to encourage production, e.g., for renewable energy. Example: Solar panel subsidies boost production.

Government Regulation of Competition

Rules to promote competition, limit monopoly power, and protect consumers. Example: Laws prevent a firm from dominating a market.