Something that affects a situation in a way that you cannot be sure what will happen
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Maximise
To increase something such as profit, satisfaction or income as much as possible
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Revenue
Money that a business receives over a period of time, especially from selling goods or services
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What are the two underlying assumptions in economics?
Consumers aim to maximise benefit, Businesses aim to maximise profit
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Why may consumers not always maximise benefit?
They have difficulty in calculating the benefits, They develop buying habits, They are influenced by the behaviours of others
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Enterprises
Companies, organisations or businesses
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Why might producers not always maximise their profits?
Performance may be influenced by other people in the organisation, Alternative business objectives, Operate as charities, Social enterprises
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Administration
Activities involved with managing and organising the work of a company or organisation
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Demand curve
Line drawn on a graph that shows how much of a good will be bought at different prices
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Demand schedule
Table of the quantity demanded of a good at different price levels - can be used to calculate the expected quantity demanded
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Effective demand
Amount of a good people are willing to buy at given prices over a given period of time supported by the ability to pay
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Inverse relationship between price and quantity demanded
When price goes up, the quantity demanded falls and when price goes down the quantity demanded rises
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Demand
The amount of a good that consumers are willing to and able to buy at a given price
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Shift in the demand curve
Movement to the left or right of the entire demand curve when there is a change in any factor affecting demand except the price
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Disposable income
Income that is available to someone over a period of time to spend - including state benefits and excluding direct taxes
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Inferior goods
Goods for which demand will fall if income rises or rise if income falls
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Normal goods
Goods for which demand will increase if income increases or will fall if income falls
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What are the factors that may shift the demand curve?
Fashion and tastes, Price of substitutes, Price of complements, Income, Advertising, Demographic changes
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Will an increase in advertising shift the demand curve to the left or to the right?
To the right
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If disposable income rises, will the demand for a **normal good** rise or fall?
Rise
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If disposable income rises, will the demand for an **inferior good** rise or fall?
Fall
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If fashion tastes change to favour a certain clothing item, will demand for that item rise or fall?
Rise
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Substitute goods
Goods bought as an alternative to another but perform the same function
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Complementary goods
Goods purchased together because they are consumed together
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If the price of car insurance rises, will demand for cars rise or fall?
Fall
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If the price of Pepsi rises, will demand for Coke rise or fall?
Rise
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Infrastructure
Basic systems and structures that a country needs to make economic activity possible
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Will demand for schools and hospitals be higher in rural areas or urban areas?
Urban areas
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If a certain ethnic group moves into a country, will the demand curve for cultural products of that group shift to the left or to the right?
To the right
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Supply
The amount of a good that producers are willing to and able to offer for sale at different prices
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Supply curve
Line drawn on a graph which shows how much of a good sellers are willing to supply at given prices
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per annum (p.a.)
For or in each year
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Proportionate relationship between price and the quantity supplied
When the price goes up, the quantity supplied also goes up and when the price goes down the quantity supplied goes down
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Shift in the supply curve
Movement to the left or the right of the entire supply curve when there is any change in the conditions of supply except the price
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Fixed supply
It is impossible for sellers to increase supply even when prices rise
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What will fixed supply look like on a supply curve?
A vertical line
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What is a scenario where there may be fixed supply?
Supply at venues where sports matches or concerts are held
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Indirect taxes
Taxes levied on spending
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What is an example of an indirect tax?
VAT
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Productivity
The rate at which goods are produced, and the amount produced in relation to the work, time and money needed to produce them
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What are factors that may shift the supply curve?
Production costs, Natural Factors, Subsidies, Indirect Taxes, New Technology
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Will a rise in production costs shift the supply curve to the right or to the left?
To the left
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Why will a rise in indirect taxes cause the supply curve to shift to the left?
Indirect taxes represent a cost to the firm
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Consumption
Amount of goods, services, energy or natural materials used in a particular period of time
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Subsidy
Money that is paid by a government or organisation to make prices lower, reduce the cost of producing goods or providing a service, usually to encourage production of a certain good
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Why may governments use indirect taxes?
To raise revenue for government expenditure and discourage the consumption of harmful products
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What is the effect of a government granting a subsidy on a good?
An increase in its supply
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Will an increase in new technology shift the supply curve to the left or to the right?
To the right
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Will adverse weather shift the supply curve to the left or to the right?
To the left
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Equilibrium price
Price at which supply and demand are equal
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Market clearing price
Price at which the amount supplied in a market matches exactly the amount demanded
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Total revenue
Amount of money generated from the sale of goods calculated by multiplying price by quantity
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Formula for calculating total revenue
TR = P \* Q
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Why is the equilibrium price known as the market clearing price?
The amount supplied in the market is completely bought up by consumers, so there are no buyers left without goods and there are no sellers left with unsold stock
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If demand shifts to the right, will the equilibrium price rise or fall?
Rise
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If supply shifts to the right, will the equilibrium price rise or fall?
Fall
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Excess demand
Where demand is greater than supply and there are shortages in the market
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Excess supply
Where supply is greater than demand and there are unsold goods in the market
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How can producers restore equilibrium when there is disequilibrium in the market?
Change the price, Adjust supply
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Price elasticity of demand
The responsiveness of demand to a change in price
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Inelastic demand / Price inelastic
Change in price results in a proportionately smaller change in the quantity demanded
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Elastic demand / Price elastic
Change in price results in a greater change in the quantity demanded
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How do you calculate price elasticity of demand?
Price Elasticity of Demand = (% Change in Quantity Demanded / % Change in Price)
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Perfectly elastic demand
Demand where PED = ∞ - an increase in price will result in zero demand
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Perfectly inelastic demand
Demand where PED = 0 - a change in price will result in no change in the quantity demanded
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Unitary elasticity with regard to demand
Where PED = -1 - the responsiveness of demand is proportionately equal to the change in price
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What values would mean demand is price inelastic?
PED is less than 1
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What values would mean demand is price elastic?
PED is greater than 1
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What are the factors affecting Price Elasticity of Demand?
Availability of Substitutes, Proportion of Income, Luxury or Necessity, Addictiveness, Time
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What acronym can be used to remember the factors affecting Price Elasticity of Demand?
SPLAT
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Will goods that have lots of close substitutes have elastic or inelastic demand?
Elastic demand
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Will goods that are considered ‘essential’ by consumers have elastic or inelastic demand?
Inelastic demand
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If consumers have to spend a large proportion of their income on a good, will demand be price elastic or inelastic?
Price elastic
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Is price more elastic in the short term or in the long term?
In the long term
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Why is price more elastic in the long term?
Consumers can search for alternatives and are more prepared to switch
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