Market Economy (2.1)

Normative Economic Statement

Similar to an opinion and are based on the value judgements of an individual Example, the government should do more for the less fortunate

Price mechanism

The decisions by consumers and businesses to interact and determine the allocation of resources

Positive economic statement

Precise, fact based. Can be proven with data

Opportunity cost

Best alternative forgone when a decision is made

Scarcity

Difference between supply and demand, or the gap between limited resources and unlimited wants

Incentive

Something that motivates an individual or a firm to act a certain way

Regulation

A law that must be followed. Violation of the regulation may result in punishment.

Law of Demand

The negative relationship between price and quantity demanded. When price rises, quantity demanded, falls and vice versa.

Law of Supply

Positive relationship between price and quantity supplied. Supplier will increase availability based on amount consumers are willing to pay.

Market

Where buyers and sellers come together. Where demand and supply occurs to determine a price.

Exceptions to the law of demand

Snob goods, Giffen goods, a good where the demand is affected by expectations and addictive goods

Exceptions to the law of supply

Fixed supply, and when the suppliers are close to maximum capacity

Individual demand

Quantity demanded by individual consumers at different prices

market demand

Aggregate quantity of a good/service demanded by all consumers at different prices

Derived demand

Demand for a good for its use in production of other goods

Composite demand

Increase in demand for one good causes a decrease in another

Joint demand

Goods bought and sold together (complementary)

Effective demand

Willingness of consumers to purchase goods/services at different prices

Demand schedule

Table showing quantity demanded a different prices

Movement along the demand curve

Change in price is only factor that causes movement along the demand curve

Factors that cause a shift in the demand curve

1. Change in income

2. Price substitutes

3. Price of compliments

4. Advertising and changes in taste.

5. Expectations of future price.

6. Population

7. Willingness of financial institutions to lend.

8. Unplanned factors, example: Covid.

How does more demand effect the demand curve?

More demand shifts demand curve to the right

How does less demand effect the demand curve?

Less demand, the curve shifts to the left

Specialisation of labour

When workers are assigned a specific task

Advantages of specialisation of labour

Workers who specialise in one task may become more efficient(might make unit price lower) Workers are more productive as they get better/faster at their assigned task. Training costs are lower.

Disadvantages of specialisation of labour

For a worker specialising might become repetitive and boring For the individual worker, there is little chance of career progression As the worker has a narrow range of skills, alternative work will be difficult to find.

Individual supply

Quantity of supply of an individual

Market supply

Aggregate quantity of goods supplied by all suppliers in the market

Supply schedule

Table that gives quantity of a good/service that would be supplied by suppliers at different prices

Movement along the supply curve

Change in price is the only factor

shift of a supply curve

1. Change in cost of production

2. Price of related goods/services.

3. Unplanned factors, example: natural disasters

4. Government/EU subsidies (payment to suppliers that covers some of the suppliers costs)

5. Number of sellers

6. Advances in technology.

Cost benefit analysis

Costs and benefits must be weighed up to make the best decision

Examples of cost

Financial costs, external costs, future projected costs

Examples of benefits

External benefits, future projected benefits, financial benefits

External costs

Loss of wildlife habitats, noise and air pollution, destruction of the landscape

External benefits

Reduce traffic congestion, future investment potential, benefit to local people and businesses.

Market equilibrium and the price mechanism

When graphing, equilibrium is where the demand and supply curves intersect.

Equilibrium price

Price where there is no unsold stock(excess supply) or unsatisfied customers (excess demand)