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The Economic Problem
The idea that there are unlimited wants and scarce resources
The Economy
An area where people produce goods and services from scarce resources for consumption
Definition of Factors of Production
The resources people use to produce goods
4 FOP's
Capital. Enterprise, Land, Labour
Economic Agents
Producer, Consumer, Worker, Government
Opportunity Cost
The loss of the next best alternative when making a decision forgone
Production Possibility Curve
The graphical representation of the combined maximum output of two products or groups of products at a firm or entire economy which can be produced efficiently with existing tech/capital/resources
Capital Goods
Assets used to help a firm or nation to produce output or consumer goods. Robotic Arm in a car manufacturing plant.
Consumer Goods
End Products and have no future productive use.
E.g a watch
Formula for OC on a PPC
Change in Good Y/
Change in Good X
Economic Assumptions
Made about the rationality of economic agent such as producers, consumer etc. They are expected to make rational decision which maximise profit, and weigh the net benefits of each decision
Economic Assumption for Consumers and Producers
Consumers are assumed to act rationally by maximising utility
Producers are assumed to act rationally by maximising profit
Economic Assumptions for Workers and Gov.
Worker are assued to act rationally by considering welfare, pay and benifits.
Why may Consumers not always maximise utility/ act rationally
Struggle to make accurate decisions due to large market.
Habits/Addictions
Social Norms
Why may Producers not always maximise utility/ act rationally
Different objectives e.g growth
Customer Care
Charitable Activities
Demand vs. Quantity Demanded
Demand is the amount of goods/service consumers are willing to purchase at a given price at a given time period
Quantity Demanded is the amount of goods/services people will buy at a particular time at a particular price.
Demand Curve
The graphical representation of the inverse relationship between QD and price. Ceteris Paribus
Law of Demand
As price increase the QD decreases as it is inversely related ceteris paribus
Shift in the Demand Curve + Factors
The Demand curve can shift back and forth based on non-price determents.
Advertising increases the demand.
Price change for complimentary products decreases the curve
Price change for substitutes increases
Change in Fashion
Change in Real Income
Demographic changes
Supply
The amount of a good/service a producer is willing to supply at a given price at a given time period
Law of Supply
There is a positive direct relationship between price and quantity supplied ceteris paribus.
Supply Curve
The graphical representation between the quantity supplied by the producers and prices. The curve slopes upwards.
Shifts in the Supply Curve + Factors
Shift left or right based on non-price determinants.
Change in COP increase
Change in Tech more efficient = increase
Indirect Tax = decrease
Subsidies = Increase
Change in No. of Firms in a market will increase
Natural Factors
Market System
Aka Free market where prices allocated by balance of supply and demand where buyers and sellers are brought together.
Market Equilibrium
When Buyers and sellers agree of a price. Buyers will set prices and sellers will exercise consumer sovereignty. Negotiate price until equilibrium is reached. Aka market clearing price.
Excess Demand
Occurs when producers keep prices too low creating a shortage where demand is higher than supply. This frustrates buyers as they can't buy products.
Excess Supply
When producers overestimate demand and produce larger amounts than the QD at a higher price. Occurs when prices are too high or demand unexpectedly falls
Price Elasticity of Demand (PED)
Shows economists how much the QD of a product will change after a shift in price. PED shows how responsive the QD is to price change.
Factors which Shift the PED
Substitutes available for a product
Addictiveness of a product
Time period
Low Price in proportion to income
Formula for PED
Total Revenue Rule
Gross Profit
(Quantity x price)
What does PED tell us
The PED can help Gov. to see how much tax can be applied
Firms maximise revenue
Price elasticity of Supply
How responsive the QS is to price change.
free market
A market economy where there is no government intervention
economic model
simplified version of reality
asset
anything that a economic owner can derive benefit or holds any value to a business
Constant OC vs Increasing OC
Utility
The Satisfaction gained from a good/service
Rational
Means that economic agents are able to consider the outcome of their choices and recognise net benefits
Consumer Inertia
The tendency how some consumers continue buying a product even if superior alternatives/options exist
Sales Revenue
Price of Product X Quantity
Market Share
The percentage of the total market revenue that a single firm has
Economies of scale
Occurs when an increase in the scale of output results in a lower cost unit
Brand Loyalty
When consumers continue to buy the same brand of goods rather than competing brands
Ceteris Paribus
If all other factors/variables remain constant
Real income
Income which has been adjusted to account for inflation
subsitute goods
Two purpose which serve the same purpose for consumers
complementary goods
Two products which the consumer uses together
Productivity
Output per unit of input used
Indirect taxes
A tax on consumption which
Producer Subsidies
An amount of money paid to a firm by the government for each unit produced
Supply Shock
A unexpected event (drought etc) which changes the supply of a product
Consumer Sovereignty
The economic power exerted by consumers in a market.
Profit
Total Revenue - Total Costs
Disequilibrium
there is a difference in QS and QD
equilibrium
supply = demand
Dynamic Markets
market with changing internal and external factors. E.g the Real World Market which is constantly shifting and adjusting to consumers.
Inflation
A sustained increase in the price level in an economy
Price Discrimination
When firms chose to charge different consumers different prices due to differences in PED. E.g price categories in a cinema
Short Run & Long Run
SR --> The time period where at least 1 FOP is fixed
LR --> The time period where all FOP's are variable
Primary Commodities
A raw material or price or primary agricultural product.
Factor Mobility
Factor Mobility signifies the degree to which FOP can be reallocated or redirected from one production activity to another based on changes in supply and demand or economic conditions
Change in income elasticity of demand
(YED)
Change in income results in change for demand in goods and services
Planned Economy
Economy where all resources are owned by the government
Merit Goods
Goods which are beneficial to society but free market does not provide enough of them.
(e.g. schools)
Public Goods
Goods which are beneficial to society but free markets will not provide ANY of them
(e.g. National Defense)
Profit Maximisation
A relentless effort to maximise profit by reducing cost and increasing sale
Nationalised
To bring Land, Businesses, Industry under the control or ownership of the Government
Sole Trader
A firm which has a single owner who makes all decisions and gets to keep all of profit. The owner is legally responsible for debt or loss.
