IGCSE Edexcel Economics: Market System Unit 1

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.