IGCSE Economy

Resources

factors used to produce goods and services

The economic problem

unlimited wants exceeding finite resources

Scarcity

there is not enough to satisfy everyone’s wants

payments of 4 factors of production:

1. land

2. labour

3. capital

4. enterprise

1. rent

2. wages

3. investment

4. profit

economic good

a product which requires resources to produce and therefore has an opportunity cost

opportunity cost

the loss of other alternatives when one alternative is chosen

free good

does not require resources to produce so does not have opportunity cost

Scarcity necessitates choices

With limited land and resources, choices had to be made to maximize the value per resource.

Benefits vs. costs

whether the benefits outweights the cost

Diminishing marginal utility

The law of diminishing marginal utility is a basic economic concept that says that the more a consumer has of a particular product, the less each additional unit is worth.

Marginal analysis

evaluates the benefit and cost for a decision.

Social benefits versus individual benefits

the private benefit of certain behaviors sometimes differs from the social benefit. This may lead to what are known as market failures in economics, which arise when the private behavior of individual consumers or producers leads to socially undesirable outcomes. Such has air pollution from cars.

Shortage

can be replenished

factors of production (Economic resources)

the economic resources of land, labour, capital and enterprise

land

any gift of nature (including fish)

labour

human effort used in producing goods and service

capital goods/producer goods

any human-made goods to produce other goods, not wanted for their own sake

consumer goods

wanted for their own sake

enterprise

willingness and ability to bear uncertain risks and make decisions

Entrepreneurs

people who bear the risks and organise the other factors of production. Decides what to produce.

Occupationally mobile

can be used for a variety of purpose

geographically immobile

unable to move geographically

mobility of labour

the ability of labour to move from one place to another or from one occupation to another

Mobility of capital

can change where the capital is or what it is used for

mobility of enterprise

the ability to change where enterprise is used or which occupation

labour force

people in work or those actively seeking work

productivity

output per factor of production per hour

output

goods and services produced by the factors of production

investment

spending on capital goods

gross investment

total spending on capital goods

depreciation (capital consumption)

decrease in value of capital/worn out or become obsolete

net investment

gross investment - depreciation

straight ppc

constant opportunity cost

curved ppc

increasing opportunity cost

ppc shifts to right

increases productivity potiential (potiential economic growth)

ppc shifts to left

reduction in resources

point inside ppc

did not use all avaliable resources

planned economic systems (planned/command economy)

government controls 3 allocations of resources, state owns all factors of production, provides public goods and gives directives. do not produce for profits and prices do not change (to soe). basic necessaties are usually given at a low or free price

advantage of planned economy

Central planning can be used to encourage production and make sure people have jobs and income.

disadvantage

Limited choice and access to desired goods and services.

The government claims to know best what is good for producers and consumers and decides what they think people should have, NOT what individuals think that they need.

public good

provided by the public sector, government provided, tax funded, non exclutable and non-rivalist

mixed economy

collection of both command and market economies. Most countries have a mixed economy.

directives

state instructions given to state owned enterprises

market economy

consumers decides allocations of resources through price mechanism, minimal government intervention, factors of production are privately owned (land, capital). Value lowest cost highest quality.

What is produced depends on what people want and whether selling it will generate profit

The most efficient method of production determines how goods and services are produced.

Goods and services are produced only for those with enough money to purchase them.

advantages of market economy

Economic efficiency

It responds quickly to people’s wants.

Firms produce only what consumers want, when they want it and normally at prices they are willing to pay. It encourages the use of new and better methods of production to make goods and services. (to become more efficient in order to increase profit)

another advantage of market economy

Variety and choice

Free markets offer a wider variety of goods and services than other systems. Firms have to give consumers what they want and need if they will make a profit. This means consumers decide what gets produced.

another disadvantage of market economy

The social effects of production are ignored. (e.g. pollution)

Profit is the most important objective.

disadvantage of market economy

Some goods will not be supplied by firms.

Goods and services that do not make profit will not be provided. (e.g. street lights)

price mechanism

determined by supply and demand. changes in d&s are signalled by price they are willing to pay for each product. incentive for producers to respond to changes in the markets. also ration out products by raising the price (example: if potato die —> too expensive —> only rich ppl can afford —> only ppl who afford demands it = market equilibrium ) The way decisions made by households and firms interact to decide the allocation of resources. When there is a shortage, demand is higher than supply therefore price increases until there is equilibrium. When there is a surplus, price decreases until equilibrium is reached again.

market equilibrium

demand = supply (price wise)

market disequilibrium

demand does not equal supply (price wise) (surplus + shortage)

circular flow

The circular flow model shows the interaction between two groups of economic decision-makers—households and businesses—and two types of economic markets—the market for resources and the market for goods and services. (household gives labor to the companies, they supply the households with goods. households buy from the companies and the companies give them money for their labor).

Public sector

Run and controlled by the government, Funded by the government, Provide essential services, Usually have a social purpose (benefits citizens some way)

Private sector

- Run and controlled by individuals, Funded by individuals, Provide products and services that fulfill wants and needs, Are focused on profit, but can also have a social purpose

Nationalization

is the purchase of private sector assets by the government, bringing them into the ownership and control of the public sector

Privatization

is the transfer of the ownership of assets from the public sector to the private sector

Public Goods

Certain goods and services not provided by the private sector (no profit in them)are public goods (ie: public parks, street lighting, road signs, etc). Public goods are non-excludable and non-rivalrous, meaning those who do not pay can still enjoy access to the product and there is no competition to purchase or use the product.

Merit Goods

These goods have social benefits; however, without government intervention they are under-provided and under-consumed. When consumed, they create positive spillover effects for third parties.

PRICE MECHANISM

An increase in price: Signals that there is more profit to be had. More resources should be shifted into this market.

A decrease in price: Signals that people do not want certain goods and services anymore and that resources should be shifted elsewhere.

3 economics systems

1. The free market economic system

2. The planned/command economic system

3. The mixed economic system

3 allocations of resources

1. How to produce

2. For whom to produce

3. What to produce

market demand

total demand for a product

aggregation

addition of individual components to arrive as a total amount (e.g. totally of demand)

demand schedule

quantity demanded + price

straight demand curves

illustrate the relationship but isn’t accurate

extension of demand

rise in quality demanded caused by a fall in the price of product

contraction in demand

fall of quality demanded caused by a rise in the price of products

contraction and extension

length of the line

increase or decrease

place of the line

change of price causes movement along the curve

change of demand changes demand shift

normal good

demand increase when income increase (vice versa)

inferior good

demand decrease when income increase

substitute

product that can be used in the place of another (price increase for that good so increase demand for this good )

complement

a product that is used together with another product (price increase for that good so decrease demand for this good)

factors of demand shifts

1. taste and preference

2. no. of consumers

3. price of related goods

4. income

5. future expectation

changes in income

inferior and normal

changes in price of related products

complement and suppliment

population

ageing and birth rate

changes in taste and fashion

health reports (scientific studies) and other

future expectations

advertising

disequilibrium