2.2 Demand (economics IB HL)

demand

when a consumer is willing and able to buy a good or service

law of demand

when price increases, demand decreases. there is an inverse relationship in P and Qd.

supply

the quantity of a good or service that producers are willing and able to sell at a given price

law of supply

when price increases suppliers will increase quantity supplied as each unit brings more profit

advantage of free market economy

resources are allocated efficiently, competition leading to lower prices, more choice and higher efficiency

advantage of a command economy

government can intervene to correct market failure, resources can be quickly mobilised in an emergency (war, conflict)

features of command economy

large state sector, decisions on resource allocation made by government

Factors of production

Capital, land, labour, entrepreneurship

Capital

man-made factor of production e.g. machinery, tools, factories, airports

Entrepreneurship

organises the other 3 FOP, takes risks of success or failure of a business

Land

natural resources, mineral, oil reserves, forest, rivers

Labour

People that contribute to production of goods. e.g. teacher, construction worker, doctor, plumber

Opportunity cost

the value of the next best alternative that must be given up or sacrificed in order to obtain something else

Free good

any good that is not scarce, and therefore has a zero opportunity cost.