Basic economic problem, markets, demand and supply

What is the basic economic problem?

Unlimited wants but limited resources, meaning choices should be made about how scarce resources are allocated

What is scarcity?

When limited resources are insufficient to satisfy unlimited wants. Scarcity affects consumers, producers, and governments

What are the three basic economic questions?

What to produce? which goods/services

How to produce? which resources/methods

For whom to produce? who receives the goods/services

What is opportunity cost?

The next best alternative forgone when a choice is made

Who are the three main economic agents?

Consumers = buy goods/services

Producers = make and sell them

Government = taxes, regulates, and provides services

What are the four factors of production?

Land - natural resources

Labour - human effort

Capital - man-made resources used in production (machinery)

Enterprise - organising the other factors and taking risks (entrepreneur)

What is a market?

Where buyers and sellers exchange goods/services, physically or virtually

What are demand and supply?

Demand: amount consumers are willing and able to buy

Supply: amount producers are willing and able to sell

What is the law of demand?

Price ↑ → demand ↓. Price ↓ → demand ↑. An inverse relationship.

What causes movement along the demand curve?

A price change. Price up = contraction; price down = extension

What causes the demand curve to shift?

Income, tastes, advertising, substitutes/complements, expectations, and population. Demand up = right; demand down = left

What are substitutes and compements?

Substitutes: alternatives (coke/pepsi)

Complements: used together (printer/ink

What is the law of supply?

Price ↑ → supply ↑. Price ↓ → supply ↓. A positive relationship.

What is market equilibrium?

Where quantity demanded = quantity supplied; no shortage or surplus

What happens when a market price is above or below equilibrium?

Above → surplus → price falls. Below → shortage → price rises.

How do demand and supply interact to determine price?

High demand/low supply → price ↑. Low demand/high supply → price ↓.

What is the price mechanism?

How price changes allocate scarce resources

What are the 3 functions of the price mechanism?

Rationing: limits demand

Signalling: shows scarcity/demand

Incentive: encourages supply

How does the price mechanism allocate resources?

Demand ↑ → price/profit ↑ → supply ↑ → resources move into that market.

Why might governments intervene in markets?

To correct market failure, using taxes, subsidies, regulation, public provision or redistribution