Supply and Demand

Human resources

Quantity and quality of the labour force, includes labour and enterprise

Labour

The physical and mental effort applied into production

Enterprise

Coordination and management of production by an entrepreneur, also refers to ideas and skills required to make new goods and services

Natural resources

Resources supplied from the natural environment

Capital resources

Refers to capital; man-made resources that assist in the production of goods and services (machinery and equipment)

Social overhead capital

Basic infrastructure of the economy

Investment

Creation of new capital goods, the ‘engine’ of the economy

Microeconomics

Deals with the economic problem from an individuals perspective

Macroeconomics

Deals with the economic problem from the society’s perspective

Ceteris parabis

All other things constant

Rational self interest

Explains human behaviour, economic decisions are based off a person using logical processes

Positive economics

Testing and developing theory, “what is” in the economy, can be tested objectively (using economic data)

Normative economics

Involves personal opinion and value judgement, “what should be” in the economy, subjective statements

Relative scarcity

Refers to the economic problem; limited resources relative to society’s unlimited wants

Opportunity cost

The cost of the forgone alternative

Principle of decreasing marginal benefit

As consumption of one thing increases, additional benefits decrease, Total Benefits - Total Cost

Law of increasing opportunity cost

Increasing production of a good increases opportunity cost (usually)

Economic system

The way a country allocates resources to deal with the economic problem

Capitalist/free enterprise economy

Resources are privately owned, decisions are made by owners acting in self-interest

Command/planned economy

Resources are allocated by the state, e.g. Cuba

Mixed economy

Combines elements of capitalist and command economies

Market

Voluntary exchange of goods and services between buyers and sellers

Law of demand

As price increases, ceteris parabis, demand decreases

Why is there a negative relationship between price and demand?

The income effect; increasing price decreases consumers real purchasing power, the substitution effect; increasing the price makes other goods look more attractive

Non-price factors effecting demand

Levels of disposable income, price of related goods (substitutes and compliments), tastes and preferences, consumer expectations, demographics

Demand

Quantity of a good or service consumers are willing to buy at a certain point in time

Complimentary goods

Can be used in conjunction with another good, often bought together

Substitute goods

Can replace another good

Supply

Quantity of a good or service producers are willing to sell at a certain price

Non price factors affecting supply

Cost of production, technology, number of sellers, producer expectation, prices of other goods

Equilibrium price

Price that clears the market, balances consumer wants with seller needs

Equilibrium

Where the demand curve intersects with the supply curve, the forces of supply and demand are balanced

Surplus

Price is too high and product did not clear the market

Shortage

Price is too low and have run out, increase price to get equilibrium price

Product market

The buying and selling of goods and services, consumers represent demand and producers represent supply

Factor markets

The buying and selling of factors of production, households sell resources to firms - represent supply, firms represent demand

Competitive market

Characterised by a large number of buyers and sellers, firms are price takers (don’t set the price), homogenous products, easy entry into market, price is determined by buyer and seller interactions

Imperfect markets

Small number of firms, product differentiation, firms have market power and are price makers, restricted entry into the market