Microeconomics

Economic Problem

Resources are scarce but wants are infinite

Scarcity

Finite or non-renewable

Three main questions for economic decisions

What to produce, how to produce it efficiently, for whom

Planned Economy

Relies entirely on the government

Mixed Economy

Limited government involvement while also applying free market concepts

Free Market Economy

Where consumer choices determine how industries work

Example of Planned Economy

North Korea

Example of Mixed Economy

UK

Example of Free Market Economy

No completely free market economies

Purpose of economic activity

To determine the production of g/s to satisfy needs and wants

Need

Something essential for survival

Wants

A desire that is not essential

Opportunity Cost

Measure our choice by comparing the value of the next best alternative foregone

Main Economic Groups

Consumers, producers, government

Consumers

Uses g/s

Producers

Provides g/s

Government

Decides how to distribute g/s

Factors of Production/Economic Resources

Capital, enterprise, land, labour

Capital

Man-made aids

Enterprise

Organisation of the other resources

Land

Natural resources

Labour

Workforce/human resources

Reward for capital

Interest

Reward for enterprise

Profit

Reward for land

Rent

Reward for labour

Wage

Subsistent Economy

Everyone only produces enough to sustain themselves

Define Markets

Any situation where buyers and sellers exchange g/s to determine price

Price

Set based on the demand and supply of scarce resources

Factor Market

Market for factors of production or inputs in the production process

Product Market

Market for the finished goods

Finished Goods

Has gone through the production process

Unfinished Goods

Items that are used to produce finished goods

Primary Sector

Extraction of raw materials/natural resources

Example of Primary sector

Farming

Secondary Sector

Processing or refining unfinished goods and components

Example of Secondary sector

Manufacturing

Tertiary Sector

Provides services to consumers and businesses

Example of Tertiary sector

Education

Goods

A tangible and physical product

Services

An intangible and non-physical activity provided

Reasons for decline of primary sector

Technology, imports

Reasons for growth of secondary sector

Industrialisation, trade

Reasons for decline of secondary sector

Scarce resources, environmental concerns

Reasons for growth of tertiary sector

Globalisation, technology

Specialisation

When firms, individuals or countries focus on producing certain products

Division of labour

The separation of a work process into smaller tasks

3 Benefits of specialisation

Increased efficiency, job satisfaction, refined skills

3 Disadvantages of specialisation

Boredom, over-dependence, limited skill set

It’s a universally accepted means of payment, making transactions easier

Money as a medium of exchange

It provides a common measure for the value of goods and services, making comparisons and calculations easier

Money as a unit of account

It allows people to store wealth and value over time

Money as a store of value

It provides a way to settle debts or future transactions

Money as a method of deferred payment

2 Advantages of a free-market economy

Wide variety of goods, goods are rationed by price

2 Disadvantages of a free-market economy

Unequal distribution of economy, profit maximisation over the environment

What are the 3 functions of price?

Rationing, signalling, incentive

• When the price of a good rises, consumers reduce their consumption

• Only those who can afford a product/service can make the purchase

Rationing Function

• When prices rise, there is an motivation to produce more as you get more profit per good

• Increased profit means a greater reward for the investing in the supply of the product/service

Incentive Function

• Something about the product/service that is important to potential buyers

• New entrepreneurs will enter an industry as prices rise as it is a chance to get high profits

• A price may rise can indicate an increase in cost of production

• A price fall (eg a sale) can indicate the seller can't provide

Signalling Function

What does price mean on demand/supply curves

The amount of money that is exchanged for g/s

Demand

The quantity of a g/s consumers are willing and able to buy at a given price/time

3 factors that cause demand to change

Income levels, competition, change in marketing strategies

What is the x axis on a demand curve

Quantity demanded

What is the y axis on a demand curve

Price

What is the downwards diagonal line on a demand curve

Demand

What causes a movement along a demand curve

Change in price

Complementary Good

A product often used with another product

Substitute Good

Products or services that can be used in place of each other

What is derived demand?

The demand for a g/s that arises from the demand for another related g/s

Supply

Quantity of a g/s a producer is willing and able to provide at a given price/time

Basic Law of Supply

As the price of a product rises, businesses expand/increase supply to the market

What is the x axis on a supply curve

Quantity supplied

What is the y axis on a supply curve

Price

What is the upwards diagonal line on a supply curve

Supply

What causes a movement along the supply curve?

Change in price

3 Factors that cause supply to change

Production cost, technology, government taxes

Equilibrium price

A state of equality between demand and supply

What happens if the price is below the equilibrium

Excess Demand (shortage)

What happens if the price is above the equilibrium

Excess Supply (surplus)

Formula for revenue

Quantity sold x selling price

Price Elasticity Demand (PED)

Measures the response in quantity demanded as a result of a price change

Formula for PED

% Change in quantity demanded / % change in price

3 factors that affect PED

Number of substitutes, proportion of income, necessity

Price Elasticity Supply (PES)

Measures the response in quantity supplied as a result of a price change

Formula for PES

% change in quantity supplies / % change in price

3 factors that affect PES

Space capacity, production time frame, flexibility of resources

PED/S > 1

Price elastic

PED/S < 1

Price inelastic

Main business objective

Profit maximisation

3 Other business objective examples

Increase market share, increase sales, survive

Public Sector Organisation

Owned by the government, provides g/s for the benefit of the community and operate with money from taxes

Public Sector Organisation example

School

Private Sector Organisation

Owned by individuals, driven by profit and operates with money from shareholders and bank loans

Private Sector Organisation example

Franchises

Fixed costs

Do not vary with output

3 examples of fixed costs

Rent, advertising, machinery

Variable costs

Vary directly with output

3 Examples of variable costs

Raw materials, electricity, wages

Profit formula

Total Revenue - Total Cost

Profit

The total amount of money made by a business in a given time period