GCSE edexcel-Economics: 1.1, The Market System.

Basic economic problem

resources have to be allocated between competing uses because wants are infinite whilst resources are scarce

Capital

1. One of the factors of production
2. Physical goods used for manufacturing.

factors of production

1. Land
2. Labour
3. Capital
4. Entrepreneurship

Working Capital

Resources in the production system waiting to be transformed into goods before being sold.

opportunity cost

The loss of an alternative when a choice is made

Human capital

The talents, skills, education and training (experience) of a worker that will determine his/her future earnings and production.

production possibilities curve

line showing the different combinations of two goods an economy can produce if all it's resources are used up.

reasons for economic growth

1. New technology
2. Improved efficiency
3. Education and training.
4. New resources

Rational

based on reason or logic

Economic good

Things people want that are scarce - there is an opportunity cost involved.

Free good

Things people want- there is no opportunity cost involved.

Assumptions

Things we think are true without definite proof

irrational

not based on reason or logic

revenue

money that a business receives over a period of time, especially from selling goods

enterprise

a company or business

commission

An amount paid to an employee based on a percentage of the employee's sales

administration

the management of any office, business, or organization

humanitarian

concerned with improving bad living conditions and preventing unfair treatment of people

inverse relationship

when price goes up the quantity demanded falls and when the price goes down the quantity demanded rises

Economic reality:consumers

1.trends or peoples behavior
2.customer loyalty
3.lack of computation
4.no information about product
5.consumer satisfaction

Economic reality:businesses

1) business owners may delegate decision making to other people
2) producers may have alternative business objectives
3) some enterprises operate as charities
4) lack of information.

disposable income

Income remaining for a person to spend or save after all taxes have been paid

inferior goods

Goods for which demand tends to fall when income rises.

normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

substitute goods

goods that can be used to replace the purchase of similar goods when prices rise

complementary goods

Goods that are commonly used with other goods

Demography

The scientific study of population characteristics.

infrastructure

the basic physical and organizational structures and facilities (e.g., buildings, roads, and power supplies) needed for the operation of a society or enterprise.

factors that may shift the demand curve

1.price of substitutes
2.price of complements
3.demographic changes
4.advertising
5.income
6.fashion and tastes

Reasons for economic growth

1. New technology
2.Improved efficiency
3.Education and training
4.New resources

Supply

amount of goods that are prepared to be offered for sale over a period of time.

Proportionate relationship between price and supply

price up, supply up
price down, supply down

Factors that might shift the supply curve to the left

Rise in production cost

Factors that might shift the supply curve to the right

fall in production cost

Factors that might shift the supply curve

1. Production cost
2. new technology
3. indirect taxes
4. subsidies
5. natural factors

equilibrium price or market clearing price

when the demand and supply are equal.

total revenue formula

Price x Quantity

demand shift →

increase in demand

demand shift ←

decrease in demand

supply shift →

increase in supply

supply shift ←

decrease in supply

excess demand

when quantity demanded is more than quantity supplied

excess supply

when quantity supplied is more than quantity demanded

price elasticity of demand

the relationship between responsiveness of the demand to a price change

inelastic demand

the price change resulted in small change in demand (bread, essential food)

elastic demand

the price change resulted in significant change in quantity demanded (ice cream)

PED formula

% change in quantity demanded / % change in price

PED less than 1 (fraction and decimal)

inelastic demand

PED more than 1 (can be -tive number)

elastic demand

PED zero

perfectly inelastic demand

PED is ∞

perfectly elastic demand

PED is -1

unitary elastic demand

Factors affecting PED

1. Substitutes
2.Necessity
3.Proportion of income spent on a product
4.Time

demand

amount of good that will be bought over a period of time.

effective demand

How much consumers can afford to buy and would actually buy.

expedinture

Spending by a government

capital goods

Goods bought by firms to produce other goods like machinery, tools

Consumer goods

Goods bought by households like cars,food

demand curve

Graph that shows how much of a good will be bought at different times/prices

Inferior goods

Goods for which demand tends to fall when income rises.

Normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income falls

Supply curve

Graph that shows how much of a good will be sold at different times/prices

need

Basic requirement for survival

want

other desires which are infinite

finite

the quantity available is limited

Basic economic problem questions

1) What to produce?
2)How to produce?
3)For whom to produce?

proportionate relationship

When the price goes up the quantity supplied also goes up when the price goes down the quantity supplied goes down.

subsidy

money that is paid by the government or an organisation to make prices lower, reduce the cost of producing goods, usually to encourage the production of a certain good

price elasticity of supply

relationship between the responsiveness of supply and a change in price.

Inelastic supply

the change in price resulted in a smaller percentage change in quantity supplied.

Elastic supply

The change in price resulted in a larger percentage change in quantity supplied

PES formula

% ∆Qs / % ∆ Price

PES less than 1

inelastic
steep slope

PES greater than 1

elastic
flat slope

PES = 0

perfectly inelastic
vertical line

PES= ∞

perfectly elastic
horizontal line

PES=1

unitary elastic
straight line that passes through the origin

Factors influencing PES

1) Factors of production
2) availability of stocks
3) spare capacity
4) time

income elasticity of demand

a measure of the responsiveness of demand to change in income

IED formula

% change in Qd / % change in income

Necessities are income...

inelastic

Luxury goods are income...

elastic

Normal goods will have..... income elasticity

positive

Inferior goods will have....income elasticity

negative

What is an economy?

system that attempts to solve the basic economic problem

What do decision makers in an economy need to decide?

1) What to produce?
2) how to produce?
3) for whom to produce?

private sector

The provision of goods and services by businesses that are owned by individuals or groups of individuals.

public sector

government organisations that provide goods and services in the economy

What do public sectors provide?

Services that are often supplied inefficiently by the private sector.

Sole trader

A business owned and controlled by one person

Partnership

a business owned and controlled by two or more people working together

companies

Shareholders own the business

Aims of private sector

1) survival
2) profit maximization
3) growth
4) having social responsibility

Divedend

part of a company's profit that is divided among the people with shares in the company

Types of public sector organisations

1) central government departments
2)public corporations
3)local authority services
4) other public sector organisations

what are central government departments?

departments which are controlled by teams lead by a government minister

What are public corporations?

*enterprises owned by government
* Government responsible for policies
*state funded by taxes

What are local authority services?

services that are delivered by local councils

Aims of public sector

1) improving service quality
2) minimising costs
3) take into account social costs and benefits
4) Making profit

What are the three types of economies?

1) Market economy- USA
2)planned economy- North Korea
3) Mixed- UK