Economics AOS1 - Demand and Supply

Five major instances of market failure

• abuse of market power

• occurrence of positive and negative externalities

• existence of asymmetrical information

• misuse of common resource allocation

• provision of public goods by the private sector

Government interventions in markets that unintentionally leads to decreased efficiency

1. setting minimum wage higher to help low-income employees = means there’s no competition

2. paying subsidies to the coal industry to encourage production, exports and employment = increases co2 emissions

Relative scarcity

The biggest economic problem, the idea that there are limited resources with unlimited wants

Opportunity costs

The value of the forgone option when choosing the alternative

PPF model - full form

Production possibility frontier

PPF model - reason

Shows the limits to a nations productions of goods and services when resources are being used efficiently

The three economic questions

• what is being produced?

• who is it being produced for?

• how is it being produced?

Pre-conditions for a perfectly competitive market

• strong price competition

• ease of entry and exit from the market

Law of demand

A higher price leads to a lower quantity demanded, and that a lower price leads to a higher quantity demanded

Law of supply

When prices of goods and services increase, production increases, when price decreases then quantity production decreases.

Elasticity

The sensitivity of products in demand and supply following price changes.

Examples of elastic goods

• cars

• electronics

• designers bags

When the price of designer bags are high then the demand is low, but when the price decreases then the demand increases

Examples of inelastic goods

• medication

• water

• electricity

Items people are still willing to pay for regardless of price

Allocative efficiency

When producers satisfy the market needs by reducing resource wats and maximizing profits

Productive efficiency

When money is invested into technology to produce more at a lower cost

Dynamic efficiency

When business needs to be ahead of trends and demands

Intertemporal efficiency

When resources are handled for present and future use.

PPF curve points - outside

not using resourced to maximum potential

PPF curve points - inside

sustainably producing

PPF curve points - on the line

efficiently producing

Supply and demand graph - surplus

There’s a surplus of stock supply, so suppliers increase price but consumers are willing to buy for the high price, leading to suppliers having to lower their price

Supply and demand graph - shortage

Shortage in supply, consumers need to be willing to pay a higher price

Non price factors that shift the curve

• income

• taste

• price of substitutes

• tax

Substitution

Good or service that consumers see as the same or similar to another product

Government interventions to fix market failure

• tariffs: taxes on imports and exports

• subsidies: money paid by government to help businesses

PED - price elasticity of demand

percentage of the quantity demanded / percentage change in its price