Success Criteria Notes

Economics is a social science that studies how individuals, businesses, and governments allocate scarce resources to satisfy unlimited wants. It involves analyzing human behavior, decision-making, and the impact of economic policies.

Needs vs. Wants

  • Needs: Essential for survival (e.g., food, water, shelter).

  • Wants: Non-essential but desirable (e.g., luxury cars, vacations).

The Economic Problem

  • Scarcity: Limited resources versus unlimited wants.

  • Resources: The inputs used to produce goods and services.

  • Fundamental Economic Questions:

    1. What to produce? (Deciding which goods/services to create)

    2. How to produce? (Determining production methods)

    3. For whom to produce? (Allocating goods/services to consumers)

Opportunity Cost

  • Definition: The next best alternative foregone when making a decision.

  • Examples:

    • Individual: Choosing a university degree over a gap year.

    • Business: Investing in new technology instead of expanding product lines.

    • Government: Funding healthcare over infrastructure.

  • Role in Decision-Making: Opportunity cost helps determine the most efficient allocation of resources.

Factors of Production & Returns

  1. Land (Natural resources) – Rent

  2. Labour (Human effort) – Wages

  3. Capital (Machinery, tools) – Interest

  4. Enterprise (Entrepreneurship) – Profit

Sectors of the Economy

  1. Primary: Extracts raw materials (e.g., agriculture, mining).

  2. Secondary: Manufactures goods (e.g., car production, textiles).

  3. Tertiary: Provides services (e.g., banking, retail).

Supply Chain Example

A cotton shirt:

  1. Primary: Cotton farming.

  2. Secondary: Textile manufacturing.

  3. Tertiary: Clothing retail.

Economic Systems

  • Traditional Economy: Based on customs and traditions.

  • Planned Economy: Government controls resources (e.g., North Korea).

  • Mixed Economy: Combines market and government intervention (e.g., France).

  • Free Market Economy: Minimal government control, driven by supply and demand (e.g., USA).

  • Planned vs. Free Market:

    • Advantages: Efficiency (market), equality (planned).

    • Disadvantages: Market failure (market), lack of innovation (planned).

  • Economic Freedom & Living Standards: Higher economic freedom often leads to better living standards.

Market, Demand & Supply

  • Market: Where buyers and sellers interact.

  • Demand: Quantity consumers are willing to buy.

  • Supply: Quantity producers are willing to sell.

  • Laws:

    • Demand: Inverse relationship between price and quantity demanded.

    • Supply: Direct relationship between price and quantity supplied.

  • Non-Price Determinants:

    • Demand: Income, preferences, substitutes, expectations.

    • Supply: Production costs, technology, government policies.

Market Equilibrium

  • Equilibrium: Demand = Supply.

  • Surplus: Excess supply (price falls to restore equilibrium).

  • Shortage: Excess demand (price rises to restore equilibrium).

  • Price Mechanism: Allocates resources based on demand and supply changes.

Economic Efficiency & Market Failure

  • Consumer Surplus: Difference between willingness to pay and actual price.

  • Producer Surplus: Difference between selling price and cost.

  • Allocative Efficiency: Achieved when MSB = MSC.

  • Market Failure: When markets fail to allocate resources efficiently.

Externalities & Government Intervention

  • Negative Externalities: Costs imposed on society.

    • Production: Pollution from factories.

    • Consumption: Smoking-related health issues.

  • Demerit Goods: Overconsumed goods with negative effects (e.g., alcohol, junk food).

  • Government Responses:

    • Market-Based Policies: Taxes, subsidies.

    • Regulation & Legislation: Emission caps.

    • Education & Nudges: Promoting healthier choices.