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The basic economic problem Resources (factors of production) are limited (scarce), but how society wants to use them is unlimited.
What is economics?
- The science of managing scarce (limited) resources. Goods and services
- Goods: physical items that can be produced, bought and sold
- Services: non-physical items that can be provided by firms and paid by customers Needs and wants
- Needs: the essential goods and services required for human survival
- Wants: goods and services that are not necessary for survival but are human desires Opportunity costs
- Opportunity cost: the value of the next best alternative given up when making a decision. Free and economic goods Economic goods - Each input was limited in supply (scarce) - There is opportunity cost in producing or consuming them
Free goods Some goods are not scarce (plentiful) so there is no opportunity cost in producing or consuming them
Introduction to economics
2022 年 9 月 16 日 11:
Economic factors (CELL) Land Natural resources used in production Labour Human resources used in production Capital Manufactured resources used in production (manufactured from land) Enterprise Skills to combine other resources to make profit What can change the quantity and quality of factors of production
- Increase quality of capital - innovation
- Decrease quantity of land - war / natural disaster
- Increase quality of labour - education
- Increase quantity of labour - higher birthrate / migration Rewards of factors of production
- Land = rent
- Enterprise = profits
- Labour = wages
- Capital = interest
Factors of production
2022 年 12 月 6 日 19:
To pruduce anything in the economy one needs inputs Inputs = CELL Manage inputs to get the most output PPC definition: maximum potential output combination if all resources are fully used (all land, labour, capital and enterprise is used) Capital goods: machine, tool, etc. used for producing consumer goods Consumer goods: goods produced PPC shows opportunity cost Opportunity cost = the other products lost by producing more Opportunity cost of moving from B to D = guns lost from B to D Inefficient allocation of resources: a point inside the PPC A, E: Inefficient A to E: using more of the resources B,C,D = efficient use X: impossible to reach (unobtainable), because there is no enough resources for this point. (Beyond PPC) B to C / D = reallocation of resources Reallocation of resources = movement along the line, Going from B to D: losing guns, gaining butter Shift the PPC
- Any change in the quality or quantity of inputs (factors of production) Parallel shift outwards - More resources are found (more land) - Immigration (more labour) - Improved productivity of labour (quality of labour is higher) e.g. education Parallel inwards shift - War - Natural disaster
- 1 mark = line 1 mark = consumer goods 1 mark = capital goods 1 mark = shows goods
Production Possibility Curve
2022 年 9 月 23 日 11:
- Natural disaster
- Decrease in productivity (lower quality of labour)
- Decrease in migration Non parallel shift: Something affecting the car industry only ○ Increase in productivity of car engineers
- e.g. more land for farming
Supply: the quantity of a good or service that a producer is willing and able to supply onto the market in a given time period at a given price Market supply: the total supply brought to the market by producers at each price. To calculate, sum the individual supply schedules Reasoning for the Law of Supply The profit motive: if the market price rises following an increase in demand, it becomes more profitable for businesses to increase their output
Production and costs: when output expands, a firm's production costs tends to rise, therefore a higher price is needed to cover these extra costs of production
Shift & movement
- Movement along the curve: only price changes (extension / contraction in supply) Shifts Changes in the unit costs of production Lower unit costs mean that a business can supply more at each price, having a shift to the right - for example higher productivity
Higher unit costs - supply less at each price - inward shift of supply e.g. a rise in wage rates or an increase in energy prices / other raw materials
Advances in production technologies / productivity ○ Lower unit cost ○ Greater level of output at each price level ○ Outward shift of supply
The entry of new producers into the market ○ Outward shift
Favourable weather conditions e.g. outward shift for agricultural products, inward shift for airline carriers when there is a poor weather
Taxes ○ Increased unit cost of production, reducing supply level ○ Inward shift of supply
Subsidies ○ Reducing the unit cost of production ○ An outward shift of supply
- Regulations increase costs - causing a leftward shift of supply
8 Supply
2022 年 10 月 12 日 10:
Market equilibrium definition Exists when the demand of the product matched the supply, so there is no excess demand (shortage) or excess supply (surplus)
- At equilibrium, there is no tendency for the market price to change. Drawing demand / supply curve
- Drawing demand & supply curve together: use 'quantity of …'
- Per time period: just at this moment in time, not later on
- *Have to be in graphs Market disequilibrium Exists when the price is too high or too low, so the quantity demanded is not matched by the quantity supplied, causing excess demand at prices that are too low and excess supply at prices that are too high
At price P1 there is an excess supply, price will need to fall to persuade consumers to buy more and for producers to contract their supply.
At price P2 there is an excess demand. Price will need to rise to reduce consumer demand and to encourage producers to supply more.
Excess supply - sale to increase demand Equilibrium change If market demand rises or if market supply falls: increase in market price Market demand fall or market supply increase: decrease in market price
Equilibrium
(^2022) 年 (^10) 月 (^17) 日 9:
- A extension in demand then Functions of price mechanism
- Signals to producers and consumers
- Solve a shortage or a surplus Features There is no government interference in economic activities Resources are owned by private economic agents who have the economic freedom to allocate resources without government interference
Goods and services are allocated on the basis of price
- High price encourages more supply
- Low prices encourage more consumer spending
- Goods are sold to these who are able and willing to buy
The allocation of factor resources is based on financial incentives
- Using factors of production with the greatest profit
Competition creates choice and opportunities for firms and individuals Consumers can benefit from a variety of innovative products at competitive prices and low quality
If price rises, demand will fall, but by how much? Calculation
- How will quantity demand react to a price change? D ercentage hange in uantity Demanded ercentage hange in rice lope
- PED is always negative - negative correlation Values for PED PED = 0 - Perfectly inelastic - Vertical demand curve ("perfect i")
0 < PED < 1
- Inelastic
- Less than proportional decrease (gradient < 1) in quantity demanded
- Steep gradient
- Hit x-axis only
PED = 1
- Unitary elastic
- Curve
- Not hitting both axis
PED > 1
- Responds more than proportionately to change in price
- More than proportional decrease in quantity demanded
- Elastic
- Smaller gradient
- Hit y-axis only
Factors that determine PED The proportion of income spent on it Small proportion = PED will be more inelastic (chewing gum) because the change in price is insignificant to consumers
The availability of substitutes
- No substitutes = demand is very inelastic (e.g. petrol) because they are difficult to be replaced
Habit
- If the consumer has a habit of using that good or service the demand is inelastic (cigarettes)
- People with habit are more willing to pay, even at higher prices
Luxury or necessity
- Higher necessity = inelastic Households needs these goods or services and will continue to purchase them even if price is rising
Width of definition Wider the definition e.g. food is more likely to be inelastic, brand is more elastic than the whole industry
Parts on demand curve
11 Price elasticity of demand
2022 年 11 月 9 日 11:
The significance of PED Help firms decide a pricing strategy e.g. price discrimination
- Different PED for different customers
- If PED is inelastic - set higher price
Decide which products to put a tax on to get high government revenue
- Tax lead to higher price
- Inelastic - less fall in demand
Help decide which products to put a large tax on
- If product is inelastic - need to put a high tax to reduce demand
- e.g. cigarettes
What is price elasticity of supply? How responsive firms are to a change in price Responsive, immediate response = elastic Not very responsive, slow response = inelastic Rise in demand → rise in price → rise in quantity supplied Calculation ercentage hange in uantity upplied ercentage hange in rice Showing PES on a diagram
- Always proportional increase
- Touching y-axis - elastic
- Touching x-axis - inelastic
- Unitary inelastic - gradient = 1 Factors that affect the PES The amount of spare capacity of factors of production - If it is high then the PED is more elastic - The firm can increase the supply relatively easily without increasing the cost of production
The cost of increasing production
- If it is high then the PED is more inelastic
- High cost to increase the supply
Complexity of producing the product
- If the product is easy to make then the PES will be more elastic (higher)
- Easier to increase supply in a short time
Level of stocks of finished products
- If this is high then the PED will be more elastic (higher) (depends on perishability)
- More able to respond quickly to a change in price by increasing supply
Time
- Short run supply is more likely to be inelastic Most firms are not able to change their input factors, such as the size of their workforce or the fixed am ount of capital equipment they employ in a short time
Why is PES important? Useful for government
- Housing has inelastic supply (slow to build a house) and this means some cannot get a house Shortage of workers (not a lot of spare capacity) may be the cause of inelastic supply so may indicate more migration is needed
Useful for firms Inelastic supply can signal to firms they may need to change production techniques ○ To become more elastic ○ Elastic = more competitive and larger sales revenue
12 Price elasticity of supply
2022 年 11 月 23 日 10:
Definition Market failure: market fails to allocate resources efficiently
- (The free market is failing)
Ways the market can fail Too many resources allocated to the production of things that cause external costs e.g. demerit goods
Not enough resources allocated towards producing things that create external benefits e.g. merit goods
- No resources allocated to producing things people require e.g. public goods
- The free market can be determined by a monopoly
- Immobility of labour can arise Public good
- Public goods are non-rival and non-excludable A type of market failure because they would not be provided in a free market due to the lack of profit available
Non-rival
- Consumption of a good by one person does not reduce the amount available for others
Non-excludable
- It is not possible to exclude people from using the good
Free rider problem
- Using something without paying for it
- Because this exists, public goods would not be provided in a free market due to low profit
Merit and demerit goods Merit goods: goods when consumed or produced create external benefits
- Firms and consumers do not take external benefits into account
- Underestimates the true benefits of a good
- Merit goods are under consumed + under provided in free market
Demerit goods: goods when consumed or produced lead to external costs
- Firms and consumers do not take external costs into account
- Underestimates the true cost of a good
- Demerit goods are over consumed + over provided in free market
External costs Negative effects on a third party
- First party = consumer (buying or using the goods or services)
- Second party = producer (providing the goods or services)
- Third party = others beyond the transaction
Examples
- Pollutions
- Noise pollution
- Cigarette smoking
- Litter
- Also called negative externality Social costs
- Costs that affect all and it is comprised of private costs and external costs Private costs + external costs = social costs - Private cost = only on first and second party (people involved in the transaction)
- Not the same as external costs, external costs are a part of the social costs
14 Market failure
2023 年 1 月 11 日 11:
- Not the same as external costs, external costs are a part of the social costs External benefits
- These are positive effects on a third party
- Benefits not to producers or consumers, but to those beyond the transaction
- Examples = education, vaccinations
- Also called positive externality Examples Private costs External costs Go to a nightclub Ticket / drink price Cost to nightclub / DJ Noise pollution Crime in area Littering Go to a football match Ticket price Food prices Transport fees Lawn costs Traffic congestion in area Private benefit External benefit A person sings Joy, relaxing Improve singing skill Going to university Knowledge Degree Future employers Creating a garden Air quality Bees Labour immobility
- The inability of worker to move Why is it a market failure The free market suggests that the price mechanism should allocate resources efficiently. This includes labour. ○ Labour should move to its highest reward
- Sometimes high wages do not incentivise workers to move jobs
- Difficulty moving between jobs - occupational
- Difficulty moving to a new location to work - geographical Possible reasons - Has not got the skills and qualifications (O) - Contracted (O) - Job is very far away (G) - May have to leave family and friends to do job (G) - Job is in a location with high cost of living (G) - Migration controls (G)
- In a free market, labour immobility can be higher because the government is not there to intervene
- e.g. government cannot help advertise jobs in different regions Monopoly
- When a single firm dominates the market
- Control market supply as no other firms can compete Monopoly power - > 25% market share
What can cause a monopoly
- Ownership of key resource - e.g. rare earth metals
- Sell a unique product - market dominance e.g. Netflix
- Legal protection - a patent / copyright
- Why is it a type of market failure
Definition
- Resources are owned and controlled by private and public sector Why is there a need for a mixed system
- Market failure Types - Monopoly power - Merit goods - Demerit goods - Public goods - Immobility of labour
Forms of intervention Legislation / targets
- Maximum price: extension in demand
- Minimum price: contraction in demand
- Imprisonment Fines / taxes - - Contraction or extension in demand
- Education Subsidising - - Extension in demand
- State provision / nationalisation
- Privatisation Minimum and maximum price Minimum price - Price floor - price cannot be set below it - Imposed when the original equilibrium price is too low so it is set above the equilibrium price - Makes the good or service less affordable and reduce demand - Demerit goods - May cause excess supply and government failure - May result in an inefficient allocation of resources
15 Mixed economic system
2023 年 1 月 27 日 11:
Maximum price
- Price ceiling - price cannot be set above it
- Imposed when the original equilibrium price is too high so it is set below the equilibrium price
- Makes the good or service more affordable and encourage consumption
- Merit goods
- May cause excess demand and government failure
- May result in an inefficient allocation of resources
Rules and regulations Advantages
- Consumption of the good or service may be changed People's behaviour may be changed in the long term ○ Awareness of the negative impacts of demerit goods is raised ○ Awareness of the positive impacts of consuming merit goods is raised
Disadvantages
- Underground markets to provide the good or service often at a very high price. The government has no control over the quality of the goods produced in underground markets ○ In some cases can be dangerous for consumption
- People break the rules e.g. fake ID cards
- The fine or punishment must be enforced and set sufficiently high to discourage consumption
Education
- Change pattern of demand for merit / demerit goods
- Correct market failures State provision Benefits - Goods and services are accessible to all individuals (public goods) - Merit goods causes social benefits when individuals consume
Drawbacks Opportunity cost ○ Expenses could be spent on other items
Overconsumed because it is free of charge ○ Leading to long queues/shortages
Free riders issue ○ Not contributing to tax income
