The economic problem

• Free goods

  • free goods are goods which do not command value in the market, they are abundant and a free gift of nature
  • E.g. oxygen, river
• Economic goods

  • goods which command value in the market as they are scarce goods. any good which has a price is scarce and commands value in the market.
• The economic problem: scarcity, choice, needs and wants

  • scarcity is based on the premise that human beings have unlimited wants and needs and that resources which can be used to fufil these wants and needs are limited.
  • this means choices need to be made about what, how and for whom to produce goods or services
• LIst factors of production

  • Land
  • Labour
  • Capital
  • Enterprise
• Land

  • natural resources that can be used during production process
  • agriculture
  • raw materials
  • the factor payment of land is rent
• Labour

  • Is a measure of the work carried out by human beings. Supply od the labour is determined by the total population but directly labour force
  • skills and training of the labour force affects the overall productivity
  • factor payment for labour is wages
• capital

  • non human imputs usedin production
  • E.g vehicles and machinery or tools
  • the factor payment for capital is interest
• Enterprise

  • It refers to the ability and initiative to combine these other factors of production to create goods and services, take risks, innovate, and drive economic growth
  • factor of payment for enterprise is profits
• Economic agents : households

  • Households(individuals) make choices about their expenditure. In this role, they are consumers who demand goods and services.
  • In order to be able to buy goods, households need income, so they also take decisions about the supply of labour
  • it is assumed that households take decisions trying to maximise their satisfaction
• Government

  • It undertakes expenditure, and influences the economy through its taxation and regulation of markets.
  • Major objective is to have stability in the economy and to avoid excessive unemployment
• Positive Economics

  • positive economics is objective and fact based
  • statements must be able to be tested and proved or disproved
• Normative economics

  • is subjective and value based
  • statements are opinion based, so they cannot be proved or disproved
• Demand

  • The quantity of a good or service that consumers are willing and able to buy at a given price ina given time period
• Contraction in demand

  • when the price rises, and quantity demanded decreases
• Extension of demand

  • when price falls and the quantity increases
• List the terms of PASIFIC

  • population
  • advertising
  • substitutes
  • income
  • Fashion and taste
  • Income tax
  • complements
• Pasific causes a shift in the demand curve
• Individual demand

  • is the demand of one individual or firm
• Market demand

  • Provides the total quantity demanded by all consumers. In other words, it represents the aggregate of all individual demand
• Joint demand

  • complements are said to be in joint demand. These are goods that are demanded together.
• Composite demand

  • demand for a good that has multiple uses
• Competitive demand

  • markets where a number of substitutes exist, and one good can be purchased instead of another good
• Marginal utility

  • the additional utility, or amount of satisfaction, gained from each additional unit of consumption.
  • Total utility will normally rise as additional units of a product are consumed
• Law of diminishing marginal utility

  • when utility is falling then consumers will consume more but place a lower value on the next unit
  • resulting in a downwards slope
• supply

  • supply refers to the amount that producers are willing and able to sell at any given price in a given period of time.
• Supply curve

  • An increase in price causes an extension along the supply curve
  • A decrease in the price causes a contraction along the supply curve
  • As price rises, rational profit maximising producers will supplt more because as output rises profits should rise
• Individual supply

  • is the supply of an individual producer at each price whereas market supply is the sum of all supply schedules of all producers in the industry.
• Factors that cause a shift in the supply curve (PINTSWC)

  • Productivity
  • Indirect tax
  • Number of firms
  • Technology
  • Subsidies
  • weather
  • cost of production
• Joint supply

  • occurs when two goods are produced together from the same factors of production . for example, if you grow wheat and straw.
  • If you in crease supply of beef, you will also increase supply of leather
• Competitive supply

  • Goods in competitive supply are alternative products a firm could make with its factor of production
• Composite supply

  • When two or more goods or services are naturally bundled and supplied together in the ordinary course of business : package deals
• Opportunity cost

  • the cost of the next best allternative forgone when choice is made
• ceteris paribus

  • a Latin phrase meaning "all other things being equal"
  • Ceteris paribus, if the price of a product increases, the demand for it will decrease." Here, the phrase assumes that all other factors (like consumer preferences, income levels, and competing products) stay constant, so you can focus solely on the relationship between price and demand.
• market equilibrium

  • occurs when the quantity of a good or service demanded by consumers equals the quantity supplied by producers, resulting in a stable market price. At this point, there is no excess supply (surplus) or excess demand (shortage), and the market "clears," meaning everything produced is bought, and there is no pressure for the price to change.
• Consumer surplus

  • The difference between the price consumers are willing and able to pay for a good/ service
  • and the price they actually pay
• Producer surplus

  • The difference between the amount producers are willing and able to supply a food/service for
  • And the price they normally recieve
• Elasticity

  • Is the measurement of sensitivity of variable in response to a change in another
• Price elasticity of demand (PED)

  • measures the responsiveness of quantity demanded to a change in price
  • Demand for some goods will be very responsive to changes in price whilst others will be very unresponsive
• Inelastic

  • Goods which are not very responsive to changes in price
• Income elasticity of demand (YED)

  • measures the responsiveness of quantity demanded to a change in price