Economics- Micro

• Consumers are people that buy goods and services


  -consumption expenditure or consumption is spending
• Producers are individuals or governments that supply goods and services


  They use the factors of production or factor inputs and turn them into factor outputs.
• Governments look to meet the needs of society

  • Government revenue is received from sources like tax
  • government expenditure is how they use income to fulfil its role
  • Target: Inequality, economic growth, low employment and price stability
• Factors of production

  • Land- natural resources (raw materials) that come from the earth that are used in production
  • Labour- workforce in an economy
  • Capital- equipment and premises(factories and offices)needed
  • Entrepreneur- organises land, labour and capital to produce a profitable product by taking risks
• Reward for factors of production

  • rent- income received for allowing its use by another party
  • wages- payment to workers for allowing the use of its labour
  • interest- payment to buy premises, machinery and other equipment
  • profit- total on income after all costs have been deducted from revenue
• Economic problem - the problem of scarcity, where there are not enough resources to meet everyone's needs
• needs- the things that are necessary for survival and well-being of an individual
• Wants- desires that people want but do not need
• opportunity cost- the next best alternative forgone
• Consumers aim to maximise their utility which is the satisfaction gained from consuming goods or services
• Firms aim to maximise profits by producing goods and services that are in demand and selling them at a price that is high enough to cover their costs and make a profit
• Economic sustainability- impact of economic choices on economic objectives now and in the long run
• Social sustainability- impact of economic choices on society now and into the future
• Environmental sustainability- impact of economic choices on the environment now and into the future
• The market mechanism allocates resources efficiently as it allows consumers to choose what they buy, firms to produce what is demanded and prices to adjust so that supply equals demand.
• market- where the product is sold to the consumer, the product is sold to the consumer (where buyers and sellers meet to trade)
• Primary sector- extraction of raw materials
• Secondary sector- manufacturing goods from raw materials
• Tertiary sector- services provided by people
• Factor market- where factors of production are sold and brought
• Specialisation- The process of workers or a country becoming more focused in the production of a particular good or service.
• Division of labour- when specific tasks are allocated to each member of staff
• Factory Specialisation

  Advantages

  • Lower unit costs (workers become experts)
  • Increased productivity
  • Disadvantage
  • Boredom due to repetition
  • less flexible workers
• Country specialisation

  Advantage

  • increased productivity mean significant source of income
  • greater reputation in that area
  • Disadvantage
  • open to competition from other countries producing the same product
  • less flexible after resources finish
• Demand is the amount of a product a consumer is able and willing to buy at a specific price and time
• Supply is the amount of a product a firm is able and willing to produce at a given price and time
• percentage change formula: (change / original value) x 100
• PED= % change in quantity demanded / % change in price
• PES= % change in quantity supplied / % change in price
• Shifts in demand

  • high income=more spending money, more able to buy
  • price of complimentary/substitute= consumers go for cheaper options
  • However it depends on the PED (the nature of the good)
• Market failure occurs when market forces do not allocate resources efficiently
• Who are consumers?

  people who buy goods or services
• Nature of the good (PED)

  • a luxury good (prices elastic) - demand will be sensitive to price change
  • a necessity (price inelastic) - it will be less sensitive to changes in price
  • the closer the substitute and the more that are available (price inelastic)
  • if the price of a good in competition with a product increases this will affect the demand and price elasticity of demand
  • the longer the time period (price elastic) other firms have the ability to produce similar products and consumers can change their habits
  • Brand loyalty (price inelastic)
  • income if incomes increase (price inelastic)
• Causes of shift in supply

  • change in the cost of production - if costs go up supplier will produce less as they will make less profit
  • better technology- lower costs as less mistakes-supply more to make more profits
  • bad weather limits amount being supplied
  • taxes-indirect taxes to the government rise so costs go up for a firm and supply will fall
  • subsidy- government grant lowers costs and raises profit to encourage firms to supply more
  • if firms believe prices will rise they will supply more (vice versa)
• determines of PES

  • If there is spare production capacity, not all of the land, labour, capital is being used so production can easily respond (elastic)
  • if a business stock piled a product they will be able to respond quickly if price rise and provide more to the market (elastic)
  • if it is easy to re-deploy any factor of production from producing one product to another (elastic)
  • if new firms can easily enter a market and increase production (elastic)
  • time in the short term (inelastic), long run they have time to respond (elastic)
• Price reflects the value or worth that people are willing to put on a good or service for the satisfaction or utility they gain and signals to producers what they should produce.
• Excess demand (below equilibrium)- demand outstrips, or is greater than supply.

  • Firms can raise prices to improve profitability (good for firms, bad for consumers)
  • alternatively they could increase supply and leave the price the same
• Excess supply (above the equilibrium)- supply outstrips or is greater than demand.

  • firms lower prices to sell their product (good for consumers, bad for producers)
  • alternatively they could reduce supply and leave price the same
• Why do firms compete?

  • to enter a market
  • to survive in the market
  • to make profit
• impacts of competition

  • promotional activity - advertising (good for firms)
  • need to innovate (more choices for consumers)