Economics

• Demand


  The willingness and ability of customers to pay a given price to buy a good or service
• Effective demand


  Genuine demand, as opposed to just a desire to buy something
• A million households might wish that they owned a luxury yacht, but there might only be actual attempts to buy 100 luxury yachts at a given price
• Law of demand


  When the price of a good rises, the quantity demanded will fall
• Reasons for the law of demand

  • Income effect: people feel poorer and can't afford as much
  • Substitution effect: people switch to cheaper alternatives
• Demand curve


  A downward-sloping curve showing the inverse relationship between price and quantity demanded

  
• Market demand curve


  The sum of all individual demand for a product

  
• Movement along the demand curve

  1. A price rise causes a decrease (contraction) in quantity demanded

  2. A price fall causes an increase (expansion) in quantity demanded
• Factors influencing demand


  • Income
  • Number and price of substitute goods
  • Number and price of complementary goods
  • Fashion, taste and attitudes
  • Government policies
• A rise in demand


  Demand curve shifts right
• Supply


  The quantities of a product that suppliers are willing and able to sell at various prices per period of time
• Law of supply


  There is a positive relationship between price and quantity supplied
• Supply curve


  An upward-sloping curve showing the quantity suppliers are willing to produce at different price levels

  
• Individual supply


  The quantity of the good that an individual firm would want to supply to the market at any given price
• Market supply


  The total quantity of the good that all firms in the market would want to supply at a given price
• Movement along the supply curve

  1. A price rise causes an increase (expansion) in quantity supplied

  2. A price fall causes a decrease (contraction) in quantity supplied

  
• Factors influencing supply


  • Costs
  • Size and nature of the industry
  • Profitability of alternative products
  • Government policy
  • Change in technology
  • Other factors
• A shift in the supply curve

  Caused by changes in supply conditions other than the price of the good itself
• Equilibrium price


  The price where demand equals supply, with neither excess quantity demanded nor excess quantity supplied

  
• Markets in equilibrium


  When the plans of consumers (demand curve) match the plans of suppliers (supply curve)

  
• Markets in disequilibrium


  When there is excess supply or excess demand
• Consumer surplus


  The difference between the total value consumers place on all the units consumed and the payments they need to make
• A price increase


  Reduces consumer surplus
• A price decrease


  Increases consumer surplus
• Producer surplus


  The difference between the price a producer is willing to accept and what is actually paid
• Consumer surplus


  The difference between the total value consumers place on all the units consumed and the payments they need to make in order to actually purchase that commodity
• Fundamental economic problem


  Scarce resources in relation to unlimited wants
• Scarcity


  The excess of human wants over what can actually be produced to fulfil these wants
• Resources


  Inputs available for the production of goods and services
• Wants


  Needs that are not always realised
• Opportunity cost


  The cost expressed in terms of the best alternative that is forgone
• Choice


  Underpins the concept that resources are scarce so choices have to be made by consumers, firms, and governments
• Sacrifice


  Choice involves sacrifice. The more food you choose to buy, the less money you will have to spend on other goods
• Types of economic events

  • B a discovery of a new oil field
  • C an increase in labour productivity
  • D a reduction in waste
• Possible answers


  • A Increased demand leads to higher market prices.
  • B Limited resources have many alternative uses.
  • C Reaching a market equilibrium may take a long time.
  • D Scarce economic resources are distributed equally.

  
• Of what is this an example?

  • A conservation of resources
  • B monetary policy
  • C opportunity cost
  • D substitution of factors
• Possible answers


  • A how to achieve efficiency with theexist enceof fixe dresou rces limi ted wantsand
  • B how to allocate resources be tween public and private sectors
  • C how to balance unlimited wants against finite resources
  • D how to decide which methods to use to exploit all resources
• 1. B The basic eco nomic problem is that human wants are unlimited while the resources available to satisfy these wants are Smiled (finite).
• 2. C If this decision was not taken, resources would have remained in investment causing in vestment to increase. So the next best alternative (opportunity cost) of this decision is the reduction in investment
• 3. A The problem of scarcity arises due to lim ited resources to satisfy unlimited wants Option A would decrease the exist ing limited resources while all other options would increase lhe limited resources