ECON UNIT 2

• MICROECONOMICS: study of individual markets and sections of the economy, with the focus of decision making on individuals, households and firms
• MACROECONOMICS: study of economic behaviour and decision making in the entire economy
• CONDITIONS OF SUPPLY: costs of production, indirect taxes, weather, new technology, number of firms in industry, subsidies
• PED is the measure of how responsive a change in quantity demanded is to a change in price.
• PES is the measure of responsiveness of change in supply to a change in price
• PED calculation: %Qd/%P
• PES calculation: %Qs/%P
• Inelastic demand is less than 1
• Elastic demand is more than 1
• Market is any set of arrangements that bring together all producers and consumers of a good or service. A market system works to allocate scarce resources efficiently.
• A market economy is an economy that has no government in the allocation of resources and distribution of goods/services.
• An economy can be considered be a market, mixed or planned economy
• Market failure occurs when there is a misallocation of resources
• Public goods are non-rivalrous and non-excludable goods
• Merit goods are goods that society deems good for us and under-consumed
• Demerit goods are goods that society judge as harmful and over-consumed
• External benefits are the positive impacts on society due to production or consumption of goods and services
• Private benefits are the benefits to producer or consumer due to production or consumption
• social costs= external costs + private costs
• private costs are the costs to producer or consumer
• external costs are the negative impacts on society due to production or consumption of goods and services
• Maximum prices are set by the government so sellers cannot legally sell the good beyond this
• Minimum prices are set by government to help producers and decrease consumption of demerit goods, also used in labour market to protect workers from wage exploitation
• Indirect taxes are taxes levied by gov on producers to reduced Qd of demerit goods
• A mixed economic system is a blend of a market and planned economu
• Economic goods are goods that are scarce in suuply so can only be produced with economic cost and/or consumed with price
• Free goods are those abundant in supply so it has no opportunity cost
• Factors of production: land, labour, capital and enterprise
• FACTORS OF PRODUCTION DEFINITION: resources/inputs which are used in the production process to produce output
• Land: all natural resources in an economy and reward is rent it recieves
• Labour: all human resources available in economy and reward is wage
• Capital: all man-made resources available in economy and reward is interest it recieves
• Enterprise: ability to take risks and run business venture or firm and reward is profits
• Quality of land depends on soil type, fertility, weather etc
• Quality of labour will depend upon skills, education, qualification of labour
• Quality of capital depends on how many good quality products can be produced using the given capital
• Quality of enterprise will depend on how well it is able to satisfy and expand demand in economy in cost-effective and innovative ways
• Opportunity cost is the cost of the next best alternative foregone in order to satisfy the other
• CAUSES OF MARKET FAILURE: when social costs exceed social benefits, over-provision of demerit goods, under-provision of merit goods, lack of public goods, immobility of resources, information failure, abuse of monopoly powers
• REASONS FOR GOVERNMENT INTERVENTION: To correct market failure, earn government revenue, promote equity, support firms, support poorer families