Ch 10-13

• When analysing changes, you need to consider if the factor affects demand or supply, if it is a change in the price of the product itself or another factor, and whether it increases or decreases demand or supply
• Price elasticity of demand


  Measures the responsiveness in demand to change of the price of the product
• Price inelastic


  Buyers are not highly reactive to change in price
• Price elastic


  Buyers are highly reactive to change in price
• PED calculation


  • (61-50) / 50 = 0.22
• Inelastic


  • Totally unreactive to change in price
  • Relatively inelastic - small response to change in price
• Unitary


  • Any changes in the price leads to the same change in Quantity Demand
• Elastic


  • Highly responsive to change in price
  • Quantity Supplied changes by a large percent change
• Perfectly elastic


  • Totally reactive to change in price where the Quantity Supplied is unlimited at a given price
• Price elasticity of supply (PES)

  Measures the responsiveness of the quantity supplied of the product to the change of its price
• Price inelastic supply


  • Firms find it difficult to change their production in a given time due to price change of markets
• Price elastic supply


  • Producers can easily increase supply without time delay if there is an increase in the price of the product
• Factors affecting PES


  • Spare capacity available
  • Product can be stored
  • Resources are available
  • Time period to produce the product
  • Mobility of the factors of production
• The government is interested in PES in the labour market
• Private sector


  Part of the economy owned by individuals
• Public sector


  Part of the economy controlled by the government
• Private sector decisions


  • Produce goods and services that consumers want and can earn profit from
  • Goods and services only bought by people with enough money
• Public sector decisions


  • Produce goods that everyone can access
  • Decisions based on providing good quality services rather than making profit
  • Can provide goods at low prices for consumers without enough money
• Basic economic questions


  • What to produce
  • How to produce
  • For whom to produce
• Market economy


  Economic system relies on the market forces of demand and supply to allocate resources with no government intervention
• Planned economy


  Economic system where the government makes all the decisions to allocate resources
• Mixed economy


  Combination of both market and planned economy where some areas are controlled by the market and some by the government
• Characteristics of a market economy


  • Private ownership of factors of production
  • Freedom of choice
  • Self-interest
  • Price mechanism
  • Supply and demand
  • Equilibrium price
  • Flexible prices
  • Allocation of resources
• Forms of government intervention in a free market economy


  • Taxation
  • Provision of defence
  • Healthcare
  • Education
• Advantages of a free market economy


  • Increased competition leading to better quality, lower prices, and greater variety
  • Unlimited profit, income and wealth leading to better standards of living
  • More efficient use of scarce resources
• Disadvantages of a free market economy


  • Income and wealth inequalities
  • Falling product quality as firms lower standards to profit
  • Worker exploitation with lower wages and unsafe conditions
  • Resource depletion
  • Development of monopolies
• Market failure


  Occurs when the market forces of demand and supply fail to allocate resources efficiently and externally
• Externalities


  Occur when there is an external impact on a third party not involved in the economic activity between buyers and sellers
• Positive externalities


  • Education and healthcare provided to those willing to pay
  • Street lighting and public roads
• Negative externalities


  • Pollution from factories
  • Noise pollution from nightclubs
• Social costs


  The sum of private costs and external costs
• Social benefits


  The sum of private benefits and external benefits
• Public goods


  Non-excludable and non-rivalrous in consumption, meaning everyone has access and one person's use does not diminish availability for others
• Merit goods


  Goods and services which when consumed create positive spillover effects in an economy, but are under-provided and under-consumed
• Demerit goods


  Goods and services which when produced or consumed cause negative spillover effects in an economy, but are over-produced and over-consumed
• Causes of market failure


  • Abuse of monopoly power
  • Factor immobility - geographical, occupational
• Consequences of market failure include inefficient allocation of scarce resources