Economics 

Introduction 
 
Positive and Normative Statements 
 
Positive statements​ are objective ​statements​ that can be tested, 
amended or rejected by referring to the available evidence 
 
example: ​A fall in incomes will lead to a rise in demand for own-label 
supermarket foods 
 
 
Normative Statements-​ A value judgement is a subjective statement of 
opinion rather than a fact that can be tested by looking at the 
available evidence 
 
example: ​Pollution is the most serious economic problem 
 

General Definitions
 
Microeconomics- ​a branch of economics that studies the behaviour of 
individuals and firms in making decisions regarding the allocation of 
scarce resources 
 
Macroeconomics- ​the branch of economics concerned with large-scale 
or general economic factors, such as interest rates and national 
productivity. 
 
Economic Growth- ​an increase in the amount of goods and services 
produced per head of the population over a period of time. 
(increase/decrease in GDP) 
 
Economic Development- ​Economic development​ is the process by 
which the economic well-being and quality of life of a nation, region or 
local community is improved. (HDI) 
 
 
Ceteris Paribus- ​Ceteris paribus​ is a Latin phrase meaning 'all other 
things equal.' In economics, it is often safe to assume that all other 
variables, except those under immediate consideration, are held 
constant. 
 

The Economic Problem 

● Unlimited wants 
● Scarce resources 
 
Factors of production: 
● Land-​ natural resources 
● Labour-​ mental/physical labour 
● Capital-​ producing some kind of output 
● Enterprise/Entrepreneurship​- management 
 
Payments to factors of production: 
●Land-​ Rent 
●Labour-​ Wages 
●Capital-​ Interest 
●Entrepreneurship-​ Profit 
 
Resource use/choices is important 
 
Use LLCE if you don’t know the factors of production 
 
Economic decisions include:  
● What?  
● How? 
● Who? 
 
What​ goods and services should an economy produce? Should the 
emphasis be on agriculture, manufacturing or services, should it be on 
sport leisure or housing? 
 
How​ should goods and services be produced? Labour intensive, land 
intensive, capital intensive? Efficiency? 
 
Who​ should get the goods and services produced? Even distribution? 
More for the rich? For those who work hard? 
 
Production Possibility Frontiers 
 

Given resources there is a certain amount one can produce. 

 
Goods can be separated into capital goods and consumer goods: 
● Capital Goods-​ ​goods that are used in producing other goods, 
rather than being bought by consumers. 
● Consumer Goods- ​goods bought and used by consumers, rather 
than by manufacturers for producing other goods. 
 
Opportunity Cost-​ ​the cost expressed in terms of the next best 
alternative sacrifice 
 
 
Test Wednesday 
 
Opportunity cost 
Positiv/Normative statements 
Micro/Macro economics 
Economic Problem 
Factors of Production 
Capital/Consumer goods 
 

 
Demand and Supply 
 
Demand​- quantity of goods/services that customers are willing/able to 
purchase at a given price in a given time period 
 
As the price of a product falls, the quantity demanded of that product 
​ eteris paribus 
will usually increase c

 
y= Price (P,) x= Quantity (Q), Line= Demand (D) 
 
Use an arrow to denote a shift in demand 
 
Determinants of Demand 
 
● Price (P) 
● Price of other goods- substitutes and complements 
● Income and the distribution of income (Y) 
● Normal and Inferior goods 
● Tastes and fashion 
● Size and structure of the population 
● Advertising 
● Expectations of Consumers, reputation 
● Government Policy 
● Quality 
● Location 
● Necessity 
 
Changes in Demand- ​Changes in any factor other than price causes a 
shift in the demand curve 
● Left- less demanded at each price 
● Right- More demanded at each price 
 
 
Shift in the demand Curve 
 
Come up with 2 scenarios that could cause a shift in the demand curve 
(Left/Right) Explain and draw the curve (4) 
 
HW: Student Workpoint p.24 2.1 on word doc/etc email it next week 
September 3   
 
Supply 

Market Equilibrium & Price Mechanism 

 

 
the point where the lines cross is market equilibrium 
 
 
 
 
 
Factors affecting the efficiency of markets 
● Amount of information about the markets held by consumers and 
producers 
● The ease with which factors of production can be put to 
alternative uses 
● The extent to which price is an accurate ​signal​ of the true u​ tility 
and true c​ ost​ in determining the level of demand and supply 
(externalities) 
● The degree to which a firm holds monopoly power 
● The degree to which property rights are clearly defined 
● Whether the market can provide public goods and services 
 
Utility-​ ​a measure of usefulness and pleasure. It gives an idea of how 
much usefulness or pleasure a consumer receives when they consume a 
product. 

 
Community Surplus = CS + PS 
 
Allocative Efficiency- occurs at e 
 
Elasticities 
 
● Price elasticities of demand (PED) 
● Income elasticity of demand (YED) 
● Cross-price elasticity of demand (XED) 
● Price elasticity of supply (PES) 
 
The responsiveness of one variable to changes in another. 
 
 
Price elasticities of demand PED 
 
If the price rises what happens to demand. We know demand will fall, 
but how much? More/less than 10%? 
 
Elasticity measures the extent to which demand will change. The 
responsiveness of demand to changes in price 
 
Where % is demand: 
● is greater than % change in price ​(elastic) 
● is less than % change in price (​ inelastic) 
 
PED equation 
 
PED = ​% Change in quantity demanded 
% Change in price 
 
%ΔQd
PED =​ %Δp  
 

 
  
D-Price elastic 
- increasing price would reduce TR (% Δ Qd > % Δ P) 
- reducing price would increase TR (% Δ Qd > % Δ P) 
 
D-Price Inelastic 
- increasing price would increase TR ( % Δ Qd < % Δ P) 
- reducing price would reduce TR (% Δ Qd < % Δ P) 
 
Calculating TR 
 
Income elasticity of demand 
-the responsiveness of demand to changes in income 
 
Normal good(+) 
● e.g. 
● demand rises and vice versa 
 
Inferior good (-) 
● e.g. 
● demand falls as income rises and vice versa 
 
%ΔQd
YED = %ΔY  
 
  
D1 income falls, quantity demanded rises 
 
YED Applications 
 
examples: 
● YED = - 0.6: good is inferior but inelastic 
○ a rise in income of 3% would lead to demand falling by 1.8% 
 
● YED = +0.4: Good is a normal good but inelastic 
○ a rise in income of 3% would lead to demand falling by 1.2% 
 
● YED = +1.6: Good is a normal good and elastic 
○ a rise in income by 3% would lead to demand rising by 4.8% 
 
● YED = -2.1: Good is an inferior good and elastic 
○ a rise in income of 3% would lead to demand falling by 6.3% 
 
Cross price elasticity in Demand 
 
The responsiveness of demand of one good to changes in the price in 
another good 
 
Substitutes (+) 
Complements (-) 
 
%ΔQuantity Demanded of good x
XED = %ΔP rice of good y  
 
eg.  sugar is a complement to tea 
tea is a substitute for coffee 
 
  
SWp 4.5 
 
Price elasticity of Supply (PES) 
 
The responsiveness of supply to changes in price 
● Inelastic- difficult for suppliers to react quickly to changes in 
price 
● Elastic- supply can quickly react to changes in price 
 
%Δ Quantity Supplied
PES = %ΔP rice  
 

 
Importance of Elasticity as a whole 
● Relationship between change in price and the impact of total 
revenue (price x quantity) 
● Importance in determining what goods to tax (tax revenue) 
● Importance in analysing time lags in production 
● Influences the behaviour of a firm 
 
Market failures and Government Policy 
 
Lack of public goods 
Public goods- 
 ● A commodity/service, provided without profit to society, by the 
government/private individual/organization. 
Free market does not provide  
● Non-excludable 
● Non-rivalrous 
 
Government Intervention? 
● Government provides the goods 
● Government subsidies private firms 
 
Data Response page 34 
 
1. Define “demand” 
 
Demand is the quantity of goods or services that customers are willing 
and able to purchase at a given price in a given time period. 
 
2. With the help of a diagram, explain what has happened to the 
demand for cigarettes. 
 

 
The Demand for cigarettes fell, causing a shift left in the demand curve 
from D to D1. This means that at P1 the quantity customers are willing 
and able to buy shifted from Q1 to Q2. 
 
3. To what extent can it be argued that the fall in demand for 
cigarette is due to the smoking ban? 
 
The question if the smoking ban caused the drop in demand for 
cigarettes has not been definitively answered as the country was 
already experiencing a slight drop in demand for cigarettes. However i 
would argue that the drop in demand was in fact caused by the ban as 
the percentage drop of 8% would be unusual for a slight decrease in 
demand. The percentage drop with younger people is even bigger (23 
percent). Therefore, although a small part of the percentage drop 
would have occurred either way, the smoking ban caused a substantial 
drop. 
4. Which groups of stakeholders have been affected by the 
government policy? How have they been affected? 
 
The group of stakeholders that has been affected would be the 
suppliers and employees of cigarette of companies as well as the 
company itself. Investors would also have been affected by the ban. As 
previously mentioned there was a significant drop in demand for 
cigarettes, which directly, negatively impacts the profit margin of 
cigarette companies, especially local ones. The investors would lose 
money, and employees may receive lower wages to make up for the 
drop in profits. Suppliers may also begin to supply less. 
 
5. Explain two other policies that the government might use to 
reduce the demand for cigarettes. 
 
A further policy the government may use to lower demand for cigarettes 
could be increasing or implementing taxes on tobacco. Another could 
be decreasing availability of cigarettes. Taxes would make cigarettes 
less desirable for both consumers and producers. Decreasing 
availability would also be an effective way to reduce demand, if 
something is more difficult to get people are less likely to go the extra 
mile to get it. For example, if tobacco licences were more difficult to 
obtain for stores (and stricter regulations applied here) the availability 
would decrease. 
 
Market failures and Government Policy pt.2 
 
All public goods are merit goods