IH Notes

Definitions

Resources :Factors used to produce goods and services

The economics problem :Unlimited Wants exceeding finite resources

Scarcity : A situation in which there aren't enough resources to satisfy everyone's wants

Economic Good : A product which requires resources to produce it and therefore has an opportunity
cost

Free Good : A product which does not require any resources to make so it doesn't have any
opportunity cost

Choice:As wants are unlimited and resources are limited we have to make choices.every choices has its
own benefits and costs . All choices have value and the value is the benefit less to the cost of your choice

Factors of production is another term of economic resources

There are four factors of production :-

● Land
● Labour
● Capital
● Enterprise

Factors of production

The four factors of production in economics are:-

● Land
● Labour
 ● Capital
● Enterprise

Land

Land includes all the types of crops lands on which afterwards development happens . It basically
covers any natural resource used in production. Land also includes the resources beneath it which
means coal or any other resources . The return of this land is the profit we get if we make the right
decisions and do development in which profit is expected . Example . If a company which makes water
parks will use the resource on the water for pools and slides and similarly a company of wildlife will
take a land of grass and forest areas .
For that example . A travel company will make use of water in its swimming pools and beaches and on
the other hand then land used by a safari park includes the grass and the graze but also the animals
themselves .

Labour

Labour is basically the human effort with we need for producing goods and services and the more the
human capital (Education , Knowledge , Qualification) the more capable they are of working .
Ex.A bank manager and a sweeper both are labour the the bank manager has more credibility than the
sweeper due to human capital and education .
.ex.A road sweeper , a steel worker and all the people who contribute to their labour

Capital

Capital is anything human-made to produce other goods and services . Capital goods are not wanted
for their own sale but for what they can produce . To differentiate between a capital and a consumer
good it is necessary to consider the user and its purpose .Consumer goods are goods which are wanted
for the satisfaction they provide to their owners , Ex.Food , Clothing and entertainment .

When deciding between both of them it is necessary to consider its user and its purpose . Ex. A laptop
will be a capital good if its used by an insurance company but if its used by a person to play games its a
consumer good .
Ex.Offices

Enterprises
Enterprise is the willingness to bear uncertain risks to make decisions in a business . In enterprise the
entrepreneurs are the main people who organize their other factors of production and who crucially
bear the risk of losing money or failure . Entrepreneurs decide what to produce according to demand
and then they find out the may of how to produce it . In businesses some of the risks that can be faces
are fire , flood and theft
Enterprise is basically risk taking or to bear uncertain risks to make decisions in a business . In
enterprise entrepreneurship is a main part in which the entrepreneurs organize the other factors of
production and also bear the risk of losing their money if their business fails . Some companies do have
rivalry and many have even lost money due to proving themselves better than the other companies .
Ex.There is always grudge between apple and samsung and due to that samsung had to play money as
they copied one of the features of an apple product to make their sales more .

Mobility of the factors of production

Occupationally Mobile - Things which can be used for a number of purposes and move

Geographically mobile - Something which is not possible to move or able to move till a certain extent

The mobility of land

Most Land is occupationally mobile as land can be used for alot of things and purposes examples.Land
can be used for farming or building a house . For example.Trees can be used to make tables or sleepers
for railways lines .
Land is also geographically immobile as it is not possible to move a section a land from place B to Place
C . Land can be moves to a certain extend like the course of river can be diverted and wildlife can be
moved .

The mobility of labour

In mobility of labour it varies a lot and it is in many types:-

● Some workers might find it difficult to move from one country to another and this is known as
geographical immobility
● Some workers might find it difficult to move from one country to another and this is known as
occupational immobility .

The differences in the price and availability of housing in different areas and countries

● Family ties

● Differences in educational systems in different countries and areas

● Lack of information

● Restrictions on the movement of workers

The mobility of capital

The geographical and occupational mobility of capital varies according to the type of capital goods

Like some type of capital goods can be transferred from one area to another ex.A photocopier used in a
bank in one area and also used by another bank of the country whereas some goods are fixed like a coal
mine and a dock .

The mobility of enterprise

The mobility of enterprise depends on the mobility of entrepreneurs

Enterprise is the most mobile factor of production and the skills involved in being an entrepreneur can
be applied in every industry . Ex.A entrepreneur can borne uncertain risks in the car industry and the
textile industry too . This is because entrepreneurs have transferable skills .

Entrepreneurs are geographically mobile as someone successful who is in a business in one country and
is likely to do the same in another country .

KEY DEFINITIONS

Opportunity Cost :The profit lost when one alternative is selected over another
Ex.There are a variety of things you can do from 5 to 6 pm and they may be shopping , read or visit a
friends but you may narrow down these choices to reading or shopping so in this scenario have to
choose the option with the best return . So , If you choose to go shopping you will miss out in visiting
the friend and vica versa .

Influence of opportunity cost on decision making

Opportunity cost and consumers

Consumers:Buyers and user of goods and services

We all are consumers and the majority of us cant buy what we like so we have to choose what we want
to buy by accounting certain factors like price , design ,durability etc .

Ex: You want to buy two books and you go to a shop and select a variety of them so you make a
decision of altering the variety to two but then you have to make the right decision with the book
having the best information coverage and the lowest price

Opportunity cost and workers

Taking a job also involves opportunity cost like a teacher might also be able to work as civil servants so
you need to carefully select the job you want to work for . Also , a job also is to be taken by considering
certain factors such as salary , standard of living and having a better life and better working conditions

Opportunity cost and producers

Producers have to decide what to make and also what is most profitable for them to make and to make
profit they account in the cost of producing the products and the demand for those products .

KEY DEFINITIONS

Production Possibility Curve (PPC) -A production possibility curve is also known as a production
possibility frontier or a production possibility boundary shows the maximum output of two types of
products and combinations of those products that can be produced with the existing quantity and
quality of resources and technology

Production Points
X(Any point inside the curve ) =There is not full use of resources
Y(Any point on the curve)=Maximum use of resources
Z(Any point outside the curve)=Not attainable

Graph
Movements along the PPC

A movement along the PPC shows that resources are being allocated and it also shows the opportunity
cost of that decision .

How does the curve show Scarcity , Tradeoff and opportunitycost

● The production possibility curve sows the idea of scarcity as you can’t produce anywhere
beyond the curve

● The graph shows tradeoff as if I start producing one product then I have to give up on another

● The graph shows opportunity cost is shown by the number of products I give up to make
another product

Opportunity cost =Lost output/Gained Output

Graph
The shape of PPC

The PPC comes in two different shapes

Constant opportunity cost

In an constant opportunity cost graph the resources to produce both the product are very similar

Like in this graph as we see that there is a constant opportunity cost between corn and wheat
So in this graph the resources used to produce corn and wheat are pretty similar like the ground ,the
climate so if you produce a certain amount of wheat you give up a certain amount of corn and if we
produce the same amount of wheat we give up the same amount of corn.

Increasing Opportunity Cost

In an increasing opportunity cost the products climate and land are completely different .
Like in terms of this graph:-
When you product the very first pineapple you give up very little cactus but when you produce the
next pineapple you probably have more and in the next one even more and in the last one you five up a
whole lot of cactus . So,when we first start producing pineapple we give up a little bit of cacti as at that
time the land is more suited towards pineapples whereas when we keep doing that we are giving up
more and more cacti as the land now is less and less suited towards pineapples
Law of increasing opportunity cost
When all resources are being used , an increase in production of one good will lead to greater forgone
production of another good

Shifts in PPC

In a PPC the shifts are in two directions right and left . If the shift is towards right there is an increase
in quantity or the quality of resources . A shift to left will be caused by the reduction of the quality or
quantity of resources.

Graph
Left

Consequences of a shit in PPC

Right - A shift to the right of the PPC increases a country's productive potential and it means that it is
capable of producing more and this is referred as potential economic growth . To take advantage of this
extra of better quality resources have to be employed
Left - A shit in the left shows uncertainty and hat the countries potential to produce is low and there is
a decline in the quality or quantity of resources

KEY DEFINITIONS
Microeconomics
Microeconomics is the study of the behaviour and the decisions of households and firms
and the performance of individual markets . Microeconomics includes factors such as
changes in earning in a particular occupation and the changes in output

Macroeconomics
Macroeconomics is the study of the whole economy and it includes topics such as the
number of people employed in the economy and changes in the country's output .

Market-An arrangement which bring buyers into contact with sellers

Economics is divided into macroeconomics and microeconomics .

Marco-Large
Micro-Small

Microeconomics
Microeconomics is the study of the behaviour and the decisions of households and firms
and the performance of individual markets . Microeconomics includes factors such as
changes in earning in a particular occupation and the changes in output

Macroeconomics
Macroeconomics is the study of the whole economy and it includes topics such as the
number of people employed in the economy and changes in the country's output .

Connection between macroeconomics and microeconomics

Macroeconomic decisions and relations add up to the macroeconomics picture . So this
means that changes in macro economy affected the changes in macroeconomy and vica
versa . For example , A reduction in the output of the car may result in the rise of the
whole countries unemployment rate

Decision maker in microeconomics and macroeconomics

● The decision makers in micro and macro economics are economic agents who
undertake economic activities and make economic decisions . These economics
agents are households , firms and government as a person who has a household is
a buyer or a consumer and a saver and worker . Firms are business concertina that
produce goods and services and they employ workers . A government(System of
 rules in a country or region) producers and provides products , financial services ,
taxes and regulates the private sector

The aim of decision makers

● Households/Consumers-They want low price and good quality products

● Workers-High pay scale and good working conditions

● Savers-Safe money and good return

● Firms(Private Sector) -As much profit as possible

● Government-Strong economy and it can be improved by objectives of
macroeconomy like full employment of labour and improve the
performance of individual markets .

KEY DEFINITIONS
Economic Systems :The institutions , organization and mechanisms that influence
economic behaviour and determine how resources are allocated

Planned Economics System -An economics system where the government takes crucial
decisions
T
Directives-State institutions given to state owned enterprises

Mixed economics system-An economy in which both the private and public sectors are
involved
Market economic system - An economic system where consumers determine what is
produced and allocate the resources by price mechanism . In this type of system the land
and capital are privately owned .

Price mechanism-The way in which decisions are made by households and firm to
decide the allocation of resources

Capital Intensive-The use of high proportion of capital relative to labour

Labour intensive-The use of a high proportion of labour relative to the capital

As economies are changing they have to answer three fundamental questions which are
:-

● What to produce?
● How to produce it ?
● Who is to receive the products produces ?

These questions arise due to the basic economic problem of unlimited wants exceeding
finite resources . For this , a decision has to be made as to how to allocate the resources .
After the decision has been made they have to decide what products to be produced and
how are they going to be produced and will they satisfy the needs of everyone .This gives
birth to a economics system which are the institutions , organization and mechanisms
that influence economic behaviour and determine how resources are allocated

The different types of economic systems are :-

The role of price mechanism

In an market economic system price changes ae determined with demand or supply .

Resources switch to products that that more popular from the ones that are less popular
and this is done by the consumers when the consumers singal the producer to produce
more as their is a change in demand .

Ex. If the demand of bananas is more then apples then the effect of demand will be like
this
Demand - The willingness and ability to buy a product
In demand , the demand and price have an inverse relationship so that means that when
demand will rise as price falls and demand will decrease as price increases . The higher
the price the less the demand as people wont be able to afford it and they would like to
switch to another products or substitutes . So , as price increases the willingness and
ability to buy a product falls

Individual and Market Demand

Individual demand - The amount of a product an individual would be able to buy at
different prices

Market demand - Total demand of a product at different prices . We can find market
demand by adding up all the individual demands at different prices .

Aggregation - The totalling up of the demand of all the potential buyers

Demand schedule

A demand schedule lists different quantities demanded of a product at different prices

prices over a particular time period

Ex.

Demand Curve
In a demand curve on the x axis we have the price and on the y axis we have the quantity
demanded .
In this curve at $90 people would stop buying tickets as the price is too high and this
graph shows how many tickets people want and at what price will there be the
maximum sales .

To save time economists draw demand curves as a straight time which do not show the
exact quantities but they do show the relationship between price and demand
The effect of a change in price on demand

Extension in demand : A rise in quantity demanded caused by a fall in the price of the
product itself .
Contraction in demand - A fall in quantity demanded caused by a rise in the price of the
product itself .

Conditions of demand

Price is not the only factor of demand . There are a range of causes for changes in
demand like an increase or decrease in demand .

● Changes in demand-Shifts in the demand curve

● Increase in demand- A rise in demand at any given price , causing the demand
curve to shift to the right

● Decrease in demand - A fall in demand at any given price ehic causes the demand
curve to shift to the left
Determinants of Demand

Changes in income

An increase in income will increase ones purchasing power so for most of the product
positive changes in income result in a higher demand . So , for this determinant there is a
positive relationship between price and income for normal goods and there is a negative
relationship with inferior goods .
Normal Goods - A product whose demand increase when income increases and
decreases when income falls

Inferior goods - A product whose demand decreases when income increases and increase
when income falls

Changes in price of related products

An increase in demand can caused by the rise in price of a substitute product . Demand
will also increase if the price of a complement falls . If there is a decrease in the price of
the substitute product then demand will decrease and it will also decrease when the
price of the complement goes up .

Substitute -A product that can be used in place of another product

Complementary -A product that is used together with another product

Advertising campaigns

Demand will also increase if there is a successful campaign as it may bring some
customers attract toward the product and end up buying that product
Changes in population
The population of a country can change in different ways like size and age . If there an
increase in number of people then demand for most products will increase . If there is
ageing population then there will be a fall in birth rate so with old people the demand
for wheelchairs is likely to increase while demand for cribs and toys to decrease and vica
versa .

Changes in taste and preferences

Certain products are influence by changes in taste and fashion like clothing , food and
entertainment . If people like vegan more then the demand for non veg will decrease and
if there is a trend of designs then the older trends will decrease and the new trends will
have more demand .

Supply - The willingness and ability to sell a product

Supply and price

Supply is directly related to price . A rise in price will lead to rise in supply . A decrease in
price will lead to decrease ins supply . If the price increases firms will be in profit and also
it will be easier for them to cover the costs of production

Individual and Market supply

Individual Supply - Supply of one plant/firm

Market supply - Total supply of a product . Market supply is calculated by adding all the
quantities that would have been supplies by each firm at each price . So here the
aggregation if the supply of each individual firm giving the market supply
Supply Schedule
A supply schedule records the different quantities supplied at different prices

Supply curve - A supply curve can also be drawn as straight lines . A supply curve always
slope up from left to right

The effect of a change in price of supply

Extension of supply - A rise in the quantity supplied caused by a rise in the price of the
product itself

Contraction of supply - A fall in the quantity supplied caused by the fall in the price of
the product itself
I

Change in supply - Changes in supply conditions causing shifts in supply curve Ex.If
there is good weather for long time then the rice production may increase so this would
make the rice farmers supply move rice

Shifts in Supply Curve

Increase in supply - A rise in supply at any given price , causing the supply curve to shift
to the right

Decrease in supply - A fall in supply at any given price causing the supply curve to shift
to the left
Determinants of supply

Changes in the costs of production

If it costs more to produce a product a supplier will want a higher price for it . The
main reasons for a change in the costs of production are :-
● A change in the price of any factor of production
● A change in their productivity

Ex.If the price of the raw material increase it will be expensive to produce the product .

A rise in the productivity of a factor of production will reduce unit cost .

Unit cost -The average cost of production . Found by dividing the total cost by output
Ex.If a worker earns 200 rupees per week and produced 100 units the labour cost per
unit is 2 and it the workers productivity increases to 200 units then the cost per unit
would fall to 1

An increase in wages also raises the cost of production and therefore a decrease in supply
but if the increase is accompanied by an equal rise in productivity then unit costs and
supply will remain unchanged .

Improvements in technology
Improvements in technology will increase the productivity of capital , reduce cost of
production and this will result in better supply . If there are improvements we can find
better quality products at cheaper priced and also there is a more efficient method of
production .

Taxes

Tax-A payment to the government

Direct taxes -Taxes on the income and wealth of individuals and firms
Indirect taxes-Taxes on goods and services

Subsidies
A payment by the government to encourage the production or consumption of a
product

Weather conditions and health of crops

Changes in weather affect a particular agricultural products so if there is good weather
for pineapples then there will be a increase in supply of it whereas if the weather is not
good then there might be a decrease in supply .

Prices of other products

If there are more firms with the same quality at a cheaper price then people might prefer
to shift to that brand so this might decrease the supply but as some companies have
brand name then people might not even shift even then

KEY DEFINITIONS

Equilibrium price - The price where demand and supplyare equal

Excess Supply-The amount by which supply is greater than demand

Disequilibrium-A situation where demand and supply are not equal

Excess demand : The amount by which demand is greater than supply

How are prices determined ?

The price is determined by the direct bargaining of the consumers and sellers in some
cases where the consumers want low price and sellers want high price . In most of the
cases related to firms the prices are determined by the equilibrium price where demand
and supply are equal .

Market Equilibrium
Equilibrium price
Where the demand and supply are equal for a price . The equilibrium price can be
found out by comparing demand and supply schedules of that product and then seeing
the intersection point of where the demand and supply are equal .

Moving from market disequilibrium to market equilibrium

Supply

Market forces the price to move towards equilibrium . If a firm sets the price of a
product above the equilibrium level then it won't sell all products it offers for sale so this
will lead to surplus (Excess supply) . So , for a firm to sell all the products it wants to it
will lower price until market clears with the quantity demanded and the exact quantity
being supplied .
Graph for disequilibrium

In this graph if the firm is willing to sell 10000 products at $6 but the consumers are
only 4000 so in this case the price will fall which will cause demand to extend and supply
to contract until price reaches equilibrium level .

Return to equilibrium graph

Demand

In demand if the price is set below the equilibrium level then there will be a shortage of
product with demand exceeding supply .

Graph
Some consumers might be anxious to buy the product even when the price is high so
this makes the suppliers recognise the excess demand will raise the price

The effect of changes in demand

● Price changes when the market conditions of demand and supply change
 ● Changes in demand cause a change in price and movement along the supply
curve

Effect of increase in demand

● Higher price encourages an extension in supply until a new equilibrium

price of P1 is reached and at this point the demand and supply are equal
● A decrease in demand causes a fall in price and contraction in supply

In this figure we can see the demand decreasing so there is a contraction of supply as
there is a surplus of unsold products .

The effects of changes in supply

● Changes in supply cause a change in price and a movement along the demand
curve .
● Initially , increase in supply meaning surplus and this surplus will decrease the
price and result in an extension in demand .

A decrease in supply will have the opposite effect as it will cause rise in price
which in turn causes a contraction in demand
The effect of demand increasing more than supply

The effect of supply increasing more than the demand

KEY DEFINITIONS

Price elasticity of demand-A measure of the responsiveness of the quantity demanded to

a change in price

PED Formula :Percentage change in quantity demanded/Percentage change in price

Calculating PED

Percentage change in quantity

Change in demand/original quantity demanded * 100

Percentage change in price

Change in price/original price * 100

Elastic demand :When the quantity demanded changed by a greater percentage than the
change in price . Elastic demand has a PED of more than 1 but less than infinity

Inelastic demand :When the quantity demanded changed by a smaller percentage than
the change in price . Inelastic Demand has a PED less than 1 but greater than zero .
Inelastic demand is represented by a steep demand curve

Unit elastic - When the PED is 1

Determinants of PED

● Substitutes- The main factor that determined whether demand is elastic or

inelastic . If a product has a close substitute it is usually elastic demand and a rise
 rise in price is a great reason to shift from the original product to its substitute . If
there is no close substitute available then the demand is probably elastic .

● Proportions of income spent -If the product takes up a small portion of the
income the its usually inelastic. Ex.Salt . On the other hand if you want to buy a
car then luxury products usually have elastic demand
● Some people also have addiction like drinking , smoking so for that cigarettes and
drink is inelastic

Differences in PED

Some of the main differences are :-

● Luxuries turning into necessities
● Due to different cultures and tastes PED may vary between countries

Other degrees of elasticity

Perfectly elastic demand

This is when a change in price causes a complete change in the quantity demanded
Perfectly inelastic Demand
When a change in price has no effect on the quantity demanded

Unit elasticity of demand

When a change in price causes an equal change in the quantity demanded ,leaving
revenue unchaves
When demand is elastic , a change in price results in total revenue moving in the
opposite direction . In this case , a rise in price will cause total revenue to fall . In the case
of perfectly elastic demand , a rise in price will cause demand to fall to zero. In the case
of unity elasticity of demand , price and the quantity demanded change by the same
percentage and so total revenue remains unchanged . In the case of perfectly inelastic
demand quantity demanded which remains uncharted when price changes . In unit
price elasticity of demand it is total revenue which does not change

Changes in PED

● PED become more elastic as the price of the product rises

 ● As soon as the price falls , demand become more inelastic

Effect of an increase in demand on PED

Effect of a decrease in demand on PED

PES-A measure of the responsiveness of the quantity supplied to a change in price
PES = Percentage change in quantity supplied/Percentage change in price

Calculating PES

Percentage change in quantity supplies

Change in quantity supplies/Original quantity supplied *100

Percentage change in price

Change in price /orginical price *100

Elastic and Inelastic Supply

Elastic Supply:When the quantity supplied changed by a greater percentage tham
change inr pcie

Inelastic Supply:When the quantity supplied changed by a smaller percentage than

change in price

Determinants of PES

● Time taken to produce

● Cost of altering its supply

● The feasibility of storing it

Other degrees of PES

Perfectly inelastic supply :When change in price has no effect on quantity supplied

Perfectly Elastic supply:When change in price has a complete change in quantity

supplies
Unit PES :When change in price hs an equal percentage change in the quantity supplied

Changed in PES
 ● Most of the products become more elastic as time increases
● Advances in technology makes supply more elastic

Implications of PES for decision making

● Consumers benefit from elastic supply as it is responsive to consumer demand

and if demand increase , price will rise . Elastic supply will cause a change in price
and the quantity supplied will rise by a greater percentage .
● Producers want their supply to be as elastic as possible as their profits will be
higher

Answers

Demand and supply are the two market forces for a product .
If demand and supply are at equilibrium price and then suddenly the demand increases
due to its advantages and on the other hand

8 markers

Intro
Examples
Demand increasing

Demand decreasing

Supply increasing

Supply decreasing
Give as many answers you can

● Any type of exchange of goods and services is known as an economy

● Evolution of money and economy
● When there is more supply there is less demand but for selling that I have to find people
● Hierarchy based upon work and status
● Feudal system get further and further developed
● When trade is going on the money earned is by capitalists
● Terminologies :Home production
● Imperialist countries
●