Economic Activity Attempts to satisfy societies wants and needs

3 Main Economic Groups:

Government Producer Consumer
Consumers interact with Producers as consumers buy products from producers
Producers interact with Consumers as they sell products to consumers
Government interact with consumers as they give income tax and producers
cooporation tax

3 decisions to make when carrying out Economic Activity:

What to produce?
How to produce it?
Who is it being produced for?

Opportunity Cost is the cost of giving up the next best alternative by making a
choice

Explicit oportunity cost - monetery

Economic Problem - "How do we allocate scarce resource to satisfy unlimited wants?"

Factors of Production
Capital - Machinery - Factory - Interest
Enterprise - Individuals who own a firm - Alan Sugar - Profit
Labour - Human Capital - Teacher - Salary/Wage
Land - Natural Resources - Oil - Rent

2 Ways to deal with the economic problem:

Capitalism - Refers to the existence of the market - Where Consumers and Producers
can negotiate for a fair price
ADV- Producers keep all the profit they make, giving them an incentive to be more
effective
Producers are encourage to innovate so that they can attract more consumers

DISADV-Firms can gain monopoly power

Workers can exploited

Communism - This is where state centrally controls and plans all economic activity
- Where a state can centrally control and plan all the economic activity
ADV-Everyone gets the same chance to build a life
Lower crime rates with a government structure

The division of labour is when a production is broken down into many seperate tasks
and each worker assigned a set task to do

Revenue = Price x Quantity

Specialisation is when an individual focuses upon completing a set task or

producing a specific product
ADV-Workers can demand and secure a higher salary
May increase employee satisfaction as if workers are specialised they are able to
concentrate on completing a task
DISADV-Workers would be demotivated repeating the same task
They will have a much less diverse skill set

ADV-Firms can become more efficient as they are more skilled and so production can
increase
If you produce more there will be a lower average cost of production <-- Economies
of Scale
DISADV-If workers are demotivated there will be lower productivity and so higher
average cost
Less care in work if demotivated and so low quality products are produced

Sectors of Production:
Primary Sector - Businesses which are involved with the production and extraction
of raw materials e.g Farmer
Secondary Sector - Businesses involved in the manufacturing and processing of raw
materials e.g Car manufacturer
Tertiary Sector - Firms which provide services to consumers e.g Hairdresser
All 3 sectors - Chain production

Protectionism is whereby Government shield their own industries from foreign

competition, by taking imports.

No opportunity cost for a free good as free good has infinite amount of supply

Tariffs are taxed based on imports

A market is a place where buyers and sellers meet to negoatiate a fair price for a
product.

A product market is the market for buying and selling a finished product

A Factor market is the market for buying and selling the factors of production
needed to make products

The point of a market is because of the economic problem and so the market is used
to rationalise products and sell to consumers

Monopoly Power is the price setting power used by the owner of a firm with monopoly
power

Money is anything acceptable as a payment for goods and services

Inflation - Sustained increase in the price level

Helicopter money - Printing money as selling it to someone

Functions of Exchange:
Medium of Exchange - people are able to exchange money rather than swapping
products directly

Unit of account - A way of comparing values

Store of Value - money can be saved and used later

A standard for deffered payments - It is possible to pay later for products

Economies of Scale is when there is a lower average cost or when you benefit from
your costs

Demand is the quantity of a good or service that buyers are willing and able to buy
at a given price in a given period of time.

Exceptions for Demand:

Veblen Goods - High Status Items which people want because they are expensive and
exclusive
Giffen Goods- Has no close substitutes and is essential
Expansion of a demand is when the price for an item decreases so the quantity
increases
Contraction of a demand is when the price for an item increases but the quantity
decreases

Factors for shift in demand:

Population Advertising Substitutes Interest-Rates Fashion-Trends Incomes
Complements

Supply is the quantity producers are willing and are able to produce at any given
price in any given period.

Factors for shift in supply:

Productivity Indirect-Taxes Number-of-Firms Technology Subsidies Weather Cost-of-
Production

Compliment - An item that goes with another e.g Tennis ball and Tennis Racket

Recession - Two consecutive quarters of negative economic growth

Cultivation - Process of making

Price Elasticity of Supply - Responsiveness of supply of change in price

Price Elasticity of Demand - Responsiveness of demand of change in price

PES = % CHANGE IN QS / % CHANGE IN PRICE

The PES for relatively inelastic supply is between 0 and 1
PES bigger than one is elastic
PES smaller than one is inelastic
PES is 0 is perfectly inelastic

PED = % CHANGE IN Quantity / % CHANGE IN PRICE

When PED is greater than one, demand is elastic.
Less than one, which means PED is inelastic.
Zero is perfectly inelastic

Inelastic Demand Example - Cigarettes, Petrol

Elastic Demand Example - Washing Machine, Fridges

Inelastic Supply Example - Housing, Concerts

Elastic Supply Example - Pizza

Firm - A business with two or more people managing the firm

Worker - An individual who is employed by the firm
Government - A group of people with the authority to govern a country or a state

Output - Amount of Products and amount of work that is being done

Productivity Gap - The difference in measured output per worker between one country
and another

Discretionary Income - Income after Tax

A competitive market - A market where there are a large number of buyers and
sellers

A monopoly is when one firm controls the market. A firm having 25% of the market
share.
Oligopoly - where small number of firms own the market - where five or fewer firm
own 50% of the market

Wages - Payments to workers which change over time

Salary - Set amount that is paid every year

Labour Market - The availability of employment and labour in terms of supply and
demand

Gross Income - Income before tax

Net Income - Income after tax

National Insurance Contributions - Contributions that are made toward public

services
Pension Costs - These are deducted from your income because you pay into a pension
each month out of the salary
Student loan repayments - These are paid to repay student loans which are deducted
when the person starts to earn more than £21,000 a year

Market Failure occurs when the free market price mechanism falls

An externality is the impact of the consumption of a good or service on a third

party that isn't included within the cost

Positive Externality:
Taking Public Transport
Vaccination Programmes

Negative Externality:
Drinking Alcohol
PLyaing Loud Music
Smoking cigarettes

Tax can be used to help reduce negative externailty

Advertising by the government can be used to help reduce negative externailty
Laws and regulations can be used to help reduce negative externailty

A government policy is when the government tries to do soemthing to prevent or

allow something

Private Benefit - These are benefits gained by parties involved in a transaction

External Benefit - Helpful effects on a third party from a transaction i.e positive
externality
Social Benefit - Overall benefit to society, private benefit + external benefit

Private Cost - Cost that are paid by the parties involved in a transcation
External Cost - Adverse effects of thrid partiesfrom a transaction
Social Cost - Overall Cost to society, private cost + external cost

4 instances market fails:

Public Goods
Externalities
Monopoly
Poverty