Economics notes

Service vs Goods

Service Goods

Non-physical (cannot touch) Physical (can touch)

Ex- Haircuts Ex- Table

Consumed as soon as it is produced (There is Can be stored (are tangible)

no time lag between the consumption and
production of services

It provides something like a facility or an

amenity

Needs vs Wants

Needs Wants

Goods are services that are essential for survival Not necessary for survival but are demanded by
economic agents to ful l their desires

Something that you cannot live without Something that you desire

For example: clean water, nutritional food, For example: designer clothes, Ferrari
education

Why do we NEED education?

- enables us to be modern, responsible citizens on the globe.
- matures thinking and stimulates development as a person.
- Enables us to get into higher paying jobs
- it makes us responsible and skilled individuals who are able to better the society
or t into the ecosystem to provide and help our families and the people around
us.
* Use word scarcity instead of not enough

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 Basic Economic Problem
- It is a problem related to the allocation of resources (or problem of choice) arising
due to limited means in relation to unlimited wants.

- It is concerned with how to best allocate scarce resources in order to satisfy

people’s unlimited needs and wants

- Scarcity of needs because of the unlimited wants and limited means of resources
for the wants and needs

- Key words:

• Allocation of resources: distribution of resources

Three Fundamental Questions in Economics addressed by

economic agents?
- What to produce?
• MAINLY Whether to produce capital goods like plants and machinery or whether
to produce consumer goods like sanitiser and mobile phones?

• What is the consumer asking for?

• what is the requirement of the economy?

- For whom?

• Rich (pro ts of producer remain high) or poor (reduction in inequality)?

• High income consumer, middle income or low income?

• For example: Ferrari has a wealthy costumer base (high income customer).

• Low income: basic clothes, rice of poor quality

- How to produce?
- using more labour (provides more employment) like steel or using more
machinery (provides more e ciency) like pots and pans?

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Consumer goods
- Consumer goods cannot be used to produce more goods, it is used for ourselves

- For example: phones

Capital goods
- Capital goods produce more goods from them

- For example: machinery

Economic agents (decision makers)

- Individuals or households. For example: a ti n maker

- Firms (businesses that operate in the economy). Their main aim is to make pro t.
For example: Tata Power

- Government. For example: The Government of India

Choice trade o
- A list of choices that were neglected while making a choice decision.

- List of all the choices after the next best choice

Opportunity Cost
- The cost of the next best opportunity forgone (given up) while making a decision

- Whenever something is not scarce, it does not have any opportunity cost.

Choice trade o vs opportunity cost

- In choice trade o it is a list of all the choices that you neglected whereas the opportunity
cost is only the next best opportunity

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 Economic vs free goods

Economic Goods Free Goods

Limited in supply Unlimited in supply

Human e ort is required to make it No human e ort is required (it is already made)

Uses scarce resources to produce

In scarce relation to the demand fo the product

For example: oil, housing, cars etc For example: air, sea, sunlight etc

Has opportunity cost No opportunity cost in the production or

consumption

Factors of production
- Scarce resources needed to produce goods and services

- Refers to the resources required to produce a good or service, namely land, labour,
capital and enterprise.

- Scarce resources: 4 categories: land, labour, capital, enterprise

- Land
• Agricultural land: Land used to grow wheat or fam cattle

• Natural ecosystems: Sea Bed, Desert and Forests

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• Material Land: You can make anything on it

• Minerals: Oil, Silver, Coal, Gold, Iron ore

• Features:

I. Not be made or destroyed

II. Its use can be changed

III. Anything that is used to be something else

IV. Resources sourced from land

V. Labour

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- Capital
• Man-made stu

- Enterprise

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 Money is not a factor of production
- A broker of trade or a medium of exchange

- Not a productive resource

- Helps you to exchange inputs like land, labour, capital and enterprise, but it
cannot literally help you to produce the good or service.

- For example, when building a wooden chair, the wood, saws, nails and labour are
the productive resources that directly build the good. Money is needed to pay for
the inputs, but it is not directly used in the manufacturing process. 

Rewards (factor payments) from factors of production

- In the resource (or factor) market, households supply the factors of production –
land, labour, capital or entrepreneurship

- rms demand those factors of production produce goods and services.

- The payment from the rms to purchase these factors is called ‘factor income’ or
‘factor payments’.

- Factor payments are the income people receive for supplying the factors of
production: land, labour, capital or entrepreneurship.

- The factor payment for land is rent , for labour is wages , for capital is interest ,
and for enterprise is pro ts .

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 Factor of production Factor payments

Land Rent

Labour Wages

Capital Interest

Enterprise Pro ts

Mobility of Factors of Production

Occupational mobility Geographically mobility

Change of occupation Change of place

Refers to the extent to which the labour is Refers to the extent to which labour is able to
willing and able to move to di erent locations move between jobs. Retaining and upskilling
for employment purposes help workers to improve occupational mobility

When a resource is able to change tasks When a resource is able to move from one
location to another

For example: A labourer going from being an Can be regional, national or international
electrician to an electrical engineer

For example: A mask making machine which is

a factor of capital, could be moved from India to
China

- Labour can learn skills to become occupationally mobile.

- All labour can be occupationally mobile but not all labour can be geographically
mobile.

- Mobility of Labour is high

- Economics teacher can easily become a business studies teacher but not so
easily a physics teacher

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Requirements to enable the mobility of a labour
- Occupational : Financially supported to take new courses etc, cost of training,
length of training, capable of starting new work, Gaining new knowledge (subject
knowledge of Physics to change from an economics teacher to a physics
teacher)

- Geographical: Willingness, nally viable to change places, VISA- permit to travel,

cost of living (the place might be more expensive than where the person is living
right now), language barriers

Investment
- Gross Investment:
• Addition to the existing stock of capital each year

• It is the total expenditure done for buying capital goods or adding to the capital stock
over a period of time

• This investment is called a gross investment

• Gross investment + depreciation

- Net Investment:
• Only gross investment

Depreciation
- The annual wear and tear cost that is used to carry out maintenance of machine or other
capital goods

- Maintenance cost

Quantity and Quality

- Productivity

- Land, labour, capital and enterprise

https://igcseaid.com/notes/

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Explicit Cost
- The out of pocket expenses that is undertaken to buy or produce something

- Can be nothing

Implicit Cost
- Imputed costs

- What you could’ve used for

- What else could you have used that money or resource (even time) for?

- Does not involve cash payments

- There is always an implicit cost

*Monopoly is when there is only one seller in the market

Opportunity cost for Consumers

- They have limited income and unlimited needs to maximise their satisfaction from
the consumption of goods and services

Opportunity cost for Producers

- They have limited factors of production.

- He has to make the best of what he has.

- Whether he needs to use machines in production or whether labour intensive

production, all have to be used judiciously.

- He has to maximise his pro t

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Opportunity cost for Government
- They have limited resource

- Tax payers money is a limited resource that government has to spend in order to
maximise welfare of its people

- Whether to spend on military or hospitals. Choosing one over another requires

opportunity cost

Assumptions
- In order to simplify real life

- Assumption 1: All the resources are utilised e ciently and fully

- Assumption 2: Both technology and resources are xed and do not change

- In an economy, millions of goods are produced but we will assume that

(Assumption 3: only two goods are produced in the economy)
- Assumption 4: The resources are not equally e cient in production of both the
goods

Production Possibility Curve (PPC)

- In order to gain something, you have to lose something

- Maximum possible output combinations that a country can produce for two
goods given that the technology and the resources remain xed and fully utilised

- Maximum possible output

- Maximum output of two goods that a country can produce considering that the
resources and technology are xed and fully utilised

- Fixed technology and resources

- Reallocation of resources is possible but not addition

- Fully utilised resources

- Shows the maximum combination of any two categories of goods and services
that can be produced in an economy at any point in time i.e the productive
capacity of the economy

- Why is PPC curve concave? Law of increasing opportunity cost

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 - Concave PPC= When there is an increase in opportunity cost

- Linear PPC= When the opportunity cost is the same

- Point outside the PPC means that the goods cannot be produced in those
numbers in the economy because of the limited resources and technology.
Beyond capacity

- Point inside the PPC means that all the resources won’t be e ciently used. Not
all the resources are used. Underutilisation of resources

- Point on the PPC means that all the resources are used e ciently and all the
resources are being used. It’s a possible combination. It’s not violating the
principle of ceteris paribus. Maximum possible output that can be produced.

- Shift of PPC vs Movement on PPC:

• Shift of PPC: When PPC moves outward, inward etc, change the curve

• Movement on PPC: Reallocating its resources, change only the points on PPC

Law of Increasing Opportunity Cost

- When the production of one thing increases, the other decreases this is called the
law of increasing opportunity cost. This is due to the e ciency of labour and the
di culties in occupational mobility of labour (skill transfer etc).

- Initially, the decrease is less because the resources that are mobile can be used
in the manufacturing of the other good

- Describes how opportunity costs increase as resources are applied. (In other
words, each time resources are allocated, there is a cost of using them for one
purpose over another.)

*Ceteris Paribus- “holding other things constant” Every other factor a ecting is
constant. All the resources and technology remain xed

Microeconomics
- Study of particular markets and sections of the economy rather than the
economy as a whole

- Concerned with the economic factors that a ect choices and the e ects of
changes in these factors on decision makers.

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 - Studies the economic behaviour of individuals, households and rms in relation to
these factors

- Decisions made by individuals, households, producers, rms or government

*Tax between producers and government is corporation tax

*Tax between consumers and government is income tax

In ation
- Steady increase in prices

Monetary Policy
- Central banks

- Independent monetary authority

- Regulate money supply

- Refers to central bank activities that are directed toward in uencing the quantity
of money and credit in an economy

Fiscal Policy
- The tool with which government allocates its resources in an economy

- Tools: Tax and government expenditure

- Refers to the government's decisions about taxation and spending

*Both monetary and scal policies are used to regulate economic activity over time.

Demand Side Policy

- Aggregate demand of the products and services

- About in ation

- Employment

- If a government has to stimulate demand in economy what should it do? (Fiscal

policy)

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 • Reducing in taxes

• Reallocation of taxes. Taxing rich and subsidising poor

• Eg: Electric vehicles to stimulate their demand

• Central Bank

• Prints the money

• Managing interest rates

• Controlling in ation

Supply Side policy

- -All the ways in which a country can produce more

- Those policies which can help in better aggregate productivity in the economy

- Transportation: Wider access to markets, Transport you product to city

- Better roads: Increased trade

Complementary Goods
- For ex: Car and Petrol

- You need one for the other

Substitute Goods
- For ex: Coke and Sprite

- You can substitute one for the other

Demand
- A person can only demand any good at service if they have willingness and ability
to buy

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Law of Demand
- If the price of a commodity or service is increasing, less number of its units are
demanded

- Luxury products violate law of demand

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Determinants of Demand
- Price of the commodity

- Income of the buyer

• Higher the income, more the demand

• If a government imposes high tax on a commodity, the demand for that good will
fall

- Price of related goods

- Habits, tastes and preferences

- Future expectation of prices

*Quantity demanded is only a ected by price, Demand is a ected by everything

except price

*ALL NON PRICE factors show the change in DEMAND, while Price Factors show
the change in QUANTITY DEMANDED




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Production

- Process of turning a range of input resources into an output of goods or services

that are required in the market

Supply
- Ability and willingness of rms to provide goods and service at a given price level

- The amount of goods and services rms are able and willing sell to consumers in
a market is called quantity supplied

Law of Supply
- If the price of a product is to increase, the quantity supplied will increase, given all
other factors are equal (Ceteris Paribus)

- Aim is to maximise pro t

- As soon as producers see the market price is rising, they would want to supply
more of it

Firms
- Aim is to maximise pro t

- Incentivised by the price: higher price, they are motivated to sell more

*DO NOT TOUCH AXIS WHEN DRAWING DEMAND AND SUPPLY DIAGRAMS

• * ARROWS WERE NOT REQUIRED





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Determinants of Supply
- Price: If the price of a good increases, the quantity supplied increases (law of
supply and ceteris paribus). Movement of curve (Price factor)

- Time: Shift of curve (Non-price factor)

- Weather: Natural calamities can disrupt supply. Shift of curve (Non-price factor)

- Opportunity Cost: The price that a seller is going to receive for the alternative
goods, may be substitutes or complements. Shift of curve (Non-price factor)

- Tax: Increase in taxes, there will be forward shift of curve. Shift of curve (Non-
price factor)

- Innovation: As new technologies and machines are innovated, humans get

replaced, work happens faster, more supply. (Forward shift of curve)

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- Production Cost: Rise in production cost, raw materials, supply will shift inward
and vice versa

- Subsidy:

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*Point of equilibrium (E) when the demand meets the supply on the diagram

Market equilibrium
- When the quantity demanded is equal to the quantity supplied

Market disequilibrium
- When the quantity demanded is more than the quantity supplied

- When the demand is more then at the supply its excess DEMAND or shortage
and when the supply is more than the demand its excess SUPPLY or surplus

*Productive capacity: An point on PPC

*There are large consumption and production of goods and services in a country.
Economy is de ned as something which captures both

*Country is progressing: Social Structure is changing

*Economy is progressing; the production of goods and services have increased.

FOP, Demand and Supply of all goods and services are studied

*Production and consumption of goods and services

*The strength of an economy is determined by the scale of its production

Types of Economies:
- Mixed Economy: Government and Individuals (India)

How to produce: Using labour because of population needs employment

Consumer or capital goods? Both. Capital goods to increase e ciency, quantity of

output and to enable production of further goods. Consumer goods to help increase
quality of life. So, if people have higher standards of living, they will demand more

- Free market: Controlled by rms

- Centrally Planned:

*The process by which the forces of demand and supply interact with each other to
determine the pice of good/service in an economy is called price mechanism

*In a free market economy, the price mechanism

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