Economics revision Information:

The economic problem --> Unlimited wants + Finite resources = Relative Scarcity = Choice / Opportunity Cost Opportunity Cost is the best alternative foregone (real cost of choosing one thing over the other) Resources = Factors of Production (Land, Labour, Capital, Enterprise) (CELL)

Factors causing shift in demand 1. Changes in consumers incomes ~ Rise means more money means able to buy more means more demand. (Vice versa) 2. Changes in taxes on incomes ~ Rise means less money to spend on other products means less demand. (Vice versa) 3. Price and availability of other goods and services ~ Eg. DVD recorder needs DVDs so fall in DVD recorder prices could mean rise in DVD prices (Joint Demand and vice versa) 4. Changes in tastes, habits and fashion ~ Eg. People are more environmentally concerned and would rather buy eco-friendly products. 5. Population change ~ More people to buy means more demand. (Vice versa) 6. Other factors ~ Eg. Weather in the summer there is high demand for cold drinks.

Factors causing shift in supply 1. Changes in cost of factors of production ~ Eg. Wages, price for raw materials 2. Changes in price of other goods and services ~ Change in price makes private sector firms move their resources to different goods. In a free market the resources go to the goods and services that will get most profit. 3. Technological advances ~ Means more efficient performance of machines and employees. Also better product quality, etc. 4. Business optimism and expectations ~ Incase of economic downturn, firms may move resources to less affected areas after fall. Eg. Luxury items like cars. 5. Global factors ~ Droughts could cause less crop to be yielded.

A market equilibrium is when market demand is equal to market supply. When the demand isnt equal to supply it is called market disequilibrium.

Price elasticity is the responsiveness of quantity demanded or supplied to a change in price. If a good/service is elastic that means that a change in prices could cause a big change in demand/supply. If a good/service is inelastic that means that a change in price will not affect the demand/supply.

To measure PED/PES

If the number is greater than 1 then it is elastic. (very responsive) If the number is less than 1 then it is inelastic. (not very responsive)

Factors affecting price elasticity of demand 1. Availability of substitutes ~ more substitutes means more elastic 2. Percentage of income spent on goods and services ~ Goods which are only a small part of spending are usually inelastic. Eg. salt, matches 3. Durable goods ~ If prices rise people will postpone replacement. Usually elastic 4. Necessities or luxuries ~ Ns are inelastic because you cannot live without them while Ls are elastic because they are not necessary. 5. Habit forming ~ Eg. tobacco, alcohol, drugs, etc.

Factors affecting price elasticity of supply 1. Time Some goods have fixed supplies because they take time Eg. oranges 2. Availability of resources Need to be able to increase one of the factors of production.

Total revenue --> Price x Quantity sold

Normal Good Demand rises as income rises (vice versa) Inferior Good Demand falls as income rises (vice versa) Income Elasticity of Demand The responsiveness of demand to changes in income

Market economy The main aim of a business is to make as much money/profit as possible. Firms decided what to produce by choosing a want that they want to satisfy. It also depends on if there is any trend. They decide how much they want to produce by how much income would be needed and how much profit would be made. Also they would need to know how many workers and how much machinery would be necessary and if they could afford these resources. They decide for whom to produce by thinking of people who would like the product.

Free Market Economy An economy in which the prices of the good and services are decided in a free market system set by supply and demand. Advantages ~ * There is a variety to choose from * Competition means better prices and services for customers * More efficient * More innovation Disadvantages ~ * It is unfair to the people who are unable to afford them.

Planned Economy An economy where the government decides what to produce, how to produce and whom to produce goods and services. Advantages ~ * Everyone is equal Disadvantages ~ * It is highly inefficient * There are no options * There are not many new products

Mixed Economy * Private sector ~ The part of the economy that is controlled by private firms and not the state * Public sector ~ The part of the economy that is owned by the public through government agencies. * Market failure ~ Governments need to prevent or impact market failure Market failure could be failure to regulate (banks in GFC) Can be externalities that are 3rd party effects arising from production and consumption (pollution) Potential for market failure is the reason for mixed economies

 Banks were allowed to take huge risks that caused them to be so indebted that they ran out of money. Governments had to buy big parts of banks to prevent a collapse of the financial system.

Nationalism Private businesses being bought by the Government Privatization Government selling state-owned assets to the private sector (to raise money or increase efficiency)

Capital and Consumer Goods Capital goods are goods that produce other goods (machinery) and they are an investement. Consumer goods are goods that satisfy immediate wants and demands. Economies need a balance of both capital and consumer goods.

Production Possibility Frontier They are graphical representations of opportunity cost.

Division of Labor Workers concentrate on performing a few tasks and then exchange their production (through their wages) for other goods and services this is specialization. Advantages Businesses Lower cost of production Workers are quicker Increased output Disadvantages Businesses Training costs Decreased efficiency (boredom) Reliance on few workers Workers Boredom through repetitive tasks Replacement by machinery (possible) Workers Improved skills Higher pay for specialized work

Demand of labor It is a derived demand Level of demand for goods and services in an economy affects the demand for labor

Eg. In a recession where overall demand for goods and services is less, the demand for labor will be less) Demand for labor is firms willing and able to employ people Wages are the price of labor Factors affecting demand of labor 1. Consumer demand for goods and services 2. Increased productivity 3. Changes in price and productivity of capital 4. Changes in other employment costs

Supply of labor Supply of labor is people who are willing and able to work

Factors affecting supply of labor 1. Changes in net advantages of an occupation 2. Demographic changes 3. Education and training

Why do different people who do the same job earn different amounts? - Regional differences (Shortage of workers with particular skills in some parts of the country) - Length of service (More experiences and productive workers have more pay) - Local pay agreements (Trade unions could agree that all workers with same skill earn the same no matter where they are in the country) - Non-wage rewards (Offer workers other things rather then higher pay) - Discrimination (to gender, age or religion) Interference in Labor Markets Trade Unions What are they? Trade unions are establishments that represent people at work. Their purpose is to help protect and improve the conditions that people work in and peoples pay. They also work to get for laws and policies that will benefit workers. Why do they exist? They exist because workers have very little negotiating power so by joining forces the workers have a chance for voice and influence.

How do they achieve their objectives? They would try to negotiate for a better pay and better benefits. They may have petitions or work slow campaigns. Their last resort would be going on strike.

What effect do they have on the business? They come out of business earnings. This could result in workers being fired even though their pay is increased.

Minimum Wage Legislation What is it? It is a ruling that is issued by the government that requires all workers to be paid a minimum amount. This means the poorer people can have a better standard of living. However it may cause unemployment among the less skilled. How could you monitor the impact of minimum wage over time? Watch the unemployment rates over time. If minimum wage was lowered then unemployment should lower as well but if it rises then so will the unemployment rate.

Production and Productivity

Production ~ The making of goods and services to satisfy peoples demands Productivity ~ The amount of output that can be produced from a given amount of input. (How efficiently resources are used to maximize production)

Inputs (raw materials)

Production

Output

(finished products) [Secondary sector] [Tertiary sector]

[Primary sector]

Primary sector Extracts and harvests products from the earth Secondary sector Manufacturing, processing, and construction Tertiary sector Provides a service to the other two sectors and to consumers.

Why do developed countries tend to be tertiary? Richer countries tend to rely more on imports and specializing in the tertiary sector. They can afford to do this and its cheaper.

Cost, Revenue, Profit Formulae: Total Cost = Fixed Cost + Variable Cost Total Variable Cost = variable cost per unit x quantity produced Average Cost = Average Cost per Unit = Total Revenue = Price x Quantity Sold Profit = Total revenue Total Cost

Economies of scale

1) Financial Economies ~ i) A larger firm can borrow money from a number of sources ii) Own more assets iii) Able to raise money from general public iv) Charged less interest on loans

2) Marketing economies ~ i) Large firms are able to buy in bulk ii) Able to afford specialist buyers iii) Can afford advertising

3) Technical economies ~ i) Can afford specialist workers ii) Afford research and develop new methods iii) Afford more transport

4) Risk-bearing economies ~ i) Buy materials in bulk so less risk ii) Produce more than one good (diversification)

Internal Economies of scale The cost savings that result from a firm being large Diseconomies of scale Problems with being too big a) Management finds it difficult to control b) Labor over-specialization could lead to bored workers.

External Economies of scale Things that are outside the business but benefit the business Access to skilled labour Infrastructure (Eg. Universities, roads, ports) Support businesses (Eg. Detroit has Ford and GM located there as well as firms that produce tires, windscreens, etc.)

Competitive markets Competition is when multiple businesses are trying to sell the same products to the same customers. They compete on: Price Service Convenience Innovation

Competition is good for consumers because it increases efficiency. It is bad for business though because they have to share the market and will receive less revenue and therefore less profit. In the long-term however, it is good because they cut costs, be streamlined and invent new products.

Large Firms ~ They have the advantage of economies (Eg. Carrefour) but they are less flexible when it comes to responding to consumer demands.

Small Firms ~

Can cater to niche (small, specialized) markets but do not benefit from economies of scale (Eg. monocle shop, local corner store)

Limitations in the growth of a small business ~ (1) Access to capital (money) (2) Aims of the entrepreneur (3) Size of market (niche)

Monopolies and Oligopolies A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. (Barriers to entry) An oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly; an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. An oligopoly is the domination of a market by a few firms. A duopoly is a simple form of oligopoly in which only two firms dominate a market. Where an oligopoly exists, a few large suppliers dominate the market resulting in a high degree of market concentration; a large percentage of the market is taken by the few leading firms. An oligopoly usual depends on high barriers to entry. It often leads to a lack of price competition (although there may be fierce competition in terms of marketing etc), which is the problem from the point of view of consumers. Because an oligopoly consists of a few firms, they are usually very much aware of each others actions (e.g. changes to prices). This can lead to informal collusion as firms match prices to avoid provoking a price war. This has a similar effect to deliberate collusion, but is harder for regulators to control. This also means that when price cuts do occur, the market tends to have to follow the lead of any one firm. Eg. Soft Drinks Coke vs Pepsi

Barriers to entry Makes it difficult for a new entrant to break into the market

 They make companies in the market more valuable as they reduce the risk of any new competition Capital costs are usually the main barrier to entry in the industries where the investment that needs to be made in fixed assets by a start-up is high relative to the sales and profits those assets will generate In many such industries the cost of the fixed assets is a sunk cost as far as the existing suppliers are concerned. This means that they will accept lower prices rather than scale back volumes, meaning that new entrants are likely to find that they drive prices down too much for the market to be worth entering. Branding, distribution and customer relationships can also create strong barriers to entry.

Privatization It involves the private sector taking over public sector activities.

Consumers Disadvantaged customers will not be provided for Potential reduction in quality of service Potential improvements

Workers Uncertainty May lead to job losses and pay cuts but productive workers may benefit from pay rises

Firms Will reduce costs and attempt to increase profitability May have incentive to expand

Governments Has less responsibility (but still has to regulate) Will have less expenditure and should be able to lower taxes.

The Economy Less inefficiency leads to better use of scarce resources Regulation 1- Solution to regional unemployment (rural, countryside)

2- Reduce congestion 3- Reduce income inequality (Eg. Minimum Wage Legislation)

Economic Growth Governments have 5 economic objectives Control Inflation Minimize unemployment Increase GDP (Gross Domestic Product) Maintain balance of payments (imports and exports) Protection of the environment

Overall government policy tries to use the scarce resources to their full use to meet as many wants and needs as possible. This will lead in a higher standard of living for everyone. Governments can use fiscal policy (treasury (money through tax)) or monetary policy (changing interest rates) to achieve their economic objectives. When a countrys GDP is falling, this means there is no economic growth. It will cause problems like: o As output is falling, fewer workers are needed and unemployment will occur. o The average standard of living will decline. o Business owners will not expand their firms, as people will have less money to spend.

Gross Domestic Product The value of output (goods and services) produced within the country over a 12 month period

How to increase GDP Easy -- Just produce more goods and services Specifically -- Increase the factors of production OR increase efficiency of the factors of production Also need political stability

Governments need to increase: Land Exploration for natural resources

Cleaning forests for use as agricultural land Reclaim land from the sea Labour Increase birth rate (subsidies, paid maternity leave) Increase immigration Increase training and immigration

Capital Increase expenditure on infrastructure Direct resources from customer goods Tax breaks for businesses to invest in capital goods Enterprise Regulate to stop monopolies Training for entrepreneurs Subsidies and tax breaks

Nominal VS Real GDP ~ The difference is inflation Nominal means value of output Real means value of output minus inflation

Limitations of GDP ~ Non-marketed items Underground economy (black market) Human cost of production Externalities Distribution of income Inflation When there is a rise in the average level of prices

How is inflation measured? Using CPI (Consumer Price Index) The government takes a basket of essential goods and then they compare it to the price in the previous year. The change in price is expressed as a percentage ad this percentage is then the official inflation rate.

Causes of inflation: Cost-push inflation ~ The cost of production increases and firms respond by increasing prices and reducing supply. Demand pull inflation ~ too much money chasing too few goods. An increase in aggregate demand in the economy raising prices, usually during economic boom. If wages rise faster than productivity then consumers competing with their extra money will drag up prices. Excessive monetary growth ~ Some economists argue that inflation can occur if there is an increase in the economy even if it is not fully employed Suppliers experience so much demand for their limited amount of goods that they decide to raise prices

Costs of inflation: Uncertainty -- Difficult for households and firms to plan ahead Unemployment Redistribution of income -- Those on fixed income will suffer but those on variable income (Eg. Workers in a strong trade union) may gain. Menu costs -- Constantly changing price labels, menus, etc. because of new prices. Its especially costly to change fixed capital (Eg. Petrol pumps, vending machines, parking meter) Shoe-leather costs Time and energy spent looking for cheapest goods

Why do costs rise? Wage increases (unions) Monopolies (excess profits) Import price rises Tax increase Exhaustion of natural resources

Unemployment It is when people who are willing and able to work do not have jobs.

Types of unemployment: Cyclical unemployment ~ Demand for goods and services is very low which means fewer workers needed.

 Structural unemployment ~ When the economy changes. Eg. Instead of CDs demand moves to ipods. Workers in CD industry will become unemployed or technological progress makes changes production becoming labour-intensive. (Eg. Less bank jobs because more ATMs) Frictional unemployment ~ Where people are between jobs. Seasonal unemployment ~ The demand for jobs fluctuate depending on the season Eg. Ski instructor in the summer Voluntary unemployment ~ People choose to enjoy 24 hours of leisure time rather than working. It can cause welfare problems

Consequences of unemployment - Under-utilization of labor (factor of production) = less GDP Government expense (welfare payments) and lack of income tax revenue Increasing incidents of crime, graffiti, suicide, and psychological illness (whole society suffers) Individual loss of income and self-esteem

Balance of Payments Countries trade with each other to get access of different goods and services Balance of trade = value of visible exports value of visible imports Balance of invisible trade = value of invisible exports value of invisible imports Visible trade is the trade of goods (Eg. Oil, cars) Invisible trade is the trade of services (Eg. Education, banking) When a countrys imports exceed exports it is in deficit When a countrys exports exceed imports it is in surplus Governments try to maintain the balance of payments by avoiding large deficits or supluses

Environmental Protection Some environmental challenges > Growing municipal and industrial waste > Contribution of EU countries to global warming > Deforestation > Risk to global bio-diversity > Congestion, noise, air pollution

> Supplies of drinking water under threat > Depletion of ocean fish > Over-extraction of ground water

What are the standard pillars of environmental policy? > Enforcing property rights on natural resources > Tax on pollution to change market prices and change incentives and behavior > Create incentives for the market to produce innovative solutions > Promote the use of renewable energy sources > Using market mechanisms like carbon trading

Command and control E.g. Legal restrictions on emissions (used by the EU in the car industry) Stronger control of property rights for commonly-owned resources Regulations by-pass the market mechanism but have problems of their own Monitoring: Monitoring emissions of polluters can be costly and difficult Penalties: Penalties for violations must be significant enough to dissuade firms from ignoring legislation

Moving to low carbon economy De-carbonization 1/ Energy efficiency i.e. increasing efficiency in homes, retail stores, factories (important distributional effects) 2/ Expanding renewable sources of energy 3/ Carbon capture and storage -every power station will need this kind of CCS investment (costly) 4/ Reducing emissions from deforestation and degradation (can be hugely significant)