Economics

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  • The Market System
    • The Economic Problem
      • The Economic Problem is where we have unlimited wants but limited resources.
        • This creates scarcity.
          • Because of scarcity, opportunity costs are created.
          • This means that we have to be careful about our allocations of resources
    • Economic Assumptions
      • The first economic assumption is that consumers aim to maximise benefits.
        • They do this by usually buying the cheapest option if having to decide between multiple different goods or services.
        • Another way that consumers do this is by buying the best quality product between similarily priced goods and services.
        • However some consumers don't always do this.
          • Sometimes it is difficult to calculate the benefits of consuming the product.
          • Some consumers have buying habits, which can affect their ability to make rational decisions. An example is brand loyalty, consumers may buy the same brand out of habit, which may not always be the most rational option
          • Often, consumers are influenced by other consumers when it comes to buying products. Young consumers may inherit habits from their parents because they trust their parents and are familiar with the brands.
            • Some consumers are influenced by their friends because they try to fit in or succumb to peer pressure
      • The second assumption is that businesses aim to maximise profit.
        • Businesses do this by buying the cheapest raw materials as long as the quality is the same.
        • Another way that businesses do this is they will charge the highest price that the market can stand.
        • However, not all businesses don't always do this
          • Business owners tend to delegate some decision making to others within the business. Some people will then priortise profit if their salary depends on the more they sell.
          • Some businesses want to maximise customer care. They may fund more money into training staff so that customer service is better.
          • Alternatively, some businesses are set up as charities. They aim to maximise raise awareness and money for a particular cause.
          • Some businesses are also set up as social eneterprises. They aim to improve human or environmental wellbeing
    • Elasticity
      • There are three types of elasticity
        • PED
          • PED measures the responsiveness of demand to change in price
          • For a good or service to be price elastic, it has to be higher than 1, and for inelastic goods it has to be less than 1.
            • You need to ignore negatives when determining the price elasticity.
          • Elastic demand means that demand is responsive to a change in price.
          • Inelastic demand is unresponsive to a change in price.
          • To calculate PED: % change in quantity demanded            /       % change in price
          • Factors affecting PED are:
            • Degree Of Necessity-- we will buy it regardless of the price.
            • Number of Substitutes-- consumers may buy alternatives if the price changes.
            • Proportion of income-- if people's incomes are higher, they are more likely to buy a product regardless of the price.
        • PES
          • PED measures the responsiveness of supply to change in price.
          • To calculate PES: % change in quantity supply            /       % change in price
          • If the value of PES is less than 1, supply is inelastic
          • If the value of PES is more than 1, supply is elastic.
          • Factors affecting PES are:
            • Stock levels-- Higher stock levels makes it easier to supply (elastic)
            • Production speed-- Fast production makes it easier to supply more (elastic)
            • Spare capacity-- if the business is working at full capacity, it's difficult to increase supply (inelastic)
          • Agricultural goods have low stock levels because they are perishable. They also have slow production speeds.
          • Manufactured goods are easy to store therefore have high stock levels. There is also fast production speed due to technology
        • YED
          • YED measures the responsiveness of demand to change in income.
          • For YED to be elastic, it has to be >1 or < -1, between 1 and -1 means the good or service is inelastic
          • If income decreases, normal goods' demand decreases, whereas inferior goods' demand increase.
            • An example of an inferior good is Carrefour baked beans.
            • An example of a normal good is Heinz baked beans.
          • Elastic demand means that demand is responsive to a change in income.
          • Inelastic demand is unresponsive to a change in income.
          • To calculate YED: % change in income       /       % change in price
    • Mixed Economy
      • A mixed economy relies on both public and private sectors. The GDP should be roughly 50-50.
        • In reality, no economy is fully planned or market.
        • Mixed economies are common in most countries.
          • The decisions on what to produce, whom to produce for and how to produce are made by both the consumers and the state
        • What To Produce:
          • Some goods are better provided by the private sector, for example clothes, leisure, food and entertainment.
          • However, things like education, health care and infrustructure are likely to be provided by the state
        • How To Produce:
          • The private sector set up businesses, aiming to maximise profit. Therefore competition exists, which means consumers benefit from choice and variety. Competition can also lead to cheaper prices.
          • The public sector provide efficient services, and have the citizens best interest in mind.
        • Whom to produce for:
          • The private sector provide goods to whomever can afford them and the market system is responsible for their allocation.
          • Most public sector goods are provided for free to everyone. They are paid for from taxes. In some mixed economies, the state provide for people who cannot work due to disability or illness.
    • Externalities
      • An externality is the third party effects from production and consumption of goods and services for which no compensation is paid.
      • Production activity can result in costs that are incurred by the third parties.
      • External costs are the negative spillover effects of consumption or production.
      • Positive externalities are the benefits to a third party that are not included in the price of the activity.
      • Private costs are costs of producing goods/services that have to be paid for by those that use them
      • Social costs are the costs of producing goods or services that are paid for by society-- social costs = private costs + external costs
      • Private benefits are the benefits of consuming goods or services that are received by an economic unit, these are paid for
      • Social benefits are the benefits of consuming goods or services that are received by society, therefore social benefits = private benefits + external benefits
      • Examples:
        • Negatives of consumption are
          • Smoking
          • Gambling
          • Alcohol consumption
          • Automobile use
          • Traffic Congestion
        • Negatives of production
          • Oil production-- spills & pollution
          • Production of goods by the use of fossil fuels
        • Positives of consumption
          • Education benefits society.
          • Healthcare & vaccines
        • Positives of production
          • Tree farms
          • Development of new technologies
          • Training for workers

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