OCR - Microeconomics

The basic understanding of microeconomics excluding government intervention - sorry

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Microeconomics ­ Demand and Supply
There are 4 factors of production:
Land ­ Natural Resources
Labour ­ Workers/employees
Enterprise ­ Risk taker who combines the other factors of production
Capital - Machinery
Basic economic needs are FINITE, SCARCE or LIMITED, they include:
Economic wants and needs are INFITE OR UNLIMITED.
The ECONOMIC PROBLEM is: How to allocate scarce resources among alternative
sources, (because resources are limited whereas wants and needs are infinite.)
Economic Need ­ Something you need for your basic survival.
Economic Want ­ Something you want to improve your quality of life.
Scarcity ­ Resources which are finite or limited.
Choice ­ Making a decision about alternatives.
Opportunity Cost ­ The cost of the next best alternative which is foregone when a choice
is made.
Factor Endowment ­ The stock of `factors of production'
Production ­ The output of goods and services.
Specialisation ­ The concentration by a worker, firm, or a whole economy on producing a
narrow range of goods and services.
Exchange ­ When you swap and trade goods and services
Division of Labour ­ When a firm splits up tasks amongst the workers
Productivity ­ The output per person
These show the maximum quantities of different combinations of output of two products
given current resources and the state of technology.
This diagram illustrates the concept of opportunity cost by showing that the
opportunity cost of increasing car production from 400 to 800 means forgoing 200
X represents a point on the graph which is inefficient, where the economy is
producing less than it could from the resources available. Y represents a point on the
graph which is currently not possible (represents point of scarcity).

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Sometimes the PPC shifts outwards (to the right) due to:
Increased specialisation
Technology advancements
New resources
The curve can also shift inwards (to the right) due to:
Non-renewable resources
Natural Disasters
Competitive Markets
Market - A place where goods and services are exchanged between consumers and firms
(and a price is agreed)
Supply ­ The quantity of a product that producers are willing and able to provide at different
market prices over a period of time.…read more

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Market equilibrium this is established at the point where supply = demand. At this point, a
market price is agreed at p, and an equilibrium quantity bought and sold at q.
Demand shifts the right
E.g. price of substitutes increase. As a result of demand
shifting to the right, demand is bigger than supply. This leads
to a shortage meaning an increase in price.
surplus ­ is the difference between the
price consumers are willing to pay and the price
they actually pay.…read more

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Number of closeness of substitutes
- The greater the number of substitutes the more elastic the demand will be.
Unique goods/services
- A good or service which is unique, has no substitutes. Demand will be inelastic.
Luxury or Necessity
- Habit forming goods will be inelastic e.g. cigarettes
- Luxuries will be inelastic
- Necessities are inelastic
The proportion of income taken up by the product
- The smaller the proportion of income taken up, the more inelastic the demand.…read more

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Inferior goods ­ As income rises, the demand for these goods fall. Hence YED will be
Normal/Luxury goods ­ As income rises, the demand for these goods increases.
Hence YED is positive.
- If YED is negative = the good is said to be inferior
- If YED is positive and less than 1 (e.g. YED = +0.5 +0.08), the good is said to be a NORMAL
- If YED is positive and greater than 1 (e.g. +1.2, +3.…read more

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If it's easy and quick for a producer to change supply of a good in response to
changes in price then the supply of that good is described as being RELATIVELY
If it's difficult and time consuming to change supply in response to changes in price
% change in quantity supplied
P ES = % change in price
PES = >+1 price elastic supply
PES = +1 unitary elastic supply
PES = <+1 price inelastic supply.…read more


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