Unit F581: Markets in Action (Microeconomics) FULL REVISION NOTES

MARKETS IN ACTION NOTES
THE REASONS FOR INDIVIDUALS, ORGANISATIONS AND SOCIETIES HAVING TO MAKE CHOICES
Economics is the study of how to allocate scarce resources in the most effective way.

DESCRIBE WHAT ECONOMISTS MEAN BY `THE ECONOMIC PROBLEM'

This is the fact that resources are scarce in relation to wants…

1. Market economy

Resources are allocated by the forces of demand and supply through the price mechanism. Decisions on how resources
are to be allocated are invariably taken by millions of people and thousands of firms. The government has little or no
direct involvement in this process. Households and firms…

diminishing returns. Diminishing returns occurs because not all factor inputs are equally suited to producing different
goods and services.




Reallocating scarce resources from one product to another involves an opportunity cost. If we go back to
the PPF diagram, if we increase our output of Good X (i.e. a movement…

PPFs can also be used to show the difficult choices that have to be made by many developing economies.
Such economies invariably have low standards of living, expanding populations, little or no economic
potential. Consequently, scarce resources have to be allocated to meet present needs at the expense of
investing…

EXPLAIN HOW DEMAND IS INFLUENCED BY PRICE AND OTHER FACTORS SUCH AS INCOME, THE PRICES OF OTHER
GOODS, AND CHANGES IN TASTES AND FASHION;

Factors that shift the demand curve: WASPTIC

Weather
Products such as umbrellas will see a high demand on rainy days however there will not be as…

ANALYSE THE DIFFERENCE BETWEEN SHIFTS IN DEMAND AND A MOVEMENT ALONG A DEMAND CURVE;

A change in any of the non-price (wasptic) factors affecting demand will lead to a shift in the position of the
demand curve. Do not confuse this with a movement along the demand curve, which is…

UNDERSTAND THE FACTORS THAT WILL INFLUENCE THE SUPPLY OF A PARTICULAR PRODUCT, INCLUDING THE
IMPACT OF CHANGING COSTS OF PRODUCTION ON SUPPLY;

FACTORS THAT SHIFT THE SUPPLY CURVE: PINTSW
ithC hips


Productivity
Increased productivity can shift the supply curve to the right. While, decreased productivity can shift the
supply curve…

Elasticity is the extent to which buyers and sellers respond to change in market conditions.

Price elasticity of demand (PED) : the responsiveness of the quantity demanded to a change in the price of
the product.

Income elasticity of demand (YED): the responsiveness of demand to a change in income…

equilibrium price falls as consumers demand the product at a lower price than before ­ which is obviously
not good news for sellers as it would decrease their profit margin.

Price elasticity of demand Price increase, total revenue... Price decrease, total revenue
Elastic Decreases Increases
Unit elastic Stays the same…

PES<1: Elastic 0
Determinants:
Availability of stocks of the product
Availability of factors of production
Time period

Business Relevance:
Where it is possible for firms to hold stocks in anticipation of a price rise, so if a price rise is expected, firms
are advised to have…