economics

• Land/Raw materials
• Labour
• Capital

Unemployment: Relates to the level of demand within an econoy and the availability of employees

Inflation: firms need information on future input and output prices to be able to plan effectively 

Exchange Rates: materials may be sourced from overseas, sales may be to overseas markets and/or competitors may be based overseas, hence business performance may be heavily influenced by various exchange rates

Interest Rates:  this influences companies' cost of borrowing and the opportunity cost of capital, household spending

Economic Growth: this will affect demand across the whole economy and hence the levels of sales

As production rises, so will people's incomes. People will thus choose to buy more. Also, firms will stimulate consumer demand through advertising and other forms of product promotion.

We have to make chouces about which goods and services we desire the most. Choices involve sacrifices or costs. If as a society we consume more of one good or service then, unless there are idle resources, we will be able to consume less of other goods and services.

The cost of one good measured in terms of what we must sacrifice is called OPPORTUNITY COST. 

The raw material cost incurred in making one more unit of output.

Quantities of each type of good that are bought and sold, and the amounts of factors of production (labour, land and capital) that are used, are determined by the decisions of individual households and firms through the interaction of demand and supply.

In goods markets, households are demanders and firms are suppliers. In labour markets, households are suppliers and firms are demanders. 

Demand and supply are brought into balance by the effects of changes in price. If supply exceeds demand in any market, the price will fall. This leads to a rise in the quantity demanded but a fall in the quantity supplied. 

If demand exceeds supply in any market (shortage), the price will rise, this will lead to a fall in the quantity demanded and rise is quantity supplied.

In either case, adjustment of price will ensure that demand and supply are brought into equilbrium, with any shortage or surplus being eliminated.

Price elasticity of demand measures the responsiveness of the quantity demanded to a change change in price.

Formula:

% change in quantity demanded / % change in price

Perfectly Inelastic- demand doesn't change when price does PED=0

Inelastic- % change in demand is smaller that % change in price, unresponsive to price changes PED= <1

Elastic- demand responds more than proportionately to a change in price, highly responsive to changes in price PED= >1

Unit Elastic- % change in demand and price are equal PED= 1

Price elasticty of demand decreases as you move down a straight line demand curve, thus you can only compare elasticity at particular points on the two curves or over particular segments.

• No. of substitutes available for consumers
• Price of product in  relation to income
• Cost of substituting between different products
• Brand loyalty and habitual consumption
• Degree of necessity

Total revenue=  price x quantity 

If a firm decides to produce more of a product, its opportunity cost is its marginal cost

The law of diminishing marginal returns states that:

When one or more factors are held constant, then, as the variable factor is increased, there will come a point when additional units of varibale factor will produce less extra output than previous units. 

When at the current level of output, a firm's average cost is greater than its marginal cost a reduction in output would raise average cost.

Why the AD curve is downward sloping

• as domestic price level rises, people will buy more imports and demand fewer domestic goods.
• as the price level rises, people will need more money to pay for goods. The extra demand for money will drive up interest rates and dampen demand.
• as price level rises, the value of people's savings will be eroded, thus they may save more and help restore value of their savings- this causes a decrease in demand of goods.

Why the AS curve is upward sloping

• higher prices encourage firms to produce more. 

DEMAND PULL- Occurs when AD grows at unsustainable rate leading to postive output gap and increased pressure on scarce resources

COST PUSH- Occurs when firm responds to rising costs by increasing prices to protect profit margins

• Exports of goods
• Exports of services
• other income and current inflows
• transfers of capital to the UK
• Direct and portfolio investment in UK
• Other (mainly short term) financial inflows
• Drawing on reserves

• Imports of goods
• Imports of services
• Other income and current outflows
• Transfers of capital from the UK
• Direct and portfolio UK investment overseas
• Other (mainly short term) financial outflows
• Adding to reserve

High

• cash
• reserves with bank of England
• Inter-bank loans on the money marker
• Sale and repurchase agreement (repos)
• Govt bonds (one to 5 years maturity)
• Personal Loans to customers
• Mortgages

Low

What causes AD curve to shift to the right?

• Increased govt spending
• Increased Investment- growth is anticipated within firm

What causes AS curve to shift to the right?

• rise in labour productivity 
• increase in stock of capital