Economics, Chapter 1 The Market System


Part 1

Market contains ; Producers & Consumers ( Supply, Demand )

Business that sells to consumers ; Retailer ----> Coop

Stock Exchange/Share ; Sharing of the ownership of a company, companies owned by 'Shareholders' ----> Apple Shares = 1000$ 

Mortgage ; A loan from the bank for housing, an amount of money you borrow and eventually payback

Interest ; A certain amount of 'extra' money which has to be added on top of the money you have loaned 

Demand = Infinite, Supply = Finite 

Price High = demand low, Price low = demand high 

REMEMBER ; 'Schedule' means table in economics 

1 of 20

Part 2

Both verbs used to describe change in demand curve = 'Extends' and 'Contracts'

The only factor that can influence the demand curve ; Price 

Price and Quantity demanded = Inversely related ----> Not the same direction

Demand curve is drawn as a straight line 

Extension on demand curve ; Price goes down, quantity demanded goes up

Contraction on demand curve ; Price goes up, quantity demanded goes down

2 of 20

Part 3

Income goes down = Demand goes down, Income goes up = Demand goes up 

Special Symbol for income ; 'Y'

Both direct and indirect taxes = Influence demand 

Advertising influences demand ; Good D goes up, bad D goes down 

Population influences demand ; Age, size, and ethnicity 

Tastes and Fashion influence demand ; Change increases D for certain products 

Substitutes influence demand ; Amounts and quality of similar types of goods 

Comeplement influence demand ; Goods have to be bought with others to work

Interest rates influence demand ; High interest rates D goes down, Low interst rates D goes up

3 of 20

Part 4

Movement along the Supply Curve ; Extension or Contraction ----> Caused by price 

When there is a verticle Supply Curve ; Fixed supply ----> Events with fixed amount of space

The goal for Suppliers = Smallest quantity for highest price 

Quantity goes up = Price goes up for better profit 

4 of 20

Part 5

Factors affecting Supply ; Costs of production = Businesses 

Factors affecting Supply ; Indirect taxes = Taxes rise = less supply and vise versa 

Factors affecting Supply ; Natural Factors = Weather, disasters ----> Farming 

Factors affecting Supply ; Prices of other goods = Choice made in order to gain a larger profit

Factors affecting Supply ; Changes in Technology = Supply more for less ----> Vaccines 

Factors affecting Supply ; Subsidies = Government help which increases supply in a business 

Factors affecting Supply ; Price = Rise in price of a good + Rise in demand = Rise in Supply 

Costs of production affect supply = Raw materials. electricity, storage, wages , etc ...

5 of 20

Part 6

Equation for total revenue = Price x Quantity = Total revenue ( a x b = c )

Equation for Profit = Revenue - Costs = Profit ( a - b = c )

The equilibrium price ; Changes if there is a change in Demand or Supply 

Supply goes up ----> Price goes down, Demand does not change ( Vise versa )

Demand goes up ----> Prices go up, Supply does not change ( Vise versa ) 

Shifts in Supply and Demand can happen at the same time 

Graphs can be drawn as to show greater change in quantity than change in price ( example )

If price in Market is below the Equilibirum price= Supply and demand will not be equal ----> Excess demand 

If price in Market is above the Equilobirum price = Supply and demand will not be equal ----> Excess Supply 

6 of 20

Part 7

Factors Affecting price elastictiy of demand ; Availability of substitutes, Degree of necessity, Proportion of income spent on product, time period

Availability of substitutes = Products with close substitutes tend to have elastic demand

Degree of necesssity = Goods considered 'essential' will have inelastic demand ----> Fuel

Proportion of income spent on product = Amounts of income spent fluctuating for products 

Time period = In short term goods have inelastic demand while long term demand is elastic 

On graphs ; More toards horizontal = Elastic, More towards veritcal = Inelastic

Equation to meaure PED ; % change in quantity demanded : % change in price 

Perfectly elastic and perfectly inelastic demand do not exist 

Elastic = >1, Inelastic = <1

7 of 20

Part 8

Formula to calculate PES ; % Change in quantity supplied : % Change in price 

<1 = Inelastic, >1 = Elastic 

Perfectly ineslatic = Vertical, Perfectly elastic = Horizontal 

Any straight line that passes through the origin ; Has a price elasticity equal to 1 

Unitary price elasticity theory ; 1% Change in quantity = 1% Change in price 

Factors affecting PES ; Stock levels, production speed, spare capacity, ease of entry into the Market

Stock levels ; High Price of holding stocks = Inelastic, Stocks that can be held= Elastic

Production speed ; Goods that can be produced quickly= Elastic, Slow production=Inelastic

Spare capacity ; If fully capicity is reached = Inelastic as they can not increase output 

Ease of entry into the market ; Not being able to enter the industry = Inelastic ( Vise versa ) 

8 of 20

Part 11

Resources are reffered to as ; 'The four factors of production'

The four factors of production are ; Land, Labour, Capital, and enterprise

Types of resources ; Valuable and Adequate 

The 3 big economic questions are ; What to produce, How to produce, For whom to produce 

Supply = What you can produce 

Demand = What people want 

REMEMBER ; Even where resources exist, a country may not be capable of exploiting them 

9 of 20

Part 12

The 3 types of economy are ; Market or free, Mixed, Command or planned 

REMEMBER ; In the case of market failure the government produces private sector goods 

Consumer goods = Private sector, not payed for through taxes

Private sector goal ; Maximise quality, minimise cost

Public sector goal ; Governmental organisations decide how to produce efficiently 

Private sectors can work for public sectors ----> Roads built on command of governement with workers from private sector 

Efficiency = Lowest cost possible of production, Minimising resources needed to produce, only producing amounts needed 

ISSUE : Public sectors lack efficiency due to lack of competition 

Market Failure ; When markets lead to inefficiency 

10 of 20

Part 12.2

Market failure is caused by ; Lack of efficiency, Externalities, Lack of competition, Missing markets, Lack of information, Factor immobility 

Lack of efficiency = High costs of production, too many resources used, Not needed goods

Externalities = Firms not taking into account all of the costs of production, cost to a third party

Lack of competition = Prices are too high and demand doesn't change 

Missing markets = Where a market does not exist for a certain service or product 

Lack of information = Mistakes amde by businesses causing costs to rise 

Factor immobility = For example when machinery does not work in any other area but a one particular factory and that factory shuts down, It is a waste ( Factor immobility ) 

11 of 20

Part 27

Central Governement departments : Controlled by teams or boards led by a governement minister ----> Ministry of defence ( Responisble for armed forces )

Local authorities services : Local authority run services, run by councillors who are elected by local community residents ----> Libraries, sports halls, fire and police services

Other public sector organisations : Run by a trust or board lead by an experienced expert appointed by a governement body, mostly funded by tax revenue ----> BBC

Sole traders = Businesses owned and run by one person 

Partnerships = Busineses owned and controlled by two or more people 

Companies = Owned by shareholders who elect a board of directors to run it on their behalf 

Survival ; Managing to make a profit even during a recession

Profit maximisation ; Make profit as large as possible so that dividends for shareholders can be high 

12 of 20

Part 27 part 2

Profit satisficing ; Making just enough money to survive, small businesses = Don't want large responsibility, Big businesses = Enough to satisfy their shareholders

Growth ; Wanting to make businness bigger and more successful this helps as ----> They reduce average costs , profits will be higher, stakeholders ( workers ) will benefit and jobs will be more secure 

Sales revenue maximisation ; Making the largest revenue possible in a give time period

Social responsiblity ; Raise interest for a company by attracting potential consumers/ workers

Improving the quality of services = Performance indicators are used to measure this ----> Reliability, Professionalism,customer service, and speed of service 

Minimising costs ; Resources are scarce/ finite not being inefficient

Allow social costs and benefits ; Public sector does not have to worry about costs, therefore they focus on externalities  

13 of 20

Part 28

The need for governement regulation is to avoid ; Anti-competitive practices or restricitve-trade

What is monitored = Increasing prices, Restricicting consumer choice, Raise barriers to entry, Market sharing 

How can the government promote competition ; Encourage growth of small firms, Lower barrier to entry, Introducing anti-competitive legislation 

The Competition Comission = A way of regulating aceptable levels of competition to ensure that consumers are not exploited 

Regulatory bodies = Monitor former monopolies, prices of these

Governement influence in location = Governement attempting to solve issues in certain regions

Reducing unemployment : Providing jobs in area in need of employment 

Reducing congestion : Reducing negative externalities caused by urbanised areas 

Reducing income inequality : Encourage equality of income, also in poorer regions of a country

14 of 20

Part 29

S.O.E = State owned enterprise ----> SBB/CFF

Privatisation ; From public to private 

Nationalisation ; From private to public 

Reasons for privatisation = Competition, Lower prices, More effecient, Gains government money, General efficency, Stopping political influence 

'Contracting out' = Contracors bid for services previously provided by public sector 

The sale of land and property = Allowing tenants of local council owned properties to buy the homes on the land with major discounts 

The effects of privatisation ; Consumers (  Fall in prices for essentials ), firms ( investments gone up, mergers made ) , workers ( Loss of jobs due to cutbacks )

TAKEOVERS = One company buys another 

MERGERS = When two companies join together to form one new company 

15 of 20

Chapter 30

Macroeconomic objectives = Objectives for the total economy placed by the government 

Endless macroeconomic cylce ; People consume less--->Production decreases--->Loss of profit--->Less jobs---> Unemployment--->Less taxes--->Benefits being payed for

Macroeconomic objectives = Economic indicators 

Formula for calculating Economic growth GDP : Consumption + Investment + Governement spending + ( Exports - imports ) = GDP ---> measured 'Quarterly' every 3 months 

Measuring economic performance = Inflation rates, Unemployment, Growth

Inflation rates ; No more than 2 % is steady 

GDP ; Growth of approximately 2-3% in developed countries, while more in developing countries

Unemployment ; 2-3% is good, 0% is bad 

16 of 20

Part 30.2

Exports = Goods and services sold to other countries 

Imports = Goods and services bought fromother countries 

Symbol for Export = X

Symbol for Import = M

REMEMBER ; Over a period of time the aim is to keep X and M balanced 

----> X > M = Surplus in current account

----> M > X = Defecit

Purchasing power goes down when price rises and vise versa 

17 of 20

Chapter 31

Growth is measured by ; Rise in GDP, Improved standard of living, income rise, also national ouptut 

Formula for GDP per capita = GDP : Population 

Nominal GDP = At current prices

Real GDP = Without inflation 

Limitations of GDP ; Inflation, Population, Statistical errors, The value of home-produced goods, The hidden economy, GDP and living standards

18 of 20

Part 32

Inflation is measured by the governement using : RPI and CPI

RPI = Retail price index ( including house prices, council tax )

CPI = Consumer price index 

REMEMBER ; Inflation is bad for people with fixed incomes ; Retired 

2% inflation = good, 5-10% = bad 

Commodity ; Natural resource that has a 'World price' ----> Gold

Causes of inflation ; Demand-pull inflation, Tax cuts ( controlled ), Lower interest rates, Increase in government spending ( controlled ), Rising demand for resources, increase in D for exports

Money-supply inflation applies to ; Governement, firms, and consumers 

19 of 20

Part 33

Consequences of inflation = Reduced purchasing power, Reduced value of savings, Increased business costs, Shoe leather costs, Menu costs

Reduced purchasing power ; Prices go up, wages remain the same

Reduced value of savings ; Savings become obsolete as they do not match up to planned savings

Increased business costs ; Firms need to pay more for resources, while workers want pay-rise

Shoe leather cost ; Consumers must find the best price for a product, this is the time spent 

Menu costs ; The cost of changing prices of goods 

Functions of money = Medium of exchange, Unit of account, Standard for deffered payments, Store of value 

REMEMBER ; Balance of payments includes 3 accounts----> Most important = current 

20 of 20


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Market Sytem resources »