Public sector - Activity ran by state, e.g NHS.
Private sector - Activity ran by private firms.
Command economy - Public sector, ran by government and administrators 'command' activity.
Transition economic system - The change from Command economy to Mixed economy
Mixed economy - Both public and private sectors
Free market - Private sector only, there are no entirely free markets, but many economies have a larger private sector.
Market forces, scarcity and choice
Market forces - Supply/demand changing in a market, thus changing prices and business/consumer decisions.
Entrepreneurs - People to take business risks.
Scarcity is used to describe the lack of resources compared to human needs/wants.
Choice - making choices based on what you can buy. This involved firms and consumers. E.g firms may choose between advertising and increasing capacity.
Opportunity cost - the option lost when making a choice or trade off.
Factors of demand
The following are all factors that affect demand:
- Tastes - culture, preferences
- Substitutes - E.g Margarine vs butter.
- Complementary goods - things used together e.g Xbox games and an Xbox
- Income - How much people earn/can afford
- Population - How many people can buy your product (geographically)
- Price - Lower price = higher demand.
Here is an example of a demand curve, as price goes down, demand goes up.
Here is an example of a supply curve, as price goes up, supply goes up.
The equilibrium price is the price where supply and demand meet. (no excess)
Price elasticity of demand
If a product is price elastic it means a small change in price will cause a large change in demand. The following make a product elastic:
- The product has close substitutes
- The product is a luxury good
- The product has been around for a long time (e.g central heating)
If a product is a price inelastic it means for demand to change there needs to be a large change in price, an example is petrol. The following make a product inelastic:
- No close alternative/substitute
- It is a necessity (e.g water)
- It hasn't been around for a long time (e.g Hybrid cars)
If a product is elastic then firms must be careful when pricing, as the wrong price could ruin the demand.