Unit 5: Introduction to Economic Understanding

Definition: An exchange that occurs as a compromise. 

Example: Jenny has £20 to spend and would like to buy a New Make-up Bag for £20, 2 CD’s which are £10 each, have £20 left over for a Night Out and make a Charity Donation of £20. 

If Jenny buys the make-up bag she has sacrificed the benefits from the other 3 items. This is her TRADE-OFF.

OPPORTUNITY COST describes the benefit lost from the next best alternative when making a choice. So the opportunity cost to Jenny of buying the make-up bag is the benefit lost from not buying the CDs.

The planets resources are SCARCE. There is only a LIMITED amount of resources (e.g. raw materials, fuel, time.) But people usually have UNLIMITED needs or wants. For example, they may want:

 - more meals out

 - a cleaner environment

Because resources are scarce, people have to make CHOICES.

Businesses often change their prices to try and increase revenue. Some businesses benefit from cutting prices but others benefit from increasing prices.

PRICE: is the amount of money consumers need to pay to buy a product.

REVENUE: is the amount of money a business gets from selling its products in a period of time.

Revenue = Price x Quantity Sold

Demand is INSENSITIVE to prices changes if:

 - there are few or no substitutes

 - the product is essential / a necessity.

Demand is SENSITIVE to price changes if:

 - there are many substitutes 

 - the product is a luxury item or not a necessity.

Demand will change more when the price changes.

• Price Increase --> Larger fall in Demand --> Decrease in Revenue
• Price Decrease --> Larger rise in Demand --> Increase in Revenue

Demand will not change very much when price changes.

• Price Increase --> Smaller fall in Demand --> Increase in Revenue
• Price Decrease --> Smaller rise in Demand --> Decrease in Revenue

Definition: Groups which have an interest in the performance of a business.

(Stakeholder - Key Interests)

• Shareholders - Profit, dividends and growth
• Workers - Wages, job security and good conditions
• Customers - Fair price, choice and good quality
• Managers - Pay, growth and power
• Government - Competition and tax revenues
• Local Community - Jobs and clean environment