Unit 5: Introduction to Economic Understanding

  • Created by: Emma
  • Created on: 20-05-13 21:10


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.

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Opportunity Cost

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.

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Scarcity and Choice

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.

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Raising and Lowering Prices

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.

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Price Sensitivity

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.

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Price Sensitive

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
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Price Insensitive

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
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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

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