ECONOMICS TOPIC 1

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  • Created on: 02-01-19 15:27
Limited resources
finite resources, e.g. oil and gas
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Unlimited wants
humans consuming more and more luxuries
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Scarcity
not being enough of resources, happens universally and can't be solved
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Choice
every choice involves a sacrifice; the cost is the next best we have sacrificed to do the first
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Rational consumers choice-
the product that will give them the most for their money, will be purchased
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Opportunity cost
next best alternative (second on consumers list), not purchased
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Wants
something we would like that we do not have now 
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Need
special want, one if we can't satisfy will make life very difficult or impossible
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Land
natural resources
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Labor
human resources
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Capital
produced- man made
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Enterprise
organizing factor that takes business risk
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Shortages
demand greater than supply, pushes up price of good. The increase in price persuades produces to supply more so people continue to buy
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Scarcity
wants greater than availability. Never eliminated. Wants always more than the amount that can be produced
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Free goods
enough to satisfy everyone's desire at zero price. Example- sunshine, wild brambles. Not free air from a garage for example as the garage still must pay
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Aims of consumers
consumers are ‘rational’. They will always choose the alternative that gives them the most satisfaction. Consumers have a scale of preferences I.e. a list of unsatisfied wants arranged in order of preference
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Aims of producers
assumed that producers aim to maximize profit when deciding what to produce. They will choose what gives them the most profit.
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Aims of government
to maximize economic welfare- therefore will spend their taxation revenue on goods and services which will help achieve this. For example, if they feel society will benefit from having more hospitals than schools it will increase its spending on the
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Factor mobility
speed and ease which a factor can move from place to place (geographical) or from job to job (occupational). Economically important for factors to be mobile- there are obstacles in practice 
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Resource allocation
every country must devise a method or system of how to allocate its resources and distribute goods produced
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Planned economies
use political judgements on what best to produce and the consumer is not powerful in a planned economy- NORTH KOREA
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Market economies
allocate resources to areas most profitable which reflects consumer demand USA
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Mixed economies
involve government intervening in areas market fails such as public goods UK
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Technical efficiency
maximum output from minimum outputs
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Economic efficiency
most valued good and services are produced, and no one can be made better off by transferring resources 
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Economic efficiency
How to use resources in a way which satisfies as many wants as possible 
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Maximum output
produced at technical efficiency- maximum output from minimum inputs
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Efficiency
maximizing satisfaction
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Equity
social justice or fairness
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Consumer goods
used up by consumers for satisfaction
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Capital goods
used for production of more goods
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PPC
production possibility curve- shows possible combinations of goods that can be produced
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Downward slope of PPC curve
shows there is an opportunity cost of producing more than one type of good
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Technically inefficient
economy producing inside the curve, producing less of both goods than it could
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Lying idle
unemployed labor, used inefficiently or overmanning a job (4 men can do job but 6 are doing it)
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Theory of demand
explains consumer behavior
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Theory of supply
explains producer behavior
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Utility
amount of satisfaction a consumer gains from consuming a good or service at any moment in time
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Total utility
total amount of satisfaction a consumer gains from consuming a good or service
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Marginal utility
the extra satisfaction, the increase in total amount of satisfaction, consumer gains from consuming one more of a product
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The law of diminishing marginal utility
the more of a good a consumer consumes the less utility they will get from each extra unit
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Rational consumers
consumer spends money in way which will give them maximum satisfaction (greatest amount of total utility)
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Rational behaviour
consumers buy goods which give them greatest marginal utility for the money they spend
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Demand
always means effective demand- the desire for a good back by the ability to get it using money 
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Individual demand
demand by one person for a product
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Market demand
sum of all individual demand for a product- total demand for a product
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The law of demand
the quantity demanded of a good will tend to increase if its price falls and decrease if its price rises
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Ceteris paribus
other things remain unchanged- example looking at the price going up, assume this is the only thing going up and nothing else has
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Real income
comparison of money income with changing prices, if prices fall can buy more with same amount of money
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Purchasing power
purchasing power of money, can buy more with same amount of money- value of that money has become more powerful
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The income effect
with falling prices the same money can buy more of the same product. Consumers either buy more of the same product as its price is lower or use the money to buy other products
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Substitution effect
same products with close substitutes, price falls, buy the cheaper one instead as it does the same thing
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Demand curve
curve plots marginal utilities, downward sloping because marginal utility diminishes aa its quantity increases- consumers will only buy more of a good if its price falls.
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Regressive demand curve/ unusual
upward sloping demand curve 
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Articles of ostentation
some goods have social status or prestige. Goods valued as a status symbol as price is well known. Price rises may be more attractive. ‘Veblen goods’
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Speculative buying
when there is expectation is further rise in price people might buy more when the price rises as they think this might happen again. Speculators in capital markets respond to ride in price of a good by buying more of it in anticipation of further pr
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Giffen goods
staple goods. A fall real income may make you more dependent on them. Poverty may cause you to buy more potatoes and less meat- even if potatoes went up in price, still cheaper than meat.
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Before and after diagram
shows factors other than price of the product altering- moves demand line left/right
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Conditions of demand
determinants of demand which are not price
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Complementary goods
go together- e.g. fish and chips, fall in price of one will increase demand for other without this other changing price. Price of fish drops, increased demand for chips without the price of chips changing. Combination is now cheaper and demand for on
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Substitutes
alternative- e.g. tea and coffee, price of one rise then some may switch to the other increasing its demand without lowering its price. Price of tea rises therefore some tea users switch to coffee.
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Inferior goods
bought less as real incomes rise. If can now afford stake won't buy mince.
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Decrease in demand
less is demanded at each price
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Elasticity
measurement of the extent to which the demand for a good or supply of a good responds to certain changes. Elasticity can be defined as the extent to which the demand for a good will change in response to either a change in the price or change in the
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Price elasticity of demand (PED)
measures the reaction of consumers to a change in the price of the good. PED is calculated by comparing the percentage change in price with the percentage change in demand.
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Inelastic demand
If answer is less than one this means inelastic demand. Demand has been inelastic compare to price change.
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Elastic demand
answer more than one. Demand has been flexible and elastic when compared to price change.
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Unit elasticity
theoretically price could equal one. 
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PED
affects the slope of the demand curve
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Perfectly price inelastic
quantity of a good does not change when its price changes
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Perfectly price elastic
quantity demanded of a good fall to zero when its price changes
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Inelastic
one demand alters less as price changes significantly 
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Elastic
demand alters more as price changes slightly
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Perfect inelastic (0)
demand does not alter at all when price changes
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Perfectly elastic (infinity)
demand varies without a price change
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Total revenue
amount of money a seller receives from selling a product in a specific time.
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Primary production
involves extraction of resources- farming, fishing, mining, quarrying 
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Secondary production
involves manufacturing and construction- industrial production processes, building and engineering
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Tertiary production
includes all services- largest employer, covers areas such as retailing and transport- professions such as doctors and teachers
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Short run
at least one factor of production is in fixed supply and cannot be changed
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Long run
all factors of production can be changed
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Fixed factor
land/ capital making you unable to extend your shop or factory in the short run. Might involve choosing a new location, talking to architects. Land and capital are often fixed factors in the short run.
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The law of diminishing returns
explains that short run average cost will ultimately rise because adding more variable factors to one fixed factor eventually reduces productivity.
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The divisions of labor/ specialization
involves each worker taking on part of the manufacturing process and repeating this single task
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Fixed costs
do not vary with the level of output and exist even at zero output.
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Variable costs
vary with the level of output- zero when output zero. Grow as output level grows.
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Total costs
fixed and variable costs added together.
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TOTAL COST how to calculate
TOTAL FIXED COST + TOTAL VARIABLE COST
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Average cost/ average total cost
cost of producing one unit/ batch. Total cost divided by number of items made.
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AVERAGE COST how to calculate
TOTAL COST / OUTPUT
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MARGINAL COST how to calculate
CHANGE IN TOTAL COST/ CHANGE IN QUANTITY
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AVERAGE FIXED COST how to calculate
TOTAL FIXED COST/ QUANITITY
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AVERAGE VARIABLE COSTS how to calculate
TOTAL VARIABLE COST/ OUTPUT
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Long run average costs
period when all factors can be varied
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Internal economies of scale
the advantages that large firms enjoy over smaller competitors- mostly reductions in average cost (per unit)
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External economies of scale
the result of the concentration of firms in one area enjoyed by the firm and its neighbors- enjoy benefits as close together. If same industry affects are greater
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Internal economies
come about inside your firm as a result of management activity and decisions you make
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External economies
involve the decisions of competitors that have a favorable impact on your company- they cut average costs.
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Technical economies INTERNAL
processes are more efficient as size increases. E.g. a large truck will carry the same amount of stock as 10. It will require 1 driver not 10 and the driver will be payed less than 10.
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Marketing economies- advertising INTERNAL
is more effectively spent when there are many outlets for customers to buy in (local shops). E.g. if you advertise on tv, which is expensive, you need to make sure your views can buy easily otherwise money is wasted.
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Administrative economies INTERNAL
large orders involve the same procedures and paper work as large order. Per unit sold on a large order, the cost will be less. This leads to purchasing economies.
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Purchasing economies INTERNAL
big orders are cheaper to process when batched for transport. Further savings may be obtained. These savings can be passed onto large firms as savings. Important to obtain a large order to maintain a continuous output and to ensure expensive equip
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Managerial economies INTERNAL
employing specialist managers. Initially adds a wage but the quality of output increases and should generate additional revenue and profits for large firms which outweigh their bills.
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Research and development economies INTERNAL
large firms devote more funds to research. The initial costs are covered by the sales of new improved products
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Risk- bearing economies INTERNAL
small firms have one or a few products and they are very dependent on sales in one area. This is risky compared with a large diverse company which spreads over many products and market. This is one factor which makes financial economies of scale big.
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Financial economies INTERNAL
large companies, tech companies (blue chip) operate in diverse markets with lots of products are less risky for banks to lend to. banks compete for less ricky loans by offering lower interest rates to large firms.
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Local suppliers EXTERNAL
suppliers or component firms spring up locally to supply all firms in the local industry. Most efficient location as this is where their customer firms are. If you are isolated from the rest of your industry this may incur transport costs which raise
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College courses EXTERNAL
local colleges are keen to train people for major local industries and services. Training costs for companies are therefore reduced. However, as a small or isolated company you may not be significant enough to have a college course.
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Research centers EXTERNAL
if an industry becomes concentrated in one area this becomes the best place to allow research facilities- companies benefit from the work of scientists and academics
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Locally skilled labour force EXTERNAL
industry concentrated in one area, the necessary skills are present in the local labour force. Many have been employed in the industry at one time or have been trained at the local college. Isolated companies will exist in a region where relevant loc
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Infrastructure improvements EXTERNAL
when an areas industry and commerce grow the local infrastructure develops too. Governments spend money on roads improvements, airports and leisure facilities to attract workers and managers to the town. Improvements make travel easier and reduce tra
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Slow decision making INTERNAL
in large companies there are many staff to involve, meeting, departments to consult- the final decision may be a weak compromise.
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Communication problems and delays INTERNAL
within layers of managements good ideas can be diluted or lost completely. Somewhere an idea can be altered- like Chinese whispers
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Labour problems INTERNAL
workers can feel isolated from final products- alienation. A ‘them and us’ attitude may leave the company prone to low motivation, poor quality output and high labor turnover. 
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Companies can be subdivided TO AVOID INTERNAL
into medium sized divisions and make decisions independent of head office. Head office can be massively reduced. An example of this is the General Electric. Runs as a group of independent units with their own profit and losses. 
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Management can be delayered TO AVOID INTERNAL
management structure can be simplified by taking out a tier of middle management.
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Companies can be de merged TO AVOID INTERNAL
split into two or more smaller companies to increase efficiency and give greater returns to share holders
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Rationalization
concentration of outputs in the most efficient plants and closing less efficient ones
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Profit
total revenue minus total cost
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Normal profit
return to the enterprise within total cost. neither so high that it attracts new entrants to an industry or too low firms begin to leave.
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Revenue
opposite of costs, provide income to a company
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TOTAL REVENUE how to calculate
SALES x PRICE PER UNIT SOLD
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AVERAGE REVENUE how to calculate
TOTAL REVENUE/ QUANTITY SOLD
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Marginal revenue
the addition to total revenue from selling one more unit.
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TOTAL REVENUE how to calculate
PRICE X QUANTITY SOLD
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Law of supply
the quantity of a commodity produced and offered for sale will tend to increase if its price increases and decrease if its price falls, ceteris paribus
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Theory of supply
explain producer behavior 
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Supply
quantity of a good or service that firms are willing and able to offer for sale per unit of time at a given price
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Individual supply
supply of a particular firm
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Market supply
total supply of all the firms in the industry
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Output
amount of a good that a firm produces
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Supply
amount of a good that a firm puts on the market 
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Determinants of supply
factors which affect supply
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Increase in supply
more is supplied at each price and the same amount is sold at lower price
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A market
occurs when buyers and sellers come into contact in some way in order to agree a price and exchange a good or service
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Free market
no government intervention, many competing firms, firms are price takers (must sell at the price set by the market).
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Equilibrium price
where demand for goods is equal to the supply of that good. Known as market clearing price. At this price there is no unsatisfied demand and everyone who wants the good and is willing to pay will get it. There will be no unsold supplies.
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Joint or complementary demand
two goods tend to be demanded together. E.g. fish and chips. Increase in the demand for one will lead to increase in demand for other. 
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Competitive demand
when the goods are close substitutes. An increase for one will result in a fall in demand for the other. Shell petrol and Esso.
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Joint supply
when two or more goods are produced together. When one is produced the other is too automatically. Increase in demand for one will lead to increase in supply of the other. E.g. wool and mutton
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Market failure
 the market fails to allocate goods (demand and supply) efficiently. 
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Public goods
street lighting, lighthouses, public parks. Things the council pays tax for.
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Merit goods
education, health care, housing. The market will under provide these. 
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Demerit goods
alcohol, tobacco, perhaps sugar in the future. The market will over provide these.
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Externalities
pollution, congestion, noise
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Monopoly
Microsoft windows
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Maximum price
governments impose a maximum price in a market that suppliers cannot exceed. imposed to protect low income consumers. E.g. sausages in a communist country, there will be a shortage of the good in the market. Demand will be greater than supply 
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Minimum price
minimum price producers will receive for a product. Imposed to give guaranteed income and can't be sold for any less. Supply will be greater than demand. Surplus of good in market. E.g. minimum wage
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Subsidies
opposite effect to taxes, increase supply, reduces producers cost and consumers cost
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Quotas
 governments put a quota on goods which limits the amount of a good which a producer can supply to a market. E.g. the government placed a quota on the amount of white fish UK fishermen could catch. This was to conserve the stocks of fish
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Barriers to entry
factors make it difficult for new firms to enter an industry 
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Capital costs
the vast amount of capital to set up a firm. This can prevent new firms from entering. Cost to set up factory is huge 
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Economies of scale
when large, new firms (which are small when getting set up) will find it difficult to compete on price 
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Legal barriers
copy right etc. Give firms exclusive rights to produce or publish certain products
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Advertising
create brand loyalty- breakfast cereals, making it difficult for new firms to compete
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Sunk costs
costs which can't be recovered if the firm loses e.g. marketing or research and development may deter new firms from entering 
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Many firms/ sellers
so many firms that not one is big enough to have influence over market price. The firms are therefore price takers- must sell at price set by market. If one firm doubled output, it would have no effect on the supply curve of the industry. 
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A large number of buyers
so many buyers that one can't have an effect on the market. Number of sellers so large that no supplier offers more than a small percentage of the total. Any change in a single firm's output does not affect the market enough to affect the price.
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Homogeneous products
consumers believe that each suppliers product is identical- they are perfect substitutes for each other. There can be no branding or product differentiation they are all the same.
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No barriers to entry or exit
easy to leave or enter
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Perfect information
consumers and producers must have perfect knowledge about prices being charged by other firms. Therefore, a seller who charges more won't sell anything or less
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Monopoly
sole seller, one person selling good or service. One firm in the market. The firm controls market price by controlling supply. They keep out potential competitors by the existence of high entry barriers. Have ability to make high profits. They are wa
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Oligopoly
market dominated by a few large firms, each firm is producing similar but branded products. Barriers to entry. When making decisions each firm has to be able to react. Firms compete in advertising or branding
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Pricing strategy
adopted by firms to determine the type of market they are operating in and the level of comp they are facing 
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humans consuming more and more luxuries

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Unlimited wants

Card 3

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not being enough of resources, happens universally and can't be solved

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Preview of the back of card 3

Card 4

Front

every choice involves a sacrifice; the cost is the next best we have sacrificed to do the first

Back

Preview of the back of card 4

Card 5

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the product that will give them the most for their money, will be purchased

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