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Economics. Definitions: Section 1. Demand: Quantity purchased at a given price over a period of time Supply: Quantity produced at a given price over a period of time Z elasticity of Y: %change Z/%change Y. Part 1: Demand and Supply. Demand.
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Definitions: Section 1 • Demand: Quantity purchased at a given price over a period of time • Supply: Quantity produced at a given price over a period of time • Z elasticity of Y: %change Z/%change Y
Demand • Demand: Quantity purchased at a given price over a period of time • Change in disposable income • Taste • Price of substitutes and complements • Advertising
Supply • Supply: Quantity producers sell at a given price over a period of time • Costs of factors of production • Changes in technology • Changes in taxes and subsidies
PED • Responsiveness of demand to a change in price • % change in demand / % change in price • Horizontal line = perfectly elastic. Gentle slope = elastic. Steep slope = inelastic. Vertical line = perfectly inelastic. • SPLAT: • S: Substitutes • P: Proportion of income • L: Luxury or not • A: Addictive or not • T: Time to respond
PES • Responsiveness of supply to a change in price • % change in supply / % change in price • PES 1 = unitary. Change in price = change in supply • Affected by stock levels, production speed, spare capacity, ease of entry into the market
YED • Responsiveness of demand to changes in income • % change in income/ % change in price • Main factor: necessity or luxury • Normal goods: relationship between income and demand positive • Inferior goods: relationship between income and demand negative
Elasticity and Firms • PED and firms • PED inelastic = price and revenue relationship positive • Always try to make products inelastic • YED and firms • Long run benefits for firms, income increases = demand increases • Product switching: Firms switch to YED elastic products • Product planning: planning ahead in order to change your product to take advantage of elasticity
Resolving scarcity • Economic problem: there are infinite wants but finite resources • What to produce? How to produce? For whom to produce? • Opportunity cost: the cost of the next best alternative foregone • Choice: solution to the economic problem
Resolving scarcity cont. • Production Possibility Curves: Show the maximum combinations of goods and services that can be produced by an economy in a given time period. • PPC shift to the right = economic growth • An economy can produce consumer goods (goods purchased by households)or capital goods (goods used to produce other goods)
Mixed Economy • Efficiency • Measure of output per unit of input • Efficiency conserves scarce resources • Market Failure • When producers operate inefficiently • Can be caused by • Lack of competition • Missing market: some goods not provided by private sector (public/merit) • Lack of information • Factor immobility (factors move from one use to another)
Division of Labor • When production process is broken down into a number of components
Demand for Labor • Derived demand • Cost and availability of machinery/cheaper labor (substitutes) • Productivity • Costs other than wage rate (housing, insurance, uniform)
Supply for Labor • Working age • Participation of women • Age distribution • Net migration • Quality of labor • Education and training
Wage differences between occupations • Training/qualifications required • Physical risk/hours (terms and conditions) • Expanding industries • Public v private sector
Minimum Wage • Minimum Wage – the least amount of money that can be legally paid • Benefits disadvantaged workers • Reduces poverty • May cause unemployment
Trade Unions • Negotiate for better pay and conditions • Provide legal protection • Pass laws benefiting workers • Restricting of trade unions • Secret ballots • Closed shops banned • Businesses seek compensation • Strong trade unions force up wages in some markets
Factors of Production • Factors of Production: The resources used to create goods and services • Production: Total output. • Land • Labor • Capital: • Fixed • Working • Enterprise: Risk takers • Productivity: output per unit input (e.g. per worker, per worker per hour, per machine, etc)
Sectors of the Economy • Primary Sector – Extraction of raw materials • Secondary Sector – Manufacturing • Tertiary Sector – Services and retail
Deindustrialization • Developed economies shift from primary to tertiary production • Demand changes from goods to services • Competition from LEDCs forces MEDCs to shift to services • Machines reduce employment in manufacturing
Production Costs and Revenue • Fixed costs – do not change as output increases • Variable costs – vary as output increases • TC = FC + VC • AC = TC/Q produced • Revenue = PQ
Economies of Scale • Technical: Large firms can afford and use technology and machinery efficiently • Purchasing: bulk = cheaper rates • Marketing: in house delivery is cheaper than hiring • Financial: Larger loans = cheaper interest • Managerial: Specialist managers • Risk – bearing: Wider range of products, less risk
External and Diseconomies of Scale • External Economies – benefits from growth of industry • Skilled labor pool, infrastructure, ancillary services • Diseconomies of Scale • Bureaucracy – too many resources used in administration • Labor relations • Co – ordination and control
Productivity • Increases in productivity = PPC shift outward • Land: Fertilizer, GM crops, drainage, irrigation, infrastructure • Labor: • Quantity: Immigrant workers, increased birth rate • Quality: Education, motivation, improved working practices (job rotation) • Capital: Technology and machinery
Externalities • An impact on a 3rd party • Social cost = private cost + negative externalities • Social Optimum: Social Cost = Social Benefit • Dealing with externalities • Taxation • Legislation and regulation • Education and advertising on dangers of externalities • Subsidies encouraging positive externalities (job creation, training and education)
Competitive Markets • Rivalry for sales • Usually occurs when products are homogenous • Competition varies between industry • Perfect competition • Many buyers and sellers • Firms have little to no control over price • Many close substitutes • High levels of information • Low barriers to entry
Growth of Firms • Organic Growth – increasing market share and output • Mergers and Acquisitions • Horizontal – Same industry and stage of production • Vertical – Same industry, different stage of production • Lateral – Same products/services, do not compete • Conglomerate – Different industries
Motives and Limitations to Growth • Motives • Economies of scale • Increased market share • Diversifying • Limitations • Limited market • Lack of finance • Aims of entrepreneur • Diseconomies of scale
Monopoly • When the market is supplied by 1 firm • Monopolies set price or determine quantity • Demand is highly inelastic • Natural Monopoly – Market is more efficiently served by one supplier • High sunk costs – high initial investment. Usually caused by high infrastructure costs e.g. water and railways • Features • High barriers to entry • One dominant supplier • Unique products – no close substitutes
Oligopoly • A market dominated by a few large producers • Firms are interdependent • Price rigidity • Non – price competition
Public and Private Sector • Public sector – ministries, local services and government business organizations • Private sector – sole traders (single person), partnerships and companies (shareholders elect a board of directors)
Aims • Public sector • Community welfare • Provide services not provided by the private sector • Minimizing costs • Allowing for social costs and benefits • Private sector • Profit maximizing/satisficing • Survival • Growth
Government Regulation • Regulation is needed to restrict excessive market power • Regional Policy • Designed to solve regional problems. • Setup incentive (take jobs to workers) • Reduce income inequity • Reduce congestion
Competition Policy - UK • Methods of promoting competition • Encouraging the growth of small firms (free business advice, loan guarantees, profit tax breaks etc.) • Legislation – passing laws • Removing legal barriers to entry • Introducing anti-competitive legislation (UK Fair Trading act, Competition Act) • Organizations • OFT – determines competition policy, enforces consumer protection legislation, investigates suspected unfair trading • Competition Commission – investigates mergers/markets where consumers may be exploited, enforces policy and prosecutes • Example of enforcing legislation • UK government forced the corporation to sell 2/3 airports in London, had ruled they had been operating as a monopoly
Privatization • Transfer of assets from public to private • Methods • Issuing shares • Contracting out • Sale of land and property • Reasons • Create efficiency • Create income • Reduce political interference
Effect on Stakeholders • Consumers: Lower prices, better choice and quality. Loss in services • Workers: Extreme unemployment in the short run • Firms: Objectives shift from welfare to profit • Government: Loses control, gains income • Economy: Improved resource allocation due to efficiency
Macroeconomic Objectives • Economic Growth – GDP. Limitations include inflation, population and standard of living. Progresses as a cycle • Control of Inflation – Measured in RPI or CPI. Demand pull, cost push, or money supply. • Unemployment – cyclical, frictional, seasonal, voluntary • Balance of payments on the current account – trade of goods and services, deficit and surplus • Protection of the environment – regulation and taxation