Economics

How to best allocate/use resources to meet as many unlimited wants

Microeconomics
- Focus on individuals, companies

Macroeconomics
- Focus on the performance of economics

Basic economic problem

- Unlimited wants
- Limited (scarce) resources
- Society - unlimited wants - always want more
- But there are limited resources to meet unlimited wants
- Economics - how to best allocate/use resources to meet as many unlimited wants

All resources have opportunity cost

Opportunity cost - Next best alternative use of a scarce resource

Economic good - goods produced using scarce resources

Free good - goods which do not use scarce resources, further they do not have opportunity
cost

Economics 3 Basic Questions

1. What to produce?

2. How to produce?

3. Who gets the goods?

Economic systems

1. Planned/Command -
● Government controls and allocates all factors of production
● Government makes all decisions and allocates all goods and resources
● No private companies, only public sector

2. Free market economy -

● Private sector is the largest part of the economy
● Private companies decide what to produce and how
● Produce → goods in demand → sell for profit → low cost → to increase profits
● Goods allocated using price mechanism

3. Mixed Economy -
● Mix of planned +free market
 ● Both public and private sectors
● Mix of public and private depends on country

Rationing systems
How goods and resources are allocated
- Non-price rationing
- Govt/Public Sector allocates goods
- E.G. COVID 19 vaccines
- Not based on ability to pay
- Price rationing/Price mechanism
- Pay for goods, decides who gets goods
- Can limit demand

Q5
A) In price rationing all economic decisions are made based of prices that have been
determined in markets. On the other hand, in non price rationing decisions are made
by use of methods that have nothing to do with prices determined in markets, and are
decided by the government.

B) The government uses both of these strategies to allocate resources effectively.

Nonprice rationing operates in such a way where financial power does not decide
who gets the goods, while price rationing distributes resources according to who is
willing to pay the highest price. It can also limits demand for goods.

C) Many communist econocmies tend to use rationing, an example of this is the Russia.
Price in market
Non price in planned/command

Productioin possibility curve (ppc)

Assume → Economy produces 2 goods
PPC → Shows combinations of 2 goods economy can produce using available resources

- Any position on ppc → On the line - alll resources fully used

- Point inside PPC → Inside the line - the inefficient use of recources
- Point outside PPC → Outside the line - not possible to reach, not enough resources

- Capital goods: goods used to produce other capital goods and consumer gooods
- Consumer goods: GOods consumed by society

- Economic growth
- More Recources in economy
- Shifts curve outwards
PPC → Shows maximum
Potential output in economy

POinte eg. A,B,C

Show actual output level in economy

Opportunity cost, scarcity + PPC

PPC → Scarcity
● Limited resources
● Canot produce max output of both goods
EG. Burnely = X
Man U + Y
→Choice
Must decide how much of each good to produce
→ Opportunity cost
Shows opportunity cost of producing each good
Eg. Produce a quantity A Burnley Shirts is Opportunity Cost
Opportunity cost is c→Y man utd shirts not produced
● Opportunity cost of producing c man utd shirts is A→X of burnley shirts not produced
● Shows basic economic problem

Page 19
●
Q1

a) 5 Microwave Ovens
b) 11 microwave ovens gain, 6 computers loss
c) 9 gained, 8 costed
Q4)
Point F

15 ovens
12 PC
Point C
26 OVens
25 PC
Opportunity Cost

Shifts in PPC
PPC shifts outwards due to
● 1) INcrease in quantity of factors of production -
○ eg. SIngapore
■ Reclaimed land
■ Immirgration increasing population size
● 2) INcrease in quality of factors of production
○ Eg. Increase in education - increase in labour productivity
○ Improve technology
○ OFS → Jungle → Change to school

Any withdrawals in the circular flow will decrease the money in the economy

Any injection in the circular flow will increase the money in the economy

Injections (J)
● Govt Spending (G)
● Investments (I)
● Exports (X)

Withdrawals (W)
● Tax
● Saving
● Imports (M)

Open economy
● Equilibrium = J = W
● J > W → Economic increase
● J < W → Economic decrease

Investments → Firms buy capital to be used to produce goods and services

1) Decrease
2) Decrease
3) Increase
4) Increase
5) Increase
6) Increase
7) Decrease
8) Decrease

Section 2
Competitive markets
Price → Determined by supply and demand

Competitive market
- Firms free to set prices
- No Govt Intervention

Demand - Quantity of a good or service consumers are able and willing to buy at a given
price ceteris paribus

Demand curve - shows relationships between price and quantity demanded

Law of demand - price and demand curve

Negative/Inverse Relationship
Eg. Increase in price = Decrease in demand
Decrease in price = Increase in demand

Non-prive determinations iof demand

1) Change in consumer taste

Non-price determinations
- Price- no change
- Other factors change

Change in consumer tastes causes shift in demand curve

Eg.
- Apple advertise laptops more
- Increases consumers demand more apple laptops
- Demand curve shifts d1 → d2
- Increase in quantity demanded Q1 → Q2
- No change price

Change in consumer Tastes include

- Advertising
- New product features
- HEALTH REPORTS
 - Fashion trends
- Weather
- Quality of goods
- Social Trends
Change in consumer real income
- Real income- income adjusted for inflation
- Norminal income- income not adjusted for inflations
- Inflation - incirease in general price level over a period of time

Change in consumer real income

Normal good
- Positive relationship
- Increase in income = increase in demand
- Decrease in income = Decrease in demand

Infrerior goode
- Negative relationship
- Income decrease = Demand decrease
- Increase in income = Decrease in demand

Complements- 2 goods which are used together

Substites - 1 good can be prepared by another good

Change in price
- Change in pric
- Cause a movement along demans curve
- Both price and quantity change
- Extension of demand - increase in demand
- Contraction of demand - decrease in demand
Price → Quantity demanded
Non-Price → Demand
1. Smoking
2.
Test

- 10 mark essay
- Part a, explain, describe
- 30 min
- chapter s 1, 2.1, 2.2
- Remember to write a PEEL
- Define economic terms at the start
- Remember to link your paragraphs to diagrams
- Make examples, can use real life

Example of question
Explain the concepts of opportunity cost, scarcity, choice and efficiency using a ppc

So define PPC, opportunity cost, scarcity, choice, efficiency

Any point inside the curve will be a inefficient use of rcources

While any point on resources are used efficiently

Explain the concepts of opportunity cost, scarcity, choice, efficiency

Define →
● PPC
● Opportunity cost
● Scarcity
● Choice
● Efficiency
Efficiency →
Any point on PPC
● All resources fully used

Non - Price determinants

2) Weather
Impacts agricultural products

3) Costs of production
Eg. Change in → Wages, Rent, Raw Materials

Increased costs → Supply shifts left

Decreased costs → Supply shifts right

4) Tax
- Change in Indirect tax eg. GST, VAT
- Increase GST → 7% → 9%
- Increased cost for companies
- Supply Shifts left

5) Govt Pays producers a specific amount of money per unit of output. Eg. $1 per kg of
rice produced
- Lowers costs of production
- Encourages producers to Increase otuput
- Shifts supply right

6) Join supply
- 1 Good/Raw material can be used to produce more than 1 good
 - Change in supply of 1 good impacts supply of the other good
- Eg. → cloth → increase output of cloth → can be used to produce → T shirts, Shirts,
Dresses

7) Competitive supply
- Supply of 1 good → changes in prIcE Of rival good IMPact its supply
Eg. Farmer → Produce Corn
- But increase price wheat
- Switch from corn to wheat producer, Decrease supply corn increase supply wheat

8) Supply side shocks

- Sudden changes which decrease supply
- Eg - Pakistan Floods - Decrease farming output, decrease manufacturing Output
- Europ - Ukraine War - Increase Energy Costs
- Russia - Stopping/Reducing Gas Supplies

1)
a) Supply in economics is defined as the total amount of a given product or service a
supplier offers to consumers at a given period and a given price level.
b) Law of supply states that other factors remaining constant, price and quantity
supplied of a good are directly related to each other.
c) The law of supply states that a higher price leads to a higher quantity supplied and
that a lower price leads to a lower quantity supplied.
d) The major difference in both terms is that Individual supply refers to the quantity
supplied by the single seller whereas Market supply refers to the quantity supplied by
all sellers in the market.

Short run –
● period of time when at least one factor of production is fixed
● (by definition meaning, that one or more are variable).
● Usually, capital is chosen to be fixed and number of employees (labor) – variable.

Long run –
● Period of time when all factors of production are variable.

Law of Diminishing Marginal Returns -

● The law of diminishing marginal returns is a theory in economics that predicts that
after some optimal level of capacity is reached,
● adding an additional factor of production will actually result in smaller increases in
output.

Marginal Cost -
● the marginal cost is the change in total production cost
● comes from making or producing one additional unit.
● divide the change in production costs by the change in quantity.
● The purpose of analyzing marginal cost is to determine at what point an organization
can achieve economies of scale to optimize production and overall operations.
 ● If the marginal cost of producing one additional unit is lower than the per-unit price,
the producer has the potential to gain a profit.

Total cost
- total cost, in economics, the sum of all costs incurred by a firm in producing a certain
level of output.
- It is typically expressed as the combination of all fixed costs (e.g., the costs of a
building lease and of heavy machinery)
- which do not change with the quantity of output produced, and all variable costs

Marginal product

- The marginal product of labor (or MPL) refers to a company’s increase in total
production when one additional unit of labor is added (in most cases, one additional
employee)
- and all other factors of production remain constant.
- In other words, the MPL is the additional output a company experiences after hiring
another worker.

- The marginal product of labor is usually a positive number during early hiring of
workers, but does not usually show constant returns
- the MPL will always begin to slow as the number of laborers increases, and they,
therefore
- must begin sharing resources like equipment during the production process.

Total product

- Total product is simply the output that is produced by all of the employed workers.
- Marginal product is the additional output that is generated by an additional worker.
- With a second worker, production increases by 5 and with the third worker it
increases by 6.

Demand

Substitution Effect
● Decreseas Price
● Increases Demand of SUbstitute good
● Demand Shifts Right

Income Effect
● Decress price
● Increases real income
○ Buy more of good even though no change income
○ Increases purchasing power
■ Quantity of good consumers can buy
 ● Demand shifts right

1)
a) $5 excess supply (8000 surplus)
b) $4 excess supply (4000 surplus)
c) $3 equilibrium (0)
d) $2 excess demand (4000 shortage)
e) $1 excess demand (8000 shortage)

2)
a)
Eg. increase energy cost
Supply shifts left
S1 → S2
Increase price p2 → p1
Decrease quantity Q2 → Q1]

Try question 3 at home page 65

Marginal Cost; Extra cost per unit
Marginal Product

Changes in market price

 - Increase in demand → Demand shifts right D2
- Demand = Q2 → Point B
- Creates excess demand
- Shortage
- Consumers bid price upwards
- Producers increase supply to meet shortage + due to increase in price
- Continues until supply = demand (Point C)

- As price increases - producers allocate more resources To produce good -

- labour materials
- Consumers have ti allocate more income to but good

Page 62 question 4 ex 2.6

4)
c) Labour cost increase - Supply
Decreases because it costs more to
make the product as costs are
increased.
- Excess demand
- Consumers bid price upwards
- producer increase supply due to
increase in price
- Allocate more resources to good
- New equilbriem point C
 d) Price of substitute good
falls - Demand decreases as
consumers will purchase the
cheaper good.
- Demand shifts l;eft
- Damand falls to Q2
- Supply still Q1
- Excess supply
- Companies decrease price to sell
excess supply
- Decrease price to increase
demand

Functions of price mechanism

1) Signalling fucntion
a) Price changes
b) Signal to producers -to increase/decrease supply
c) Signal to producers how to allocate resources
2) Incentive function - Change in price - Gives producers reason to Increase or
Decrease supply
3) Rationing - Goods allocated depending on consumers ability to pay

Page 65
Q2 (Consider the market for coffee, and suppose that the demand for coffee falls because fo
a fall in the price of tea, a substitute good, leading to a new equilibrium price and quantity of
coffee. Using diagrams explain the role of price as a signal and as an incentive for
consumers and for firms in reallocating resources.)

Price signal will be an incentive for consumers and for firms in reallocating resources
because a substitute good took over demand for coffee.
Practice
Q3 (Consider the labour market, and suppose the supply of labour falls due to large
scale…………..)

Consumer surplus

Highest price consumers are willing to pay for a product minus price actually paid.

Area A - Area above price and below demand curve

Depends on individual

Producer surplus

Price decline by firms for selling their good minus the lowest price they are actually paid.

Area B - Area below price and above supply curve

Depends on firm

Social Surplus

Producer + Consumer supr;us

Maximised at market equilibrium

Marginal benefit (MB) = Marginal Cost (MC) → Allocative efficiency

Calculations - Formulas (P68+69)

Consumer surplus = (𝑃 𝐼𝑛𝑡𝑒𝑟𝑐𝑒𝑝𝑡 𝐷 𝑐𝑢𝑟𝑣𝑒 − 𝑝𝑟𝑖𝑐𝑒) * 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦/2

Producer Surplus = (𝑃𝑟𝑖𝑐𝑒 − 𝑃 𝑖𝑛𝑡𝑒𝑟𝑐𝑒𝑝𝑡 𝑆 𝑐𝑢𝑟𝑣𝑒) * 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦/2
Social Surplus = 𝐴𝑟𝑒𝑎 𝑇𝑟𝑎𝑝𝑒𝑧𝑖𝑢𝑚 = (𝐴 + 𝐵) * 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦/2
a) (6-2)*6/2 = 12 = Producer surplus, (12-6)*6/2 = 18 = Consumer surplus
b) 38.25, 22.75
c) 20.25, 10.75
d) Decrease Price 6→3, Increase quantity 6→9
 1) Airlines
2) It is very effective
3)

Price elasticity of demand (PED)

PED → measjres how quantity demanded responds to a change in price

PED = %change in quantity demanded/%change in price

0= perfectly price inelastic demand

Demand does not respond to a change in price

0.1→.9 = Price inelastic demand. Changes in price cause demand to change by a smaller
percentage
Eg. basic necessities

1= Unitary price elastic demand

Change in price causes demand to change by the same percentage

Over 1 = Price elastic demand

Change in price causes a demand to change by a larger percentage
Eg. luxury goods

Infinity = Perfectly price elastic demand

Demand → extremely sensitive

1)
a) A good's price elasticity of demand is a measure of how sensitive the quantity
demanded is to its price.
b)
 2) Since price and quantity demanded are negatively (indirectly) related, the PED is a
negative number, However, the common practice is to drop the minus sign and
consider PED as a positive number.
3) 100 → 120 = 20%, $16 → $12 = 25%, 20/25 = 0.8
4) 8/10 = 0.8
5) x/15=0.8, x = 12 = Percentage decrease in quantity demanded
6) 30/x=1.5, 30=1.5x, 30/1.5 = x = 20 = percentage decrease in good y s

High prices - PED = Elastic

Smal percentage change in price causes large percentage change in quantity
Low prices - ped = inelastic
Large percentage change in price causes small percentage change in quantity
 a) 50% increase in price, 12.5% decrease in units, 12.5/50 = 0.25
b) 20% increase, 20% decrease, 20/20 = 1
c) 12.5% increase, 50% decrease, 50/12.5 = 4
1) Type of good

Necessities → inelastic eg. basic foods, water, electricity

Luxury good → elastic eg. holidays, expensive restaurants
2) Addictive/ Habit forming goods
Inelastic → Alcohol, tobacco
3) % of income spent on a good
Inelastic → Low percentage of income on basic foods
Elastic → High percentage of income eg holidays

Using PED

How firms might use PED

Firms - Revenue changes

 - Planning decisions eg decrease in price - elastic PED
- Large increase in demand
- Increase in raw materials
- Increase in Staff
- Increase in output

Government - usually tax inelastic goods

- Increase in indirect tax on goods with inelastic demanded PED eg
alcohol, tabacoo

Practice question Page 95 ex 3.5 Q3, 4

Q3
a) -15
b) 15
c) 0.2

Q4
a) 250
b) 350
2)
A) Cadbury’s chocolate more elastic
B) Orange juice more elastic
C) Sweets more elastic
D) Computer more elastic
E) Heating oil in one week more elastic
F) Meat more elastic