Eco Notes - Textbook

Unit 1 - Scarcity

• Scarcity is the lack of resources to produce the wants

• Resources, including workers and machinery, are scarce
• People still want more products than the resources available can produce. Over a period of time,
wants continue to grow and change
• The economic problem arises because scarcity
• There is no limit to people wants - they are infinite
• The no. of workers machine and offices are limited so, because of this mismatch, between what
people want and the maximum that can be produced, give rise to the economic problem

Unit 2 - Factors of Production

• There are main four factors of production - land, capital, labour and enterprise

• Land - gifts of nature for production

- Land is basically covers every natural resource which is used in production
- Land also includes whatever is beneath the land like coal, what occurs naturally on the land, eg.
rainforests and the sea, ocean and rivers
- The amount of physical land in existence does not change much with time
- Other natural resources, can change quite rapidly like the rainforests are currently declining at a
rapid rate
- Some renewable resources, for instance wind power are replaced by nature and hence can be
used again
- Some non-renewable resources, e.g. gold and oil, are reduced by use
- Most land is occupationally mobile

Occupationally mobile - capable of changing use

Geographically immobile - incapable of moving from one direction to another location

• Capital - human-goods in production

- Capital is any human-made (manufactured) good used to produce other goods and services
- Capital is also referred to as capital goods and producers goods
- Capital goods are not wanted for their own sakes but for what they can produce
- Consumer goods, such as food, clothing, and entertainment, are wanted for the satisfaction they
provide to their owners
- The supply of capital tends to increase with time
- Some capital goods physically wear out and some become outdated
- Gross investment is the total value of the output of capital goods
- The value of replacement capital is called depreciation or capital consumption
- Net investment is the value of the extra capital goods made. It is equal to gross investment
minus depreciation
- Occasionally, the gross investment may be lower than depreciation
- The geographical and occupational mobility of capital varies according to the type of capital
goods

Investment - spending on capital goods

• Labour
- Labour covers all human effort - both mental and physical involved in producing goods and
services
- The more human capital workers have, the more they should be capable of producing
- Supply of labour is influenced by two key factors. Number of workers and number of hours
for which they work

- The number of available workers is determined by:

• The size of the population - the larger the population, the more workers there are likely to be
• The age structure of the population - The country with a high-proportion of people in the
working age will have more workers than a country with the same population size but a higher
younger or older people
• The retirement age - the higher the retirement age, the more workers will there be
• The school leaving age - Raising the school leaving age will increase the no. of workers
• Attitude to working women - Countries, where it is acceptable for women to work, have more
workers to draw on

- No. of hours, for which people work

• Length of the average working day
• Whether they work full time or half time
• Duration of the over-time
• Length of holidays

Productivity - output per worker hour

- Mobility of labour

• Geographical immobility
Differences in the price and availability of housing in different areas and countries
Family ties
Differences in educational systems in different areas and countries
Lack of information
Restrictions on the movement of workers

• Enterprise
- Enterprise is the willingness and ability to bear uncertain risks and to make decisions in a
business
- Entrepreneurs are the one who organise the factors of productions and who bear the risk of losing
money, if their business fails
- The two keys tasks of an entrepreneur can be carries out by different people. In large
companies, it is the shareholders who runt he risk of losing their money if the company goes
out of business whilst the managing director take production decisions and organise the
factors of production
- Most mobile factor of production

Entrepreneurs - risk bearing and decision making in business

Unit 3 - Opportunity Cost

• Opportunity Cost is the cost of a decision in terms of the best alternative given up to achieve
it
• Consumers are buyers and users of goods and services
• A vast majority of good are ECONOMIC GOODS. This means that it takes resources to
produce them and hence, their production involves an opportunity cost.
• FREE GOOD - a product which does not require any resources to make it and so does not
have an opportunity cost

• Production possibility curve (PPC), also known as opportunity cost curve is used to show
opportunity cost
• A PPC shows the maximum output of two products and combinations of these products that
can be produced with existing resources and technology

Unit 4 - Market and Mixed Economies

The Three Main Economic Systems

All economies have to answer three main fundamental economic question

These are:
• What to produce - allocation of resources
• How to produce it - manufacturing it
• Who is to receive the products produced - price (needs/wants)

• These questions arise because of the basic economic problem of unlimited want exceeding finite
resources
• An economic system covers the institutions, organisations and mechanisms in a country that
influence economic behaviour

Different Economic Systems

There are three main economic systems:

PLANNED ECONOMY - an economy where the government makes the crucial decisions,
land and capital are state-owned and resources are allocated by directives

• It can also be called a centrally planned, command or collectivist economy

• It is the one where the government makes the decisions about what to produce, how to
produce it and who receives it
• The stats owns all or at least most of the land and capital and employs who receives it
• It gives instructions to state owned enterprises on what to produce and how to produce it
• it will usually provide basic necessities and important products such as housing, transport and
education free of cost or at a low price

A MARKET ECONOMY - an economy where consumers determine what is produced,

resources are allocated by price mechanism and land and capital are privately owned

• Also known as a free enterprise economy, where the consumers decide what is produced
• They signal their preferences through the price mechanism. If they more of a product, they will be
willing to pay more for it
• Government intervention is minimum
• Land and capital are privately owned

ADVANTAGES OF MARKET ECONOMY

• Consumers can choose which firms to but from, firms can decide what they want to produce
and workers can choose who to work for
• Innovation - chances for profit
• Variety for consumers
• Produce at low prices - higher profits
• High incomes provide an incentive for people to work hard
• Consumers are said to be the SOVEREIGN

DISADVANTAGES OF MARKET ECONOMY

• Consumers and private sector firms only take into account the cost and benefits to themselves and
not the costs and benefits of their decisions on others
• Only focus on their benefits and not external costs
• Some firms who have been leading the market with their products may produce cheap quality
products for high prices and the consumers have no choice
• There can be a very uneven distribution of income

A MIXED ECONOMY - an economy in which both the private and public sectors play an
important role

• Combination of the features of a planned and a market economy

• Some firms are privately owned and some are government owned
• Some prices are determined by the market forces of demand and supply and some are set by the
government
• Both government and consumers influence what is produced

ADVANTAGES OF MARKET ECONOMY

• The government should take into account all the cost and benefits
• Government can also encourage the consumption of products that are more beneficial for
consumers and others than they realise by granting subsidies, providing information or passing
legislation
• Government can discourage the consumption of products that are harmful for the consumers
• The government can pay for manufacturing of the product that cannot be charged for directly
• Less unemployment

DISADVANTAGES OF MARKET ECONOMY

• Unnecessary interference - poor management

• Too much market - inequality
• Too much competition
• Taxes + Regulations

Unit 5 - EQUILIBRIUM PRICE

DEMAND

• Individual Demand - the amount of a product an individual would be willing and able to buy, at
different prices
• Market Demand - total demand for a product at different prices
• A demand schedule lists the different quantities demanded of a product, at different prices over a
particular time period
• A DEMAND SCHEDULE - different quantities demanded of a product at different prices over a
particular time period
• A DEMAND CURVE - graphically shows the DEMAND SCHEDULE.
• THE EFFECT of a CHANGE in PRICE on DEMAND
- a fall in the prise of the product is likely to lead to the rise in demand for it known as extension
in demand, expansion in demand or an increase in the quantity demanded means that cause
of the change in demand is a change in the price of the product
- AN EXTENSION IN DEMAND - a rise in the quantity demanded caused by a fall in the price
of the product itself
- A CONTRACTION IN DEMAND - a fall in the quantity demanded caused by the rise in the
price of the product itself

SUPPLY
• Supply - willingness and ability to sell a
product
• Influenced by the amount produced but not
the same as production because some
produced today, could be stored in order to
be sold later
• Supply is directly related to PRICE
• A rise in price would lead to a rise in supply
• INDIVIDUAL AND MARKET SUPPLY
- Individual Supply - supply of one plant/
firm
- Market Supply - total supply of a product
produced by all the firms in the industry
• AN EXTENSION IN SUPPLY - a rise in the quantity supplied caused by a rise in the price of
the product itself
• A CONTRACTION IN SUPPLY - a fall in the quantity supplied caused by a fall in the price of
the product itself

• Price Determination
- Consumers want low prices whilst the sellers want high prices.
- Sometimes there is direct bargaining between the consumer and seller
- Firms estimate and then charge, what they think the EQUILIBRIUM PRICE is

• EQUILIBRIUM PRICE
- THE PRICE WHERE DEMAND AND SUPPLY ARE EQUAL
- Also known as the market clearing price because it is the price, where demand and supply
are equal so there are no shortages or surpluses of the product
- Can be found by comparing the demand and the supply schedules of the product and seeing
where the demand and the supply are equal
- Can also be found by seeing the demand and supply graphs and the place where the two lines
intersect in your Equilibrium Price
- If a firm, sets their price above the equilibrium level then it will not sell all their products then
there will be a surplus
- Disequilibrium - a situation where demand and supply are not equal
Changes in Demand

• Increase in Demand is shown by a shift to the right in the demand curve

•Causes in Changes in Demand
-Changes in Disposable Income
-Changes in Population
-Changes in taste or fashion
-Changes in price of related products
-Advertising Campaigns

•Disposable Income - income after income

tax and national insurance contributions
have been deducted
•Normal Good - a product whose demand
increases when income increases and
decreases when income falls
•Inferior Good - a product whose demand
decreases when income increases and
decreases when income falls
• Substitute - a product that can be used in place of another
• Complement - a product that is used together with another product
• Ageing Population - an increase in the average age of the population
• Birth Rate - the number of live births per thousand of the population in a year

Changes in Supply

Increase in supply is illustrated by

a shift to the right

Causes of changes in Supply

Cost of production
reasons for a change in costs of
production:
a change in the price of any of the
factors of production
change in their productivity

Unit cost - the average cost of

production. It is found by dividing
total cost by output

Improvements in technology
• Since improvements in
technology raise the productivity
of capital, reduce costs of
production and result in an
increase in supply
• Becomes cheaper to produce a
range of products due to
availability of more efficient
capital goods and methods of production
Taxes - payment to the government
• Taxes on firms, including corporation tax and indirect tax such as VAT and excise duty, are
effectively a cost that firms have to pay
• They recover the extra cost by raising the prices of the product

Subsidies - a payment by the government to encourage the production or consumption of a

product
• a subsidy given to the producers provides a financial incentive of them to supply more
• Granting subsidies, will cause an increase in supply whilst the removal of a subsidy will cause a
decrease

Weather condition and Health of livestock and Crops

• Changes in weather affect particular agricultural products
• period of good weather will increase the supply of the product

Prices of other Products

• Firms often produce a range of products so, if one of their product becomes popular then the
price will rise and supply will increase
• The firm will divert more resources to produce this product because it is in demand and make less
of the other product but the price of the product won’t change, only supply

Disaster and Wars

• Natural disasters such as hurricanes, floods and wars can result in significant decrease in supply
Discoveries of new sources and Depletion
• The supply of commodities, such as gold, coal and oil is affected by discoveries of new sources

Unit 8 - Price Elasticity of Demand

• PED - measures the extent to which the quantity demanded changes when the price of the
product changes. A measure of the responsiveness of demand to a change in price.
• PED = Percentage change in quantity demanded/percentage change in price

Interpretation of PED

• PED provides two pieces of information

- Sign - PED is minus which tell us that there is an inverse relationship between demand and
price
- Rise in price will cause a contraction in demand and a fall in price will cause an extension in
demand

- Size - this indicates the extent by which demand will extend or contract when price
changes

Elastic and Inelastic Demand

• Elastic Demand - when demand changes by a greater percentage than the change in price

- PED figure of more than 1 but less than infinity is ELASTIC DEMAND
- When demand is elastic, price and total revenue move in opposite directions
 • Inelastic Demand - when demand
changes by a smaller percentage
than the change in price

- PED is less than 1 but greater than

0 which means that it is inelastic
demand
- Price and total revenue move in
the same direction

Factors Determining the Degree of Elasticity

• Availability of substitutes of a similar quantity and price

- If a product does have a close substitute, it is like to have elastic demand
- a rise in price will cause a significant fall in demand as consumers will switch to the substitute
- If there is no substitute for the product then the demand will be inelastic, demand will not fall
much in response to a rise in price because there is no other substitute for the product

• Proportion of income spent on the product

- if a product makes a small proportion of the people’s income then it is likely to be inelastic

• Luxury/Necessity
- Luxury products usually have elastic demand
- Necessitates like soap have inelastic demand

• Addiction
- It is difficult to cut back on their purchases of addictive good like coffee and cigarettes which
means that these products have inelastic demand

• Time
- If the purchase of the demand can be delayed then the demand trends to be elastic
- A rise in price will result in a greater
percentage fall in demand as people will
postpone the purchase of the product,
thinking that the price will drop in the
future

Differences in PED

• As people become richer, luxuries turn

into necessities which changes the
demand from elastic to inelastic
• PED differs in different regions due to
different tastes, income levels and
cultures

- Perfectly Elastic Demand (Theoretical Concept) - when a change in price causes a complete
change in demand

- Perfectly Inelastic Demand

(Theoretical Concept) - when the
demand doesn’t change when price
changes. Consumers buy the same
quantity despite the alteration in price
and PED is zero

- Unit Elastic - percentage change in price

results in an equal percentage in demand,
giving a PED of one

Unit 9 - Price Elasticity of Supply

• PES = Percentage change in quantity supplied/Percentage change in price
• PES - a measure of the responsive of supply to a change in price

Elastic and Inelastic Supply

• Elastic Supply is when the percentage change in

quantity supplied is greater than the percentage
change in price. PES of 1 but less than infinity is
elastic

• Inelastic Supply is when the percentage

change in quantity suppled is less than the
percentage change in price
• PES of less than 1 but greater than 0 is
inelastic

Factors Influencing PES

- time taken to produce it

- cost of altering its supply
- feasibility of storing it

• if a product can be made quickly then the cost of altering its supply is low
• if it can be stored, supply can be adjusted relatively easily in the event of a price change

Other Degrees of PES

- Perfectly inelastic supply - quantity supplied doesn’t not alter with price change and PES is 0
- Perfectly elastic supply - change in price will cause an infinite change in supply, and PES will
be infinity
- Unity PES - when a given percentage change in price causes an equal percentage change in
supply
Unit 10 - Merits of the Market System

- The use of resources is changing all the time in response to changes in consumer demand and
costs of production

The Importance of Competition and Incentives

• Allocative Efficiency

- occurs when resources are allocated in a way that maximises consumers’ satisfaction
- firms produce products, that consumers demand, in the right quantities
- Allocative efficiency being achieved with supply matching consumer demand
- Allocative inefficiency (under production) - happens when there are too few resources being
devoted to the product, which results in a shortage
- Allocative inefficiency (over production) - happens when there are too many resources being
devoted to the product, which results in a surplus
- Market forces, by changing prices, should eliminate surpluses and shortages and move towards
allocative efficiency. Competition can play a key role because in a competitive market, a firm has
both an incentive in the form of profit and a threat of punishment in the form of a risk of going
out of business to be allocatively efficient

• Productive Efficiency

- when a firm produces at the lowest possible cost per unit

- if a firm produces at the lowest possible cost, then it may capture more sales and gain more profit
- if the costs are higher than its rivals then it will lose market share an and possibility all of its
sales
- if a firm is productively efficient then it means that they are not wasting resources
- if all the producers in a country are productively efficient then the economy will be able to make
full use of its resources and hence will be producing on the PPC

• Dynamic Efficiency

- arises when resources are used efficiently, over a period of time

- profit incentive and threat of going out of business can encourage firms in a market system to
spend money of R&D. firms which introduce new methods of production and bring out improved
products, increase the chances of gaining high profits
- the firms who don’t keep up with new ideas to product and don’t develop new products, run the
risk of driven out of the market

Advantages of the Market System

- providing consumers with the power to determine what is produced, choice, low prices and high
quality products
- improvement of methods of production
- rise in the quality of products made

Unit 11 - Market Failure

• Market failure occurs when market forces fail to produce the products that consumers demand, in
right quantities and at the lowest possible cost
• Market failure arises when markets are inefficient

• Failure to take into Account all Costs and Benefits

• Information Failure
- Occurs when there is a lack of information between the people in the economic exchange
- Factors that cause it - lack of information, asymmetric information,

• Merit Goods
- Merit goods are good for the consumers than they realise but the consumption is very low. Ex:
healthcare
- Merit goods are under-consumed and hence under-produced

• Demerit Goods
- Demerit goods are more harmful to the consumers than they realise and they generate external
costs. Ex: Cigarettes
- Demerit goods are over-consumed and hence over-produced

• Public Goods
- If these public goods are provided for some people, others can consume them without paying for
them. people who take advantage as known as free-riders
- Non-rivalry - consumption of the product by one more person doesn’t reduce someone else’s
ability to consume it
- It is possible to stop non-payers from enjoying the products and if one person consumes a unit of
the product, someone else cannot
- Public goods have to be financed through taxation

• Abuse of Market Power

- can arise due to producers having more market power than consumers (ask)
- If one firm dominates the market, then it won’t have the competitive pressure to respond to
consumer demand, to keep its cost low and to improve its and improve its product

- Can also occur when more than one firms are producing a product because they might merge to
reduce competition by increasing the price of the product so, the consumers are forced to buy
from them which is known as PRICE FIXING
- The government try to promote competition and prevent firms from abusing their market
power
• Removing restrictions on the entry of new firms into a market and making uncompetitive
practices such a price fixing illegal
• They may also prevent firms from merging

• Immobility of Resources
- Firms produce products which are more popular rather than products whose demand is
decreasing
- This requires resources to be both occupationally and geographically mobile but some resources
are immobile
- Government can take to promote occupational mobility of labour, are to improve education also
provide training in the new skills needed
- Government can provide investment grants to make it easier for firms to change the use of land
and buildings

• Short Termism

• Unfairness
- Income distribution can be very uneven if its solely determined by market forces. Some people
will be very rich but some would be very poor
- Firms will only produce products that people are willing to buy and able to pay for which means
that they won’t be producing products demanded by the poor

• Government Failure
- Occurs when government intervention worsens the situation instead of improving it
- Government may lack information about the extent of externalities
- it may overbite the extent of the private benefits, offered to the people by consuming merit
goods and it may find it difficult to calculate the most efficient quantity of public goods to
supply
- Governments decisions may be influenced by political factors
- Government intervention may also reduce economic efficiency by reducing incentives

Unit 12 - Use of Resources

Unit 13 - Public Expenditure versus Private Expenditure

• Public Expenditure
- Expenditure done by the public sector
- Includes the expenditure done by the central government, local authorities or regional bodies
and SOE’s (state owned enterprises)

- Two broads categories of Public Expenditure

- Exhaustive Spending
• Involves the public sector directly buying goods and services such as buying medical equipment,
paying the police and building roads
• The public sector determines the use of resources

- Transfer Payments
• Transfers money to people (to pensioners and the unemployed) and firms (in the form of
subsidies and grants)
• Non-exhaustive expenditure - the government doesn’t decide the allocation of resources

- Uses of Public Expenditure

National and regional governments spend money on:
• Public goods
• Merit goods
• Supporting vulnerable groups
• Helping private sector industries
• covering any losses, incurred by the SOE’s and
• Managing the economy, including promoting employment
- Financing Public Expenditure
Public Expenditure can be financed by:
• Taxation
- The amount of tax a government can raise is influenced by the income of the country, the
willingness of the citizens to pay taxes, reaction of firms and the workers to tax changes and tax
rates in other countries
- If the GDP of the country is high then the country will raise a considerable about of money
- People may not be prepared to pay taxes and if increasing the tax may not be very successful in
increasing tax revenue but may instead increase the size of the informal economy
- The government may be reluctant to raise taxes, if it thinks that workers will work for fewer
hours or emigrate and MNCs will leave the country

• Privatisation
- Selling off state owned assets, including SOEs, to the private sector can raise revenue in the
short term
• Borrowing, profits from SOE’s
- Ability of a government to borrow will depend on its credit worthiness at home and abroad
- If people, firms, foreign governments, and international organisations will lend the money to the
government if they think that they will be repaid
- Amount borrowed by a government will be influenced by the state of the economy, level of
economic development and acceptable rate of interest

• Government influence on Private Sector Expenditure

- The government influences private sector expenditure in many ways like:
- Taking income and expenditure
- Providing subsidies
- Giving grants
- Influencing the level of economic activity

Unit 14 - Specialisation, Exchange and Money

- Specialisation - concentration on particular products or tasks

- Specialisation of Countries
- If countries specialise in what they are best at producing, the output should be higher and hence
their citizens should enjoy higher living standards
- Concentrating on a few products is fine but only if the demand is high and the COP doesn’t rise.
If the demand falls or the COP increases then the country might have some difficulties

- Specialisation of Firms
- Firms that specialise in a narrow range of products can get to know the behaviour of the market
and build up a reputation
- Resources the producers get also affects the specialisation
- Location and the demand in the location also play a role as a food shop in a rich are will store
expensive items than the one in a poor area

- Some firms choose not to specialise and diversify their products to spread their risks across a
number of products. If the demand for one product is going down then it is likely than demand
for another is rising

- Specialisation of Workers
- Division of labour - workers specialising in particular tasks
- If workers specialists on one task then their productivity increases as they are doing the same
thing repetitively
- It also has a side effect as the worker can get bored which might lead to the worker not taking
care of their work which results in a higher unit cost

- Specialisation and the Individual

- Specialising in less demanding jobs can reduce the pressure on workers
- Disadvantages: demand for their service may fall and it might be difficult for them to find
another job. A particular task might be boring.
- Advantages: Consumers can get lower prices and better quality.
• Functions of Money
- Money allows people to buy and sell
- Functions:
• Medium of Exchange - products are exchanged for money and that money is used to buy other
products
• Store of value - money can be saved
• Unit of account - Money can be used to place a value on an item
• Standard of deferred payments - Allows people to borrow and lend

• Types of Money
- Coins, notes and bank accounts are the main forms of money
- Bank accounts are not a legal tender (any form of payment which, by law, has to be accepted in
settlement of a debt)
- Characteristics of Money:
• Intrinsic Value - it does not have to be worth something in its own right
• Generally acceptable
• Durable (will last some time)
• Portable (can be carried around easily)
• Divisible (can be divided into units of different values)
• Homogenous (every note or coin of the same value should be exactly the same)
• Recognisable (people can easily see that the item is money)

Unit 15 - Banks

- Commercial Banks - private sector banks which aim to make a profit by providing a range
of banking services
- Business organisations which seek to make a profit
- Have limited liability and are in the private sector

- Functions of Commercial Banks

• Enables costumers to keep their money in a safe place
• Current Account - Easy and immediate access to money in this type of account but usually the
interest is not paid on money held
• Deposit account - period of notice usually has to be given before the money is withdrawn from
this account

- Banks make most of their profits by charging higher interest rate from borrowers than that paid
on the money half with the banks
-