ECONOMIC

notebook

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Economic problem
Not being able to satisfy everyone’s wants arises
because of scarcity

Economic goods and Free goods

Economic goods - take resources to produce
Free goods - take no resources to produce

Key Terms
Resources: factors used to produce goods
and services
The economic problem: unlimited wants
exceeding finite resources
Scarcity: a situation where is not enough
to satisfy everyone’s wants

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Factors of production (Economic resources)
Economic resources that are used to produce goods
and services

(4) factors of production (Key Terms)

Land - gifts of nature available for production
Labour - human effort used in producing goods and
services
Capital - human made goods used in production
Enterprise - risk bearing and key decision making in
business

Additional terms
Consumer goods : goods for own sake
Capital goods : goods used to produce other goods
(or)
used for other purpose not for own sake

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Mobility of factors of production
Geographically mobile: capable of moving one
location to another
Occupationally mobile : capable of different use

Geographically Geographically Occupationally Occupationally

mobile immobile mobile immobile

Capital Capital Labour

Land
(Vehicle) (Machinery) (un-trained)

Capital
Labour
Labour Land (M with one
(trained)
purpose)

Land
Enterprise Enterprise (destroyed/
damaged)

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Opportunity cost
cost of the decision in terms of the best alternative
given up to achieve it

Influences
Workers - undertaking one job has opportunity cost
Produces - private sector firms choose the options
with maximum profit
Government - Carefully consider expenditure of tax
revenue

Key terms
Opportunity cost : the beset alternative forgone
Additional terms
Economic goods - goods that requires resources to produce
(Almost every good; food, clothing, phone, etc.)
Free goods - goods that requires no resources to produce
(Air, sunlight)

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Production Possibility Curve (PPC)
A curve that shows the maximum output of two
products and combination of those products that can
be produces with existing resources

Points in PPC
Inside curve - not full use of resources
On the curve - maximum use of resources (efficient)
Outside the curve - not attainable

Resources are being reallocated

Movements in PPC
Movement along PPC
illustrates
opportunity cost of the decision

Shape of PPC
Usually bowed
2 products -> if equal output -> PPC = constant

Other names of PPC

Production possibility frontier
Production possibility boundary

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 A production possibility curve

A Constant
production possibility curve

Shifts in PPC
Shifts to right
increase in 2q of resources 2q - quantity and
Shifts to left quality of resources
decrease in 2q of resources
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Economic growth -> shift to right
 Microeconomic

It is the study of behaviours and decisions of

households, firms and performance of individual
markets.

small scale
For example: households, firms, industries

Microeconomic

It is the study of whole economy.

large scale
For example: study of GDP, inflations, unemployment

Decision Making is done by:

Economic agents - people who take decisions in micro
and macro economies
Economic agents

microeconomics macroeconomic
(households, firms) (Government)

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Low prices, good quality, save good strong economy

return, profit maximisation, Good ROI

(3) Fundamental economic questions

1. What is produced?
2. How to produce it?
3. Who is to receive the product?

Planned Economic system Market Economic system

Other names: Market

Other names: Command
economy or free
or Collectivist economy
enterprise economy

What to produce: alerted

Decision maker:
by buyers to producers
Government
through price mechanism

State give instructions Minimal government

(Referred to directives) intervention

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Additional terms
Capital intensive : high proportion of capital relative to
labour
Labour intensive : high proportion of labour relative to
capital
Mixed economy : both private and public sectors play
crucial role

Key terms
Economic system: the institutions, organisations and
mechanisms that influence economic behaviour and
determine how resources are allocated.
Planned economic system: an economic system where the
government makes the crucial decisions, land and capital
are state-owned and resources are allocated by
directives.
Directives: state instructions given to state-owned
enterprises.
Mixed economic system: an economy in which both the
private and public sectors play an important role.
Market economic system: an economic system where
consumers determine what is produced, resources are
allocated by the price mechanism and capital are
privately owned.

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Price mechanism: the way the decisions made by
households and firms interact to decide the allocation of
resources.
Capital-intensive: the use of a high proportion of capital
relative to labour.
Labour-intensive: the use of a high proportion of labour
relative to capital.

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Demand

Willingness and ability to buy a product

Only talk about effective demand

Demand and price

Inversely related
Price⬆️ = Demand ⬇️ Demand
Price⬇️= Demand ⬆️

Individual Market
Demand Demand

Amount of product an Total demand for a

individual would be product
demanded

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Demand Curve

Price ➡️ on vertical axis

Quantity demanded ➡️ on horizontal axis

downward slope
left to right

Often not taken to axis

because axis means ➡️ highest price
curve ➡️ straight or curve

A Demand Curve

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 Extension and Contraction
in demand

Price falls ➡️ extension

in demand
Price rises ➡️ contraction
in demand

Increase and Decrease in demand

Occurs when demand is affected by other factors

Increase in demand ➡️ shift to the right
Decrease in demand ➡️ shift to the left

Other factors

changes in income
changes in price of related products
(substitute, complement)
Advertising campaigns
Changes in population
Changes in taste and fashion
Other factors: weather conditions, special events

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Supply

Willingness and ability to sell a product

Only talk about effective supply

Supply and price

Directly related
Price⬆️ = Supply⬆️ Supply
Price⬇️= Supply⬇️

Individual Market
Supply Supply

Supply of one firm or Total supply

plant(factory)

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Supply Curve

upward slope
can be drawn as straight line

Extension and Contraction

in Supply

Price rises ➡️ extension

in supply
Price falls ➡️ contraction
in supply

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Increase and Decrease in supply

Occurs when supply is affected by other factors

Increase in supply➡️ shift to the right
Decrease in supply➡️ shift to the left

Other factors

changes in the costs of production

improvements in technology
taxes
subsidies
weather conditions and health of live stocks and crops
Prices of other products
Disasters and wars
Discoveries and depletions of commodities

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Price Elasticity of Demand (PED)
The extend to which the quantity demanded
changes when the price of the product changes.

Percent change in quantity demanded

PED =
Percent change in price

PED =
🔺
% QD ×100
%🔺P

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 Chapter 15
Mixed Economy
15.1 A market Economy
A combination of the features of a planned and a
market economic system.

Key term: An economy in which both the private

and public sector play an important role.

Aim->To gain advantages from both and avoid disadvantages

Products produced by private sector

Generate choices,
increasing efficiency
creating incentives

Government interventions Benefits

Account all costs and benefits

Aim : Benefits of society > costs
Encourage consumption of products with social benefits
(Merit Goods - Healthcare, Education)
Grant subsidies
provide information
pass legislation

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Discourage consumption of products with social costs
(Demerit Goods - Alcohol, Cigarettes ) <- Harmful goods
Impose taxes
provide information
pass legislation

Finance goods that cannot be charged

For example: Defence

Prevent private sectors from

exploiting consumers
charging high prices
Merging and monopoly

To make maximum use of resources

including labour
people willing and ability to work can find jobs

Plan more ahead than private sector

devote more resources to capital goods

Helping vulnerable groups

ensure they have access to necessities
more distribution of income - tax rich at high rate

Vulnerable groups
population that need humanitarian assistance than
others
For example: Children, Elderly, Disable people,
low-income people

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Maximum price (price ceiling)
setting price below the equilibrium
shortage(demand exceeds supply)
Have to allocate

Allocation methods
queuing
rationing
lottery

Minimum price (price floor)

setting price above the equilibrium
surplus (supply exceeds demand)

To do
compulsory
providing free sometimes
bought by government (e.g. capital goods)

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Government measures to address market failure

Subsidies and indirect taxes

Effect of subsidy influenced by ➡️ subsidy’s size and

price elasticity of demand
(Results ➡️ supply curve to the right)

Explanation:
If inelastic ➡️ have to use more subsidy
Result: consumers receive most of the benefits
Producers keep the rest but it is low

If elastic ➡️ only a few amount of subsidy is required

(Consequence: producers can keep more of the subsidy)

Effect of tax influenced by ➡️ tax size and price

elasticity of demand
Higher tax ➡️ greater impact

$2 I 2000 units
inelastic > 1800 units > $3600
elastic > 900 units > $1800

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Competition policy
prevention of mergers
removes barriers to entry and exist
regulation of monopolies
prohibition of uncompetitive practices
predatory pricing
limit pricing

Environmental policies

restrictions on the amount of pollutants emmited

tradable permits

Regulations

target audience for the product

quality of products
staff managements
timing for opening and closing of shops

Problems from regulations

being not directly compensate those who suffer

reducing market flexibility
creating barriers to entry

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Nationalisation and privatisation

Nationalise
state-owned enterprises, public corporations and
nationalised industries.
no shareholders
funds

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