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Red Chapters Economics Summary:

Key terms are written in blue!

Supply and Demand:

In the markets there are buyers and sellers-
The buyers are responsible for demand in the market
Demand is the amount of a good that will be bought at given prices over a period
of time.
Sellers represent supply in the market.
Supply is the amount of a good that sellers are prepared to sell at given prices
over a period of time.
If demand starts to rise for a product, price is likely to rise. If demand falls, prices
will also fall.
If sellers try to increase the supply of a product the price is likely to fall.

The Market System:

The Market is a set of arrangements allowing buyers and sellers to communicate
and exchange goods and services.
The market system or price mechanism is the automatic determination of prices
and the allocation of resources by the operation of markets in the economy.
The Price is the amount of money that goods are exchanged for in a transaction.
Markets can fail due to i.e a lack of competition.

The Demand Curve:

Effective demand shows how much would be
bought.
The demand curve slopes down from left to right.
The price and the quantity demanded are
inversely related.
This means when prices go up demand will fall.
When prices go down demand will rise.

Demand Curve a line drawn on a graph which
shows, how much of a good will be bought at
different prices.
Effective demand the amount of a good people are willing to buy at given prices
over a given period of time backed by the ability to pay.
Inverse relationship (between price and quantity demanded) when price goes
up the quantity demanded falls and when the price goes down the quantity
demanded rises.
Shift in the demand curve a movement to the left or right of the entire demand
curve when there id a change in any factor affecting demand except the price)




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Factors affecting demand:

Income: It rises -> demand for normal goods rises. (Normal good a good for
which demand will rise if income rises or fall if income falls).
Advertising: If goods are advertised more heavily, demand is more likely to rise.
Population: As it grows -> increase in demand
Fashion: i.e seasonal clothing (summer, winter)
Prices of substitutes: (goods bought as an alternative to another but perform the
same function). If it were lowered, demand for a product would fall.
Prices of complements: (these are goods purchased together because they are
used together, such as milk and cereals -> complementary goods). Demand for
such a product is likely to be affected by the price of a complementary good.
Interest rates: (the price of borrowed money). If interest rates increase it
becomes more expensive to borrow. Therefore demand for goods purchased with
borrowed money will fall.

The Supply Curve:

Prices go up, supply will also go up.
Prices go down, supply will also go down.
Supply curve a line drawn on a graph
which shows how much of a good sellers
are willing to supply at different prices.












This would be a fixed supply curve.

Factors affecting Supply:

Costs of production: If production costs rise, sellers are likely to reduce supply.
This is because profits will be reduced. Then the supply curve would shift to the
left.
Indirect taxes Taxes imposed by the government on spending. When they are
increased the supply curve shifts to the left because indirect taxes represent the
costs to firms.
Subsidies a grant given to producers to encourage production of a certain good.
They help to reduce production costs, which is an increase in supply.
Changes in technology: This lowers production costs, so the curve shifts to the
right.
Natural Factors: (weather) agricultural products, good growing conditions will
increase supply
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Prices of other goods: A rise in the price of carrots may encourage a farmer to
produce more carrots a t the expense of i.e parsnips.

VAT: value added taxes -> a percentage is added to the price of a good when sold

The Market equilibrium Price:

In any market the price is set where the wishes of consumers are matched exactly
with those of producers.
Equilibrium price is where supply and demand are equal.





<----Equilibrium Price

<--------Total Revenue



Total Revenue:

The amount of money generated from the sale of goods calculated by multiplying
price by quantity.
The amount of money generated from the sale of output
TR = Price x Quantity

Excess Demand:

Where demand is greater than supply and there are shortages in the market.

Excess Supply:

Where supply is greater than demand and there are unsold goods in the market.

Price elasticity of demand:

The responsiveness of demand to a change in price.

Price inelastic demand: (the number is below 0)

A change in price results in a proportionately smaller change in demand.
When the change in demand was not as big as the change in price.
(The number is bigger than 0, even if a is in front of it)






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Price elastic demand:

A change in price results in a greater change in demand.
When the change in demand is bigger than the change in price.
Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price

Perfectly inelastic demand: Perfectly elastic demand:











A price change will not affect demand If prices rise demand will fall to zero

Factors affecting PED (price elasticity of demand):

Availability of substitutes: Goods that have many substitutes have elastic demand
because consumers can switch to another product. If there are a few or no
substitutes for a product, demand will be inelastic.
Degree of necessity: essential goods (petrol) have inelastic demand. This is
because they are needed even if prices increase.
Proportion of income spent on a product: If consumers spend a large proportion
of their income on a product -> elastic demand.
Time Period: short term -> inelastic demand (consumer needs to find substitute).
Long term -> elastic demand.

Price elasticity of supply:

The responsiveness of supply to a change in price.

Perfectly elastic and perfectly inelastic supply curve:













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Perfectly inelastic supply:

A price change will not affect supply.

Perfectly elastic supply:

Producers are prepared to supply any amount at a given price.

Factors affecting price elasticity of supply:

Time: The speed with which producers can react.
Stock levels: Producers can hold stocks of goods and can respond quickly to price
changes so supply will be elastic.
Production speed: Products, which can be produced quickly, have elastic demand.
Spare capacity: With spare capacity, producers have the ability to produce more
with their resources.

Income elasticity:

Income elasticity of demand the responsiveness of demand to a change in
income.

Percentage change in quantity demanded
Percentage change in income

Factors affecting income elasticity of demand:

Main factors = whether or not goods are necessities or luxuries.
Necessities are goods a consumer needs to buy.
Luxuries are goods that consumers like to buy if they can afford them.

Price elasticity and firms:

When a firm changes its price there will be a change in demand and therefore a
change in total revenue.

Unitary elasticity:

Where price elasticity of demand for a product is equal to 1. For such a product
total revenue is exactly the same at all prices.

Income elasticity and firms:

Changes in income in the economy may affect demand for the products.
Product switching:
o Flexible resources => can switch from the production of one good to
another.
Product planning: goods produced that are income elastic will expect changes in
income to affect demand.


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If incomes are rising in future they can plan ahead, having enough capacity
(outputs).
If incomes decrease (recession) firms would plan to cut output.

Price elasticity and the government:

Indirect taxes such as VAT
o VAT = value added taxes -> a percentage is added to the price of a good
when sold.
Governments target goods which are necessities or have few substitutes
(inelastic demand)

Finite resources:

Limited quantity => resources are scarce.
Referred to four factors of production: Land, labour, capital and enterprise.
Scarce resources the amount of resources available is limited.

Infinite wants:

Wants peoples desires for goods and services. (Holidays etc.)
Needs basic requirements for human survival. (Water, shelter etc.)
People want always more.
Wants are unlimited or infinite.

The economic problem:

Basic economic problem allocation of a nations scarce resources between
competing uses that represent infinite wants.
The worlds resources are scarce, the peoples wants infinite.
Demand for resources is greater than their supply.
o What to produce?
Impossible to produce all goods wanted
o How to produce?
Using a variety of different production methods
Four factors of production
o For whom to produce?
Should everyone get same quantities, or some more than others?
The way in which they are made depends on what sort of economic system an
economy has.

Choice and opportunity cost:

Choice deciding between alternative uses of scarce resources.
Opportunity cost when choosing between different alternatives it is the benefit
lost from the next best alternative.
All decision makers are faced with choices.
Resources have a number of alternative uses.



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How to use?
o Individuals: how to spend their limited budget?
o Firms: they have to choose btw spending on advertisement or on training
its labour.
o Governments: decide whether spending on welfare benefits or new
motorway.
Choices face a cost => opportunity cost, because a sacrifice has to be made when
making a choice.
Once the government (or a firm or individual) has chosen the best alternative, the
opportunity cost will be the benefit lost from the next best alternative.
Example: The new motorway is the governments preferred choice. Therefore the
5 billion will be allocated to this project. The opportunity cost in this case is the
benefit lost from not building the new hospital. I.e. the benefit lost from the next
best alternative (the hospital).

Production possibility curve:

Production possibility curve (PPC) a line which shows the different
combinations of two goods an economy can produce if all resources are used up.












Point A shows a combination of units of consumer goods and units of capital
goods, which can be produced.
Point B it is also the combination of units of consumer goods and units of capital
goods, which can be produced.
Point C illustrates a combination or consumer goods and units of capital goods
can be produced. At this point not all resources in the country are being used.
This is because point C is inside the PPC. A country should aim to push
production so that it is on the PPC.
Deciding which goods to produce and the concept of opportunity cost can be
illustrated using production possibility curves.
A PPC shows the different combinations of goods that can be produced if all
resources in a country are fully used.
The maximum quantities of goods can be produced.
If a country produces more capital goods it will probably be able to produce more
consumer goods in the future because capital goods are used to produce
consumer goods.
However by doing so there will be fewer consumer goods today and some people
will have to go without.


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What happens to the PPC over time? :

Over a period of time an economy would expect to raise the production of all
goods, because over time resources are used more efficiently.
New production methods are more efficient than old ones.
Countries find new resources.
Oil exploration companies regularly find new oil reserves worldwide. If countries
can produce more, the PPC will shift outwards.
This is called economic growth.












The mixed economy:

An economy where goods and services are provided by both the private and the
public sector.
Economy system that attempts to solve the basic economic problem.

The public and private sectors:

Public Sector government organisations that provide goods and services in the
economy.
Private sector the provision of goods and services by businesses that are owned
by individuals or groups of individuals.
The public sector is basically a range of organisations such as government
departments and other agencies, which provide services that are often neglected
by the private sector. Examples include health care, education or defence.
The private sector has individuals or groups of individuals who are free to set up
businesses and supply goods and services to anyone who wants to buy them.

Types of economy:

Three types of economy:
o A market or free enterprise economy: relies least on the public sector for
the provision of goods and services. The majority is provided by private
businesses. The public sector is limited and ensuring that competition
exists between businesses.
o A command or planned economy: relies entirely on the public sector. No
private businesses like in North Korea. Goods are distributed from state
outlets where they are sold to consumers are prices set by the state.
o A mixed economy: relies on both the public and the private sector to
provide goods and services.
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The mixed economy:

Most countries in the world have mixed economies.
The decisions what to produce, how and for whom to produce are made jointly
between consumers and the state.
What to produce:
o A mixed economy recognises that goods such as consumer goods, are best
provided by the private sector. Goods such as food, clothes, leisure and
entertainment and household services are best chosen by consumers.
Goods such as education, street lightening, roads and protection are more
likely to be provided by the state. The public sector provides goods that
the private sector might fail to provide in sufficient quantities. Due to
market failure.
Market failure where markets lead to inefficiency.
How to produce:
o In the private sector goods are provided by individuals or groups of
individuals. They aim of making a profit. Competition exists. This provides
choice and a variety for consumers. They try to maximise and minimise
the costs. The public sector will decide (government) how these services
should be provided and attempt to supply them efficiently. Some public
sector goods are produced by private sectors.
For whom to produce:
o The goods produced in the private sector are sold to anyone who cant
afford them. Most public sector goods are provided free to everyone and
paid for from taxes.
Public goods goods that are not likely to be provided by the
private sector.

Efficiency:

Efficiency minimising costs and the use of resources.
Efficiency => private sector!!!
It means: producing goods at the lowest cost possible, minimising the quantity of
resources that are needed to produce goods, and only producing those goods that
are needed by people.
Private sector, competition exists, goods are likely to be produced efficiently.
In the public sector efficiency is sometimes lacking due to a lack of competition.
E.g. who competes with the police force to provide policing services in the UK?

Market failure:

In the private sector -> not paying for pollution.
Public sector -> tax pollution
Externalities:
o Poor air quality. Any damage that is made to a third party, such as ill
health, as a result of this activity is called a negative externality.
o In this case the public sector is to impose laws that force such firms which
pollute to meet these costs by cleaning or stopping their discharges.



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Lack of competition:
o A market may fail if there is a lack in competition. It becomes dominated
by one or a small number of firms.
Missing markets:
o Public goods are not provided by private sector. Examples include policing
and street lightening. It is not possible to charge users directly for these
services. Other goods called merit goods, such as education and health
care are underprovided by the private sector, because they are expensive.
Merit goods goods, which are under-provided by the private
sector.
Lack of information:
o Information to buyers and sellers.
o Buyers need to know everything about the product, the nature, the price
and the quality.
o Firms need to know all about the resources and production techniques
used o make the product.
Factor immobility:
o Factors of production need to be mobile.
o Factors like capital and labour must be able to move freely from one use to
another.

The division of labour:

Division of labour the breaking down of the production process into small parts
with each worker allocated to a specific task.
Specialisation the production of a limited range of goods by individuals, firms,
regions or countries.
Working population those people who are in work or seeking work.

Labour:

Those people available for work in a country represent the working population.
In some cases however, there may be jobs but the people without work do not
have the skilled required to do them.
Labour as a resource has some interesting characteristics:
o Labour is the most difficult resource to manage, because relative to
machines people have complex needs.
o They may react adversely to instructions, be emotive etc.
o The quality of work done by people may also be inconsistent compared to
machines.
o Globally the supply of labour is increasing, because the worlds population
is increasing.
o Its an expensive resource.
o Unlike machines, people need breaks and holidays.

Specialisation and the division of labour:

Specialisation is the production of a limited range of goods by individuals, firms,
regions or countries.
In the USA i.e. Ford manufactures cars and McDonalds is a fast food chain.

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Many firms divide their organisations into departments, which specialise in
certain functions.
In a particular country there is likely to be some regional specialisation. In the
UK, Scotland is recognised for its whiskey production.
Across the world different countries specialise in the production of certain goods,
much of the worlds gold comes from South Africa, China is a huge exporter of
manufactured goods.
In many businesses the production process is broken down into small parts and
each worker is allocated a specific task. This is called the division of labour. It
allows people to concentrate on the task or skill at which they are best.
It is argued that specialisation raises efficiency in firms and the economy.

Division of labour and the worker:

An individual worker will benefit from focusing on one specific work task but
there will also be some disadvantages.

Advantages:

Focusing on the same task allows the worker to become an expert in that field.
Practice makes perfect
Workers with well-practised skills will be able to find employment.
The more highly skilled they are the more they are likely to get paid.
Workers may enjoy more job satisfaction if they are highly skilled in a specialist
task.

Disadvantages:

One of the main problems with specialisation is that the work can become boring
because it is repetitive.
This is most likely to happen if a particular task requires little skill.

Division of labour and the firm:

If workers are more specialised efficiency improves and businesses can make
more profit. However, there are also some drawbacks for firms of the division of
labour.

Advantages:

Efficiency is improved because workers can perform tasks more quickly and
more accurately.
Fewer mistakes happen
Productivity (output per worker) will rise
People who try to perform a wide range of tasks may find it difficult to develop
the skills needed to be proficient in each one.
Productivity will be lower
Production time is reduced because workers do not have to waste time moving
from one task to another.
It involves moving around the workplace, collecting tools, changing workstations
and resetting machinery.
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Specialists are likely to remain at the same workstation repeating their task
without the need to move around.
The organisation of production becomes easier, because specialist workers can fit
more easily into a structured system of production such as a production line.

Disadvantages:

One of the main problems of division of labour is that if tasks are too repetitive
and boring, people become dissatisfied and poorly motivated.
This might result in poor-quality work.
This will reduce productivity and therefore have an impact on profitability.
If one stage of production depends on another stage, one stage breaks down; all
other stages may also break down.
This is called interdependence.
Specialisation may result in a loss of flexibility in the work place.

The labour market:

Derived demand demand that arises because there is demand for another good.
Wage rate the amount for their services over a period of time (i.e. the price of
labour).

The demand curve for labour:















The price of labour is the wage rate.
This is the amount of money that has to be paid to people for them to work for a
period of time.
The demand curve for labour slopes downwards, from the left to the right,
because the wage rate and the demand for labour are inversely related.
This means that when wages rise firms demand fewer workers and when wages
fall they demand more.






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Factors affecting the demand for labour:

The wage rate affects the demand of labour.
The demand for labour is said to be derived demand. This means that the
demand for labour is derived from the demand for the goods and services
supplied by firms and public sector organisations.
The demand for labour is also affected by the cost and availability of substitutes
for labour. In many organisations it is possible to replace people through
machines.
The productivity of labour may also affect demand. If every worker is able to
produce more output, demand for workers is likely to increase.
These include for example national insurance contributions (NICs) (which are
paid to the government when employing a worker in some countries); maternity
pay; holiday pay
Changes in these factors will have an effect on the demand curve for labour, if
there is an increase in the demand for air travel, there will be a increase in the
demand for cabin crews.
This will shift the demand curve for cabin
crew workers to the right.

The supply curve for labour:

The supply curve for labour sloped upwards
from left to right, because wages and the
quantity of labour supplied are
proportionately related.


Factors affecting the supply of labour:

Changes in the school leaving age or the retirement age. If the school leaving age
is reduced the supply of labour is increased. If the retirement age is increased the
supply of labour will also increase.
In many countries has been a change in the role of women. An increasing number
of females have abandoned the traditional role of housekeeping and child
rearing. Instead they have opted to work and pursue careers. This has the size of
the working population.
The age distribution of the overall population of a country may have an effect. In
most developed countries the world is an aging population. This means that the
number of people over the age of, say 65, as a proportion of the total population
is increasing. This also means that the dependency ratios is rising.
It is the proportion of dependents (non-workers) to workers in the population.
Many countries welcome immigrants to help swell the working population.
Changes in these factors will have an effect on the supply curve for labour. For
example, if there is an increase in immigration, there will be an increase in the
supply of labour. This will shift the supply curve for labour to the right.





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Wage determination:

The wage rate in any labour market is
determined by the interaction of the supply and
demand for labour.
The equilibrium wage is determined where the
supply and demand for labour is equal.
A change in the supply or demand for labour will
change the equilibrium wage rate.


Wage determination between different occupations:

Supply and demand analysis can be used to explain why there are different wage
rates in different industries and different occupations.
There will be a greater supply of workers in jobs which require no skill, training,
qualifications, experience or talent. As a result wages for shop workers, care
workers, labourers, cleaners, waiters and van driver for example will be
relatively low.
In contrast it takes many years to train as a lawyer. There are strict entrance
qualifications and the work is intellectually demanding. As a result the supply for
lawyers is much lower which forces wages up.
Some jobs like bomb disposal, mine clearance and deep-sea diving are dangerous.
Others like cleaning up after accidents and working in a slaughterhouse can be
very unpleasant. The supply of workers into such occupations is therefore limited
and wages are higher.
Wages will rend to be higher in expenditure industries. As an industry expands,
demand for labour on that industry rises. This forces wages up.
In some countries in the public sector are lower than those in the private sector
because public sector jobs may be considered more secure.
Workers in trade unions may get higher wages than those who are not.

Quality of labour: qualifications and training:

Over a time a country will want to improve the quality of labour so that it is more
productive. This will require investment by the state and firms in training and
education.

Interference in the labour market:

Minimum wage a minimum amount per hour which most workers are entitled
to be paid.

Minimum wage legislation:

It basically means no employer is allowed to pay their workers an hourly rate
below the limit set.




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Reasons for minimum wage legislation:

To benefit disadvantaged workers: Workers benefit from minimum wages.
To reduce poverty: A minimum wage increase will help reduce poverty. The
minimum wage raises the wages of low-income workers in general.

Effects of minimum wage legislation on wages and employment:

If the government increases a minimum wage above the equilibrium wage, by law
all workers will receive more.
Unfortunately, economic theories say that a minimum wage over the equilibrium
wage will have an adverse effect on the level of employment.
A rise in minimum wage will result in job losses.

Trade unions:

These are organisations that exist to protect the interest of workers.
The main aims of trade unions are to:
o Negotiate pay and working conditions with employers.
o Provide legal protection for members such as representation in court if an
employee is fighting a case against an employer.
o Put pressure on the government to pass legislation that improves the
rights of workers.
o Provide financial benefits such as strike pay whenever necessary.

Effects of trade unions on wages and employment:

A strong union may be able to force wages up in some labour markets.
It can put pressure on employers when it comes to wage negotiation.
If a trade union interferes it will force wages up.
If the firm needs to hire more workers, wages will rise further.
Job losses might be avoided:
o If labour productivity rises at the same time.
o If employers are able to pass on wage increase customers in the form of
price rises.
o If profit margins are reduced.