Introduction to Economics, Market Systems, Demand and Supply, Elasticities, Market Structures

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 7 (1337 words) Published: February 19, 2014
Introduction to Economics

Economics: A social science
-A study of how people make decisions regarding the allocation of scarce resources to satisfy unlimited wants.

Scarcity: Basic problem of Economics
-Due to lack of resources (time, productive forces, etc) some opportunities must be forgone

Opportunity cost
-Next best alternative forgone when an Economic decision is made Can only forego known alternatives
No choices/options will mean no cost

Ceteris Paribus: ‘Other things being equal’
-Assumption in economic models, seeing the effect of only changing one variable.

Types of goods
-Economic goods
The more the better
Relatively scarce and thus carries opportunity cost
-Free goods
No opportunity cost as it is abundant

Sectors of the economy
-Private
Resources owned by individuals
-Public
Resources owned by the State (E.g. Healthcare)

Sectors of industry
Primary: Extraction of resources (metal, wood, fish)
Secondary: Adding value on to extracted resources (can manufacture) Tertiary: Service industry (banking)

Factors of production
-Land
Natural resources
-Labour
Human resources; workforce
-Capital
Financial → Cash
Physical → Machinery
-Enterprise (risk-takers)
Organise other factors and allocate resources to reach goal

Market systems

-Free market
Consumers buy; Producers sell without government intervention Invisible hand of competition will facilitate the market
-Planned economy
All decisions are made by the central government in the economy State monopoly

Free market:

Advantages
Disadvantages
Effective and efficient as there is competition
Essential services (healthcare) may not be existent at all
Quality guaranteed due to competition
Customers exploited if firms colluded and monopolies could gain too much power Stimulates economy as there is more freedom, creativity, and motivation The weak will suffer (E.g. disabled people unlikely to be employed Price works as a demand indication and eliminates those who are ‘unworthy’ of certain products Contamination and neglect of environment

Consumers have more choice
Harmful products may be sold (E.g. Drugs)

Planned market:

Advantages
Disadvantages
Services and products are for everyone
Consumers have no choice
Standardised goods so everyone gets the same and is fair
Not as effective or efficient as there is no competition and waste of resources likely Consistency
No indication of demand so overproduction os underproduction possible Equality with fixed prices
Corruption
Full employment, in theory, and nobody discriminated against Lack of motivation
Production Possibility Frontier (PPF)
-Maximum combination of 2 goods and services that can be produced using all factors of production in an economy to their fullest extent -Shows opportunity cost and economic growth

X: Not all resources are used fully, production can be increased without opportunity cost A, B, C: Point of production where all resources are used fully. Increase in production of one good will result in the decrease of another. Y: Impossible point of production unless resources increase

Economic growth and development
-Growth
Quantitative concept, often the increase in GDP, expansion of production, and illustrated with shifts of PPF

Actual growth- Movement from within the PPF to a point closer to the PPF Potential growth- Rightward shift of PPF, an increase of resources due to improvement in technology

Development
Qualitative concept whose indicators include improvement in living standards, welfare, life expectancy, education, GDP per capita etc.

Demand and Supply
Demand:
Quantity that consumers are willing and able to pay for at a given price level Function of many factors (Price, Income, Price and availability of substitutes and complements, tastes and preferences, size of population, government regulation Law of demand when the price of a product increases, the quantity demanded decreases, ceteris paribus...
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