Economic Definitions: Year 10

Economic Definitions (Year 10 Test 1 2025)

• These definitions are essential for understanding economic concepts related to resources, production, and market dynamics

Resources and Economic Problems

• Unlimited wants and limited resources define the fundamental economic problem of scarcity
• Choices are made that involve how to allocate these scarce resources

Contexts for Economic Decisions

• Economic decisions are made in various contexts; consumers, workers, producers, and governments
• Consumers must decide how to spend their limited income on goods and services
• Workers decide which job to take or how many hours to work given limited time and skills
• Producers, or firms allocate limited resources such as raw materials and labor to decide what and how much to produce

Economic vs Free Goods

• Economic goods are scarce and have an opportunity cost; cars, clothes and food
• Free goods are abundant and have no opportunity cost; air and sunlight

Economic Sectors

• The public sector involves government production of goods and services like healthcare, education and libraries
• The private sector involves private firms and individuals producing goods and services

Mobility in Labor

• Geographical mobility refers to the ability to relocate for employment
• Occupational mobility refers to the ability to move between jobs or careers to meet industry needs or for financial gain

Factors of Production

• The essential inputs used to produce goods and services

Land

• Land is natural resources used in production, such as minerals, forests, and water
• Land has a fixed supply and cannot be moved, but its use can change

Labour

• Labour is human effort used in production, like a worker in a factory
• Labour can be skilled or unskilled, and productivity varies among workers

Capital

• Capital includes man-made resources used to produce goods and services, such as machinery, buildings, and tools
• Capital depreciates over time and requires maintenance

Enterprise

• Enterprise involves risk-taking and organizing other factors of production
• Entrepreneurs make decisions and innovate when starting new businesses

Opportunity Cost

• Opportunity cost is the value of the next best alternative given up when making a choice
• It represents the benefits missed by choosing one option over another

Opportunity Cost Examples

Consumers

• Consumers allocate their income between goods and services, considering what they give up
• The cost of spending on a vacation involves foregoing saving for retirement

Workers

• Workers allocate time between work and personal life or between different job opportunities
• Selecting a job with higher pay but longer hours means foregoing free time

Producers

• Producers allocate resources like labor, capital, and raw materials between different products
• The cost of investing in research for a new product means foregoing expansion of current production

Governments

• Governments allocate budgets between various public services and projects
• The cost of investing in defense means foregoing social welfare programs

Product Possibility Curve (PPC)

• A PPC is a graph that shows all combinations of output that can be produced with current technology and resources
• It illustrates the maximum utilization of resources between two goods

PPC Points

• Points on the PPC indicate maximum resource use
• Points inside the curve show inefficient resource use
• Points beyond the curve are unattainable due to lack of resources

PPC Movement

• Opportunity cost exists when moving along the PPC because producing more of one good means producing less of another
• A straight PPC line indicates a constant opportunity cost
• A curved PPC indicates increasing opportunity cost due to resource scarcity

PPC Efficiency

• Moving from inefficient resource use to more efficient use does not incur opportunity cost if producing more of the same goods proportionately
• Per unit opportunity cost is calculated as opportunity cost divided by units gained (e.g., giving up 2 bikes for 2 computers has a per unit OC of 1)

PPC Shifts

• Outward shifts of the PPC indicate economic growth
• Inward shifts indicate economic decline

PPC Outward Shifts

• Increased labor supply leads to more output due to increased productivity
• Discovery of raw materials increases production capacity

PPC Advancements

• Advancements in technology increase productivity and output

PPC Inward Shifts

• Natural disasters erode infrastructure and reduce population
• Low investment in new technologies causes productivity to fall
• Running out of resources, especially non-renewable ones, decreases production capacity

PPC Example

• Points A, B, and C on a PPC represent maximum resource utilization, while point X represents inefficient allocation
• Point Y is unattainable
• Moving from point A to B incurs an opportunity cost of refrigerators but yields more cars, while moving for C to B incurs an opportunity cost of cars but leads to more refrigerators

Nature of the Economic problem

• The economic problem results in people making choices due to unlimited wants and scarce resources
• Scarcity necessitates choices with opportunity costs

Microeconomics vs. Macroeconomics

• Two branches of economics that study different aspects of the economy

Microeconomics

• Microeconomics studies decisions of firms and households and the performance of individual markets
• Examines topics like changes in earnings and output of occupations

Macroeconomics

• Macroeconomics studies the whole economy, including employment, output, and inflation

Economic Agents

• An economic agent is someone who undertakes economic activities and makes economic decisions
• The private sector consists of firms and businesses owned by shareholders and individuals

Micro vs Macro

• Households, firms, and the government all influence the total output of an economy
• Households are consumers, savers, and workers
• Firms produce goods and services and employ factors of production
• Governments provide public goods and services, tax, and regulate the private sector

Economic Connection

• Many microeconomic concepts are used in macroeconomics
• Microeconomic decisions aggregate to form the macroeconomic picture, e.g individual shoe firm profits add to the GDP
• Macroeconomics influences microeconomics, e.g through income tax reduction leading to increased demand for firms goods and services
• Individuals provide labor and consume, firms provide enterprise and capital, and governments influence through public services and economic policies

Resource Allocation + Price Mechanism

• Price mechanism is how prices change according to supply and demand to reach a new equilibrium
• Resources are allocated based on supply and demand
• High demand incentivizes firms to allocate more resources into a product, increasing supply
• Goods are produced at high quality and lower prices due to market competition
• Companies that produce goods in high demand are rewarded, while those producing low-demand goods are penalized

Demand

• Willingness and ability to buy a product or service
• Market demand is the total demand, aggregated from individual components

Demand Curve

• Demand rises as price falls; demand and price are negatively correlated
• To write the demand curve three factors are needed; price, quantity demanded

Demand Movement

• Extension in demand is a rise in quantity demanded caused by a fall in price
• Contraction in demand is a fall in quantity demanded caused by a rise in price
• Movements along the demand curve occur when the price of the product itself changes

Demand Graph Description

• Points move from A to B on the demand curve
• Due to price decreasing/increasing from $Y to $X
• Quantity demanded then increases/decreases from Y to X

Demand Shifts

• Shifts in the location of the demand curve represents a change in demand
• Increase in demand is a rise in demand at any given price, shifting the curve to the right
• Decrease in demand is a fall in demand at any given price, shifting the curve to the left

Demand Graph Description

• Demand increases/decreases at any given price
• Reason is based on non-price factor
• Demand curve then shifts to the right/left

Goods

Normal Goods

• A product which demand increases when income increases, and vice versa

Inferior Goods

• A product which demand decreases as income increases
• Inferior goods are cheaper substitutes for a product, e.g instant noodles instead of nutritious food

Substitutes and Complements

• A substitute is a product used in place of another
• A complement is a product used with another product

Advertisement

• A good advertisement campaign will increase the demand by bringing in new customers or encouraging old customers to purchase more

Non-Price Factors

• Factors that affect the demand curve other than price

Income

• Increased income raises purchasing power; most products (normal goods) increase in demand
• Inferior goods decrease in demand as income increases

Related Products

• Increase in demand is caused by a rise in the price of a substitute product
• Demand also increases if the price of a complement falls

Advertising Campaigns

• A good advertisement campaign increases demand by bringing new customers, and encouraging old customers to purchase more

Population

• An increase in population will raise the demand for most products
• An ageing population increases demand for wheelchairs while decreasing demand for toys

Fashion

• Certain products are influenced by fashion and popularity, which causes demand to rise or fall; entertainment, food and clothing

Weather

• Weather changes influence demand for related items like ice cream and umbrellas Special events like the Summer Olympics can increase demand for related products, such as holidays in the host country

Expectations

• Expectations of future price changes can impact demand

Supply

• Willingness and ability to sell a product

Supply Curve

• Positive correlation exists between quantity and price
• As prices increase firms are willing/able to produce more to meet demand
• Incentive to make money influences firms to increase prices

Supply Curve Movement

• Extension in supply occurs when price increases and quantity supplied increases
• Contraction in supply occurs when price decreases and quantity supplied decreases
• Shifting of a curve occurs due to a non-price factors

Supply Increases

• Changes in supply increases shifts the supply curve rightwards

Supply Decreases

• Changes in supply decreases shifts the supply curve leftward

Factors that Shift Supply Curve

• Non price factors that cause curve to shift

Cost of Production

• Increased raw material prices decreases supply as increased labour cost decreases supply (less workers, less output)
• Decreased labour costs increase supply (more workers = more output)

Technology

• Increased quality in capital goods and methods of production increases supply due to improved efficiency and productivity

Taxes

• Increased direct and indirect taxes decreases supply
• Decreased taxes increases supply (firms willing to sell more due to higher profit)

Subsidies

• Larger subsidies encourage supply; paid to consumers and firms

Weather

• Bad weather decreases supply, good weather increases supply

Price of products

• If the price of other products increases, more resources will be allocated into to the product, thus other products will lack resources and supply will dwindle
• if jointly supplied products have an increase in demand and supply, the supply of the joint product will increase due to more people needing it

Commodities

• Discovery of new commodities increases supply, while depletion decreases supply

War + Disaster

• Disasters and wars will affect supply + firms negatively

Taxes Explanation

• A direct tax is a tax that a person or organization pays directly to the entity that imposed it
• An indirect tax is a tax put on goods and services rather than on income or profits

Price Determination

Market Equilibrium

• Equilibrium is where market supply and demand are balanced, resulting in stable prices
• Demand = supply

Equilibrium Diagram

• Equilibrium price is where demand and supply are equal
• Firms determine prices by estimating and charging what they believe to be the market equilibrium price
• Firms selling all stock, while charging a high enough price to make revenue is an example of where the market is in equilibrium

Disequilibrium

• Demand doesn't equal supply
• Disequilibrium occurs when quantity supplied does not equal quantity demanded
• This leads to either a shortage or a surplus of demand + supply

Market Incentive

• The price mechanism provides an incentive to firms to respond to changes in market conditions
• Higher consumer demand and prices encourages firms to produce more
• Market equilibrium often shifts to disequilibrium and back again to maximize profits due to changing costs of production and consumer demand

Inflation and Prices

• People’s income increases
• Increase in demand
• Demand curve shift to right
• Supply curve remain the same
• New and higher equilibrium price encourages more supply
• There is an extension in the supply
• Supply increases, price is increased (inflation) due to increased demand
• Cost of living increases, leading to unemployment and increased poverty

Price Changes

• Price changes when market conditions of demand and supply change
• Changes in demand will cause a change in price and movement along the supply curve

Demand Shifts

• Demand curve shifts to the right
• Excess demand at original equilibrium price
• Firms increase price due to excess demand, leading to an extension in supply
• This allocates more resources into the demanded product, resulting in a higher equilibrium price where supply and demand are equal

Supply Shifts

• Reduced supply causes firms to increase prices
• Reduced supply causes a contraction in demand and increased prices

Tax Decrease

• Increased taxes shifts the supply curve to the right because firm's production costs decrease
• Excess demand encourages firms to reduce product's price
• An extension in demand occurs as people buy more
• Equilibrium price will be at a decreased value Changes in demand and supply will impact market depending on direction and proportion of changes

2.7 Price Elasticity of Demand

Price Elasticity

• A measure of the responsiveness of the quantity demanded to a change in price.

2.7.1 Inelastic Demand (Price Inelastic)

• When the quantity demanded changes by a smaller percentage than the change in price.

2.7.2 Elastic Demand (Price Elastic)

• When the quantity demanded Changes by a greater percentage than the change in price.

2.7.3 Formula for Price Elasticity of Demand

• % change in quantity demanded / % change in price

2.7.4 Calculate Percentage of Change in Quantity Demanded

• New Quantity demanded - Original Quantity demanded / Original Quantity demanded x 100%

2.7.5 Elastic Demand =

• 1 < | Price Elasticity of Demand | < infinite

2.7.6 Inelastic Demand

• % change in quantity demanded is smaller than the % change in price.

2.7.7 Elastic Demand

• The higher the chance in price of product the higher the change in percentage

2.7.8 Inelastic Demand

• The higher the change in of product the lower the change in percentage

2.7.9 Determinants of price elasticity of demand

2.7.9(a) Products with no close substitute = inelastic. Products with close substitute = elastic.

• product’s price increase = the product’s quantity demanded will only slightly fall → this is because customers are unable to switch to substitutes if there is little competition/ price does not take a large portion of income.
• the product’s price increase = demand will fall significantly. The quantity demanded of the product’s close substitute will increase. This results in a more elastic demand for a product because with an increase/decrease in price, customers can easily switch to a larger range of substitute products.

2.7.9(b)

• The purchase of a product takes up a small proportion of people’s income = demand is likely to be inelastic. Because price changes regarding products that take up a small proportion of income are not very noticeable/important as they are cheap
• • The purchase of a product takes up a large proportion of people’s income = demand is likely to be elastic. Because people will likely be more responsive to price changes that take up a large portion of their income; e.g if they are buying luxury goods and the price increases, they may not be able to afford the new increased price and thus might not choose to buy.

2.7.9(c)

• The product is a necessity = demand is likely to be inelastic. They will still need to purchase a particular item even if they are not addicted.
• The product is a luxury product = demand is likely to be elastic. They wil be more sensitive to price changes and have more disposable income when the price for luxury good prices do not increase or decrease.

2.7.9(d)

• The product is addictive = demand is likely to be inelastic. Even if the cost of the product increase their reliance on it will stop them from switching
• The product is not addictive = demand is likely to be elastic. If addicted the reliance on it will affect price sensitivity

2.7.9(e)

• The purchase can be postponed = demand is likely to be elastic. The sensitivity increases because in some cases, it is deemed not as important; may have substitutes, or the customer could be waiting for something; this could signify that the product is not a must-buy and thus the consumer may be more responsive to price changes to the product.
• The purchase cannot be postponed = demand is likely to be inelastic. - The sensitivity increases because in necessary emergencies when it cannot be postponed the situation is extremely urgent, and thus consumers will be less likely to switch based on price changes like during the covid (masks) period

Possible changes to PED

• Occur in different cultural influences → some products may become necessities - Income → increase in income, increase in proportion to use

Perfectly inelastic (ped = 0)

• • If price rises by 10% then revenue rises by 10%. Price and revenue changes in the same direction and percentage.

Perfectly elastic (ped = infinity)

• If price increases revenue falls because demand falls to zero.

Exam notes:

• Exam Tip (6)
• Consumers: lower prices
• Producers: are reluctant to raise prices due to substitutes
• May have to provide good quality products to remain competitive

Firms: -

• increased revenue if elastic even through increased prices
• distinctive = less substitutes can raise

Government:

• inelastic = tax ineffective
• price elasticity can affect tax and how governments plan

2.8 Price Elasticity of Supply

Definition:

• Change in quantity supplied to changes in market price.

Formula:

• • % change in quantity supplied / % change in market price. Always positive.
• • New - old/ old x 100% is how to work out change.

Interpretation of PES:

• PES indicates how responsive the quantity supplied of a good is to changes in its price.

Elastic PES:

• Supply is flexible, the producers can adjust quickly when market price change

Inelastic PES:

• The change market causes a difficulty or takes time for new output.

Determinants of PES

Availability of production capacity:

• Time taken to produce it -> A shorter time enables more outputs
• Cost of altering its supply -> - Cheap Alter (High PES), and High Alter (Low PES)
• Feasibility, the product must be easy to store for high PES

2.8.9 Elastic Supply:

• Quantity supplied changes significantly with market changes
• • Producres can increase/decrease Supply quickly.

2.8.10 Inelastic Supply: (Opposite of Elastic🤯)

• -Quantity supplied changes only slightly with price changes.
• • Producers find it harder to adjust supply quickly.

Unitary Elasticity:

• When a price change results in an equal change in supply
• Firms Seek Elastic Supply:
• -They could adjust production quickly
• • Can reduce supply -> avoid stock lost.
• • When prices rise, increase to make profit

Governments:

• Elastic = subsities (good for output)

2.9 Planned economic system

• An economics system where the government makes all decsions and the land and capital are state owned and resouirces are allocate via direction

2.9.1 Mixed Economic System

• An economy where the public sectors both play a critical role. Most modern economies have mixed economic system.

2.9.2 Market economic system

• an economics System, in which it's customers choice driving direction and resources are being allocated

2.9.3 Advantage of Market Economic

• responsive
• Choice driven (prices and services low)
• Profit and completion promote methods and production quality

2.9.3(A) Disadavantage of Market Economic

• Don't know other people personal benefits
• Consumers desires are too low
• May lack income and income is distributed
• Advertisements can be miss-leading

2.9.4 Efficiency in a market driven economy

• Allocative to eliminate stortages and surpluses to keep prices low.
• Competitive helps firms to be allocatively efficient for costumers
• lowest possible cost
• Frms are more likely to not waste recouses and produce more to keep cost low
• dynamic - innovation and efficient resource usage.

2.10

• 2.10 Market Failure: if markets do not produce what consumes want it the quantities are at incorrect level for the correct price. Market will fail.
• 2.10 Indicators of Market Failure Include Shortages, surpluses, high prices, poor quality and lack of innovation

2.10(a) if lack of market forces there may be problems

• 2.10(a)(1) some products under produces
• 2.10(a)(2) some products are over produced
• 2.10(a)(3) Prices may be high even through not competitive

2.10 (b) Third Parties - Those not connected to the product or consumes

• 2.10(b)(1) Social benefits: The more of products and service product the more people are helped
• 2.10(b)(1) Social cost: Total cost to the society
• 2.10 (b)(1) private costs: Costs from directly consuming or consuming something product

2.10( C)Social vs Private Benefits costs

• Private benefits: Benefits received from the production or the consumer of a product
• External Benefits" What those reives when they are not consuming or connected to the product (EG school help workplace)

2.10 d - Consequence of Marker Failure

• -Resource Misallocation: - inequality; Extranatilites ; Reduced Economies

2.10 E - Market Goods:

• • When government and consumes understand the benefits of the production of a products then that can be sold or used like a good/service - EG increased skill and worker

2.10 E Market Goods:

• What product that aren't good or good for health which governmnet is likely to reduce usage of EG smoking or deugs

2.10 F -Public Sector:

• Goods avalible for free, open for everyone to use (park/air)

2.10 G - Abuse of Power; occurs due to structure of market has 1 supplier and the rest cant have access to the market

The problem =

• Price Fixing
• no quality product

2.10 h - mobility in resource

• Occupaitonal/Geogrpal

2.11 - 2.11 Mixed Economics System

• The intervention occurs during economic failiure and or economic problems relating to good + products
• Max / Min Price
  • Helps peopl ein lower incomes

2.11 B - 8 Benefits and why the state intervenes:

• Take costs into acocunt the more better quality
• Government can fine consumers more to help products
• Govermnet can provide production that can't be charge
• Can prevent price being exploited
• Govermnert can enusre more jobs are avalibe
• Possablity for gorwemnet to pay more to the capital costs of production

2.11 D -

• Sum, the average amount of people agree for somthing
• Subslity: the reliance on price to gain revune

3. MONEY

• Accepted and durable

3.1 2 - froms

• physical or eletricity

3.1 3 - Functions of Money

• medium of exchange
• store of value / debit payment / UNIT

3.1 D Characteristics:

• durbaility, limited suppply (regulated (long lasting (portable_

3.1 D - role of banks:

3.1 D - Role for banks

• economic statiblity
• Fincial intergation (between sellers and consumers)
• Facilitate

3.1 d Role for Centrla banks

• Monetary (stablise economics) banking supervision; lender for resucres / manages government funds / debt

3.1 E Indpende ce fo Cenrtal bank

• Goverment
• Commercial banke + liquide assests

3.2 HOUSE HOLD- KEy terms

• Disposal
• Borwong

3.2A Spending

• maintain livign standards

3.2B - Interest rates and expenses

• expenditure
• wealtch
• wealth + shares that helps buy homes cars and saving

3.2B - Saving for the APS And APC

• ApC: the disposable income which is spent
• Aps: the disposable income that is saved (can vary dependign on the home)

3.2C Pattern of Expditure, people spend save and borow more amounts the Poor

• the poor spend higher amounts on the income that is spent (the poor tend to get luxery good compared to the rich)
• the house comp can very dependign on the amount (wealth gerante inco,e + cash)
• wehalt affects confucnce (the rich can afford to be dissaving)

3.2 D - SAVING TWO FORMS

• Contraul, money a bank shares REsons to saving: Target - reasons and finance charges.

3.2 E - infucne the amount

Borrowing

• available rates higher the intrest will decrease amount to pay
• Social attitudes will increase if economic is increasing

3.3 Workers

Divison of labour and specialisation

• The diving of work between labour and the economy.

A AVS in the divison and LABOUR and specialisation are expertise which can increase prouds.

• • If done this will affect other

3.33 - DISVS

OVER SPECIALSIATION DECREAS LABOYR

• for the company it can create disrputon

3.34 FOR ECONOMTY - AVS/DVS

• can led to over reliance on capital goods or a small amount

3.3 EAVG/COS = OUTOUT

• can create high price

3.4-3.4 Trade Unions:

• An Union between Workers and Employers to Promote Improved wages, working hours & Conditions and Employment
• The Purpose of a trade union improve the working life and make it more fair for workers and employers

A 3(1) - TRADE UNION

• 3.4A(1) - Negotiating improvements in wages and other non-wage benefits with employers
• 3.4A(2 - Defend the rights and Jobs for Trade Works)
• 4: Trade Inconus - General, industiral craft

C(1) - - Collective Bargaining: + Open/Close Shop+ Single Union, if closed it can limit choices(more infor above for context) + (ADV time + disrgemenys/ DISS )

D(1) - Industrial Action: - Actions due to employeer (or firm) + Employee

• 3.4D(2)Forms of action and effects

D - Aribation

• help from 3rd party (GOV)

E Avs from TRAde from Employer and Workrs

• Improve Workers Conditons + Firms (skill level)

F- DISS

• DISS : for firms may not provide great cost
• WOrkers - may be unemploywed

3.5-3.5 Firms

Classifications (5.1)

• Economy divided to sectors (prmay , srcondary and teriary )

A: Size of workforce

• measure size and worker quality = 1/2 and few works on few workrers

###3.5 SMMALS

• independtlty operaterd + lower cap
• ADV - owner control and specilaisaton desicopns
• economic + Finacncing is limited to firms with high risks

3.6-WHY SMALL FIRS

• Market small = no money and small, personalizad cusotmers + limited

ADV: Higher bRANDRECALL/ Less work + high risk, more less pressure

DIS/AVG

• Small businless and high risk of failing.