GCSE Economics Paper 1 Revision 2021-22 PDF

2.2 Demand 2.3 Supply 2.4 Price GCSE ECONOMICS PAPER 1 REVISION 2021-22 Key skills Drawing demand and supply curves Movement along vs. shift Drawing demand and supply curves with different elasticities 2.2 Demand THE POINT OF VIEW OF CONSUMERS Introduction Demand is the willingness and ability to pu...

2.2 Demand 2.3 Supply 2.4 Price GCSE ECONOMICS PAPER 1 REVISION 2021-22 Key skills Drawing demand and supply curves Movement along vs. shift Drawing demand and supply curves with different elasticities 2.2 Demand THE POINT OF VIEW OF CONSUMERS Introduction Demand is the willingness and ability to purchase a particular good or service at a given price at a given point in time. Individual demand: demand for a good or service by an individual consumer Market demand: total demand for a product created by adding together all the individual demands A demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. Movement along a demand curve For most goods and services, the quantity demanded will fall as the price rises. This inverse relationship is called the law of demand and occurs for two reasons: 1. As the price of a good or service falls, consumers have more money left over and can buy more of it (income effect) 2. As the price of a good or service falls, consumers who could not afford it before are now able to do so (substitution effect) A change in price leads to a movement along a demand curve. An increase in price leads to a contraction of demand. A decrease in price leads to an extension of demand. A shift in the demand curve The demand curve itself can shift to the left or to the right for a change in a factor OTHER THAN PRICE. Examples: changes in tastes, changes in income, advertising, etc. If the demand curve shifts to the right, we call it an increase in demand. If the demand curve shifts to the left, we can it a decrease in demand. This is not to be confused with extension and contraction of demand which happens when we move along the demand curve! Price An increase in demand Price A decrease in demand P1 P1 D2 D1 Q1 Q2 For every price level, the quantity demanded increases. D2 Quantity Q2 Q1 For every price level, the quantity demanded decreases. D1 Quantity Factors that cause a shift in demand Income Tastes and preferences Advertising Seasonal changes Substitutes and complements Population size and demographic Expectations of future prices changes The state of the economy Consequences of changes in demand Movement along a demand curve The main consequence is that price and quantity move in opposite directions, i.e., if prices rise, then quantity demanded falls and vice versa. For consumers, a movement along the demand curve will mean they can buy fewer goods and services, reducing their standard of living. Alternatively, they will be forced to look for cheaper substitutes. For producers, rising prices and falling demand will lower their sales and profits. This may mean they have to reduce output, make workers unemployed or even close down. A movement down the demand curve could lead to producers increasing their market share, leading to higher profits and possibly forcing competitors out of the market. Consequences of a shift in demand The main consequence is that price and quantity move in the same direction, i.e., if demand increases, then both price and quantity will rise, and vice versa. Further possible consequences of changes in demand are: 1. If the price of a good rises, but income rises even faster, then consumers may demand more the good, despite the price increase. 2. The demand for substitute products will fall if people prefer other goods and services. 3. An increase in demand may allow producers to enjoy economies of scale (cost of production per unit falls as the scale of production rises). This might allow them to either lower the price, or to enjoy higher profits. 4. A fall in market demand can cause a firm to go out of business. Price Elasticity of Demand The price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good or service to a change in its price. When demand is very responsive to a change in price, it is said to be ‘price elastic’. When demand is not very responsive to a change in price, it is said to be ‘price inelastic’. % 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 %∆𝑸 𝑷𝑬𝑫 = = % 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆 %∆𝑷 The percentage change in quantity is given by The percentage change in price is given by 𝑸𝟐 "𝑸𝟏 𝑸𝟏 ×𝟏𝟎𝟎 𝑷𝟐 "𝑷𝟏 ×𝟏𝟎𝟎 𝑷𝟏 where P1 and Q1 = original price and quantity, and P2 and Q2 = new price and quantity Value Description of Response 0 A change in price will have no effect on Quantity Demanded (QD) The %Δ in QD is less than the %Δ in P (i.e. demand is not very responsive to changes in P) The %Δ in QD equals the %Δ in P Perfectly Inelastic Inelastic 0 to -1 Unitary -1 Elastic -1 to -∞ The %Δ in QD is more than the %Δ in P (i.e. demand is very responsive to changes in P) Perfectly A change in price will cause an -∞ Elastic infinite change in the QD Things to keep in mind about PED 1. PED is always negative 2. PED changes along a linear demand curve (it is higher when the price is high) 3. In order to have PED = -1, we cannot have a linear demand curve Factors that affect the elasticity of demand 1. Availability of substitutes: if the good has very few alternatives, demand will be inelastic. 2. Necessities tend to have inelastic demand. 3. When spending on a good accounts for a low percentage of income, its demand is likely to be inelastic. 4. Price elasticity of demand for a particular good is likely to increase over time as people adjust their habits and new alternatives become available. Significance of PED for producers: tells them how changing price affects revenue When demand is inelastic, price and revenue move in the same direction. A rise in price will cause an increase in revenue and a fall in price will cause a decrease in revenue. When demand is elastic, price and revenue move in opposite directions. A rise in price will cause a decrease in revenue and a fall in price will cause a rise in revenue. Significance of PED for consumers If demand is inelastic, governments may choose to tax this product as they know they will receive significant tax revenue. Consumers may be more responsive to changes in price at different times or in different places, and prices may reflect this. For example, peak train times or buying items at the airport terminal or motorway services PED for a product may be different at different times of the year e.g. coats in summer, ice cream in winter. 2.3 Supply THE POINT OF VIEW OF PRODUCERS DEFINITIONS Supply is the quantity of a good or service that a producer is willing and able to supply to the market at a given price in a given time period. A supply curve shows a relationship between the price and quantity a firm is willing and able to sell over any given time period. A supply curve is usually upward sloping. Why is a supply curve upward sloping? Why does the quantity supplied increase when price goes up? 1. The profit motive When the market price rises, it becomes more profitable for businesses to increase output. 2. Production cost When output expands, a firm’s production costs tend to rise, therefore a higher price is needed to cover these extra costs of production. 3. New Firms New firms may be attracted to the market because higher prices means they can cover their higher production costs. Movement along a supply curve Price Price S P2 S P1 Contraction of supply Extension of supply P2 P1 Q1 Q2 Quantity Q2 Q1 Quantity Factors that cause a shift in supply Changes in availability of factors of production Changes in costs of production New firms entering the market Technological progress Government taxes and subsidies Natural disasters or seasonal changes Changes in the size of firms Government regulation Price An increase in supply Price A decrease in supply S1 S2 S2 S1 P1 P1 Q1 Q2 For every price level, the quantity supplied increases. Quantity Q2 Q1 For every price level, the quantity supplied decreases. Quantity Consequences of shifts in the supply curve 1. Economies of scale: if a firm can produce more at the same price level, then its average cost of production is likely to fall, leading to economies of scale 2. Efficiency: if a firm can produce more using the same amount of resources, then it is likely that there is greater efficiency and productivity 3. Higher revenue: being able to supply more at the same price can increase revenue. 4. Potential for higher exports: As supply increases and firms become more efficient, they are likely to become more competitive on the world market and be able to export more 5. Monopoly: if a firm can continue to produce output more cheaply, it can end up driving its rivals out of the market and establishing a monopoly (become the sole producer). Consequence of a movement along the supply curve Extension of Supply ◦ Greater revenue and profits (due to higher output and higher prices) ◦ Higher profits might encourage new firms to enter the market Contraction of Supply ◦ Fall in revenue and profits ◦ This may cause less efficient firms to be pushed out of the market, while efficient firms may have to reduce their production The price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price. 𝑷𝑬𝑺 = % 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑺𝒖𝒑𝒑𝒍𝒊𝒆𝒅 % 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆 = %∆𝑸𝑺 %∆𝑷 The percentage change in quantity is given by The percentage change in price is given by 𝑸𝟐 6𝑸𝟏 𝑸𝟏 𝑷𝟐 6𝑷𝟏 𝑷𝟏 ×𝟏𝟎𝟎 ×𝟏𝟎𝟎 where P1 and Q1 = original price and quantity, P2 and Q2 = new price and quantity SUPPLY is… Value Perfectly Inelastic 0 Inelastic 0 to 1 Unitary 1 Elastic 1 to ∞ Perfectly Elastic ∞ Description of Response There is no response in quantity supplied to a change in price The % change in quantity supplied is less than the % change in price The % change in quantity supplied equals the % change in price The % change in quantity supplied is more than the % change in price Producers are prepared to supply any amount at a given price Things to remember about PES PES is always a positive number. A linear supply curve which goes through the origin has a price elasticity of 1 If a linear supply curve intersects the quantity axis, it is price inelastic (PES < 1) If a linear supply curve intersects the price axis, it is price elastic (PES > 1) Factors that affect PES 1. Spare production capacity: if there is spare capacity, a business can increase output without much of an increase in costs. 2. Stock levels of finished product: If a firm holds large stocks, then it can respond to price changes quickly. Depends on storage costs and whether the good is perishable. 3. Flexibility of factors of production: Can a firm quickly acquire more labour or raw materials? Can existing workers and machinery switch to another task? Can the land be used to grow a different crop? Greater flexibility means more elastic supply. 4. Length of production process: The longer the production cycle (e.g. harvesting crops annually), the more inelastic the supply. How does PES affect consumers? 1. If supply is elastic, consumers will find it easier to buy greater quantities. 2. If supply is inelastic, consumers are likely to have to pay higher prices to buy more. 3. If supply is very inelastic or if there is a fixed quantity being supplied, then it can lead to illegal activities e.g., ticket touts. How does PES affect producers? 1. The more elastic the supply, the more easily firms can respond to changing market conditions. This makes the firm more competitive and allows it to generate higher revenue and profits. 2. If supply is inelastic, the demand side tends to determine price 3. If supply is inelastic, it is harder for new firms to enter the market. 2.4 Price PUTTING DEMAND AND SUPPLY TOGETHER RECAP Demand ◦ The price reflects how much a good or service is worth to consumers Supply ◦ The price reflects how much it costs producers to make a good or service. Market equilibrium is where demand and supply intersect. Efficient allocation of resources: producers supply the quantity demanded by consumers. An increase/decrease in demand or supply means a SHIFT When one curve shifts, there is a movement along (extension or contraction) along the other curve. Demand and Supply S Price (£) E Pe Market Equilibrium is where at the current market price, the quantity demanded is equal to the quantity supplied D Qe Quantity Drawing supply and demand graphs Remember to give your diagram a title; e.g. “Market for….” Remember to label your price and quantity axes Remember to label your demand and supply curves Remember to show the price and quantity pairs using dashed lines. Remember that factors OTHER THAN price will cause a demand or supply curve to SHIFT Always draw the initial equilibrium before drawing any shifts Disequilibrium: Excess supply occurs when, at a given price, the quantity supplied is greater than the quantity demanded. Thus, some goods are left unsold. Price (£) S Excess supply – Surplus Ps E Pe Market Equilibrium D Qd Qe Qs Quantity Disequilibrium: Excess demand occurs when, at a given price, the quantity demanded is greater than the quantity supplied. Thus, some buyers are unable to purchase the good. Price S E Pe Market Equilibrium PD Excess demand – Shortage D Qs Qe Qd Quantity When there is a disequilibrium In a free market (one without government intervention), if there is excess demand, the price of a good will rise until equilibrium is reached. If there is excess supply, the price of a good will fall until equilibrium is reached. Market forces are factors that determine equilibrium price and quantity in an economy without government intervention. Allocation of resources: how scarce resources are distributed among producers and how goods and services are distributed among consumers. Prices are signals that guide the allocation of resources. They transmit information about where resources are needed and help ration goods when demand outstrips supply. Elastic demand curve Inelastic demand curve Price S2 Price S2 S1 S1 P2 P2 P1 DEL DINEL Q2 Q1 Quantity Q2 Q1 Quantity If the demand curve is inelastic, a shift in supply will cause a BIGGER change in price, but a SMALLER change in quantity. If the demand curve is elastic, a shift in supply will cause a SMALLER change in price, but a BIGGER change in quantity. Inelastic supply curve Elastic supply curve SINEL Price Price SEL P2 P2 P1 P1 D2 D1 D2 D1 Q1 Q2 Quantity Q1 Q2 Quantity If the supply curve is inelastic, a shift in demand will cause a BIGGER change in price, but a SMALLER change in quantity. If the supply curve is elastic, a shift in demand will cause a SMALLER change in price, but a BIGGER change in quantity.