DP1 Economics Notes PDF

27/08/2024 Key concepts ============ - - - - - - - - 28/08/2024 Two kinds of economics ====================== **Microeconomics** - studies the behaviour of individual economics ------------------------------------------------------------------ **Macroeconomics** - studies the...

27/08/2024 Key concepts ============ - - - - - - - - 28/08/2024 Two kinds of economics ====================== **Microeconomics** - studies the behaviour of individual economics ------------------------------------------------------------------ **Macroeconomics** - studies the economy as a whole, focusing on countries\' fundamental economic goals. -------------------------------------------------------------------------------------------------------- 02/09/2024 Definitions =========== Economics - A social science. It is the study of people in society and how they interact. It is the study of rationing systems: How scarce resources meet the infinite needs of individuals. -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Economic good - Is a scarce good. It is limited. ------------------------------------------------ Free good - A good so abundant, there is no scarcity. No opportunity cost to produce. ------------------------------------------------------------------------------------- Scarcity - Unlimited needs and wants but limited resources. Due to scarcity, we are unable to have everything we desire. Therefore, we must make choices about the resources we consume and give up. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Trade-off - All the alternatives that are given up when a choice is made ------------------------------------------------------------------------ Opportunity cost - The next best alternative that is given up when a choice is made. ------------------------------------------------------------------------------------ Centres Paribus - The effect one economic variable has on another, provided all other variables remain the same Scarcity leads to choices. Choices lead to trade-offs. But not all trade-offs are equal. Factors of production - CELL ============================ Capital ------- Physical capital - any human-made resource used to create other goods and services Human capital - skills or knowledge gained through education or experiences. Entrepreneurship ---------------- Leaders who bring together all the factors of production to create goods and services. Their primary motivation is profit. Land ---- Any natural resource used to produce goods and services. Anything that comes naturally from the earth. Labour ------ A person who devotes effort to a task and who is usually paid. Decision making =============== When analysing choices, economists will "thinking the margin"(marginal analysis) which simply put, means making decisions based on increments. The basic economic questions ============================ 1. 2. 3. Economic system =============== **Traditional economies** - Hunting, or barter. Roles and jobs are typically passed down through generations. ------------------------------------------------------------------------------------------------------------- **Command/Centrally planned economies** - Controlled by the government, which decides what to produce, how to produce it, and who gets the goods. ------------------------------------------------------------------------------------------------------------------------------------------------- **Market economies** - Allows individuals and businesses to make decisions based on supply and demand with little government interference. ------------------------------------------------------------------------------------------------------------------------------------------ **Free Market economies** - A type of market economy with no government intervention, where the forces of supply and demand completely guide economic activity. --------------------------------------------------------------------------------------------------------------------------------------------------------------- **Mixed economies** - Combines elements of both market and command economies, with some government regulation alongside private enterprise. ------------------------------------------------------------------------------------------------------------------------------------------- PPC - Production Possibilities Curve ==================================== A model designed to show the alternative combinations a firm or a country can produce using their maximum resources. [Assumptions of the PPC:] - - - - Note: It is about an economy NOT about a business or a firm Efficiency ========== Resources are being used in the best possible way. The is no waste and no improvements to be made. 03/09/2024 Opportunity cost, Scarcity, and Choice ====================================== [Opportunity cost] ------------------------------ The value of the best alternative is forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. As you produce more of one good, the opportunity cost increases.\ Not all resources are equally suited for the production of both goods. The result of this leads to a 'bowed out' curve. Sometimes, resources can be easily interchanged to produce either good leading to a constant opportunity cost. Constant opportunity cost all resources are of equal quality and that they are all equally suited to the production of both commodities. (straight) Increasing opportunity costs mean that for each additional unit of G produced, ever-increasing amounts of D must be given up. (curve) ### Actual growth When growth/efficiency is achieved by making better use of resources. That is growth that can happen given the current resources. ### Potential growth An increase in the maximum amount that can be produced. Results in a shift in the PPC.a few things can cause the shift of the PPC: - - [Scarcity] ---------------------- The demand for a good or service is greater than the availability of the good or service. [Choice] -------------------- The ability of a consumer or producer to decide which good, service or resource to purchase or provide from a range of possible options. [Circular Flow] =========================== [Closed Circular Flow] ----------------------------------  [Open Circular Flow] --------------------------------  Leakages - money that flows out of an economy (saving, taxes, imports) Injections - money that flows into an economy (investments, government spending. exports) \*transfer payments are not part of government spending #### **Growing the economy** Gross national Income (GNI) - the amount of income flowing in the circular flow GNI rising -\> The economy is growing; injections growing and no growth in leakages. GNI falling-\> there might be a recession; leakages are growing larger than injections. [Classical economics] ================================= Advocates for private ownership of business, empowered individuals, and a labor-based theory of value. Say's law - - Entrepreneurship and the supply of goods/services lead to profit, wages, income, and spending resulting in an overall increase in demand. [Neoclassical Economics] ==================================== - - - - - - - [New concepts in the 19th century] ---------------------------------------------- ### Utility - a measure of satisfaction derived from consuming a good or service ### The margin or marginal utility is the extra or additional utility derived from consuming one more unit of good or service. [Keynesian revolution] ================================== - - - Stagflation: a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high -------------------------------------------------------------------------------------------------------------------------------------------------- [Monetarism (new classical)] ======================================== Monetarists believe the main determinant of economic growth is the total amount of money in the economy so their focus was mainly on monetary policy; money-making. - - [21st century] ========================== - - - - - [Doughnut model] ============================  Microeconomics [Types of demand] ============================= [Individual ] ------------------------- Individual demand is the demand of one person for a product [Market] -------------------- The market demand is the sum of all the individual demands for a product at every price. [Law of demand] =========================== An inverse relationship between price and quantity demanded, As the price of a good rises, the quantity demanded will usually fall, ceteris paribus. (& vice versa) Example: higher price = lower quantity demanded Why does the law of demand occur -------------------------------- - ### Income effect - - - ### Substitution effect - - ### Law of diminishing marginal utility - - - 5 shifters of demand ==================== 1. a. b. 2. c. d. 3. 4. 5. e. f. Non-price determinants of demand are all the factors that affect demand for a good or service, except for the price---for example, amount of consumers, income, price of related goods, consumer expectations, etc. DEDE ==== Definitions. 2-3 (intro) Explanation(with the help of a diagram) Diagrams Examples A Veblen good is a type of luxury good, named after American economist Thorstein Veblen, for which the demand increases as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve. ============================================================================================================================================================================================================================================ **[Elasticities of Demand]** ======================================== Goods and services are not all created equal. Some goods are very sensitive in price change while others seem to be unaffected. Elasticity - How sensitive one economic factor is to changes in another. Elasticity of demand - a measure of the responsiveness of the quantity demanded of a good or service to change in one of the factors that determine it. Price Elasticity of Demand (PED) - a measure of how much the quantity demanded of a good changes when there is a change in its price. Formulas -------- The extent to which the quantity demanded depends on how elastic its demand is concerning its price. Percentage change = [\$\\frac{new - old}{\\text{old}} \\times 100\$]{.math.inline} = [%△]{.math.inline} PED = [\$\\frac{\\%\\ change\\ in\\ quanity\\ demanded\\ of\\ good\\ x}{\\%\\ change\\ in\\ price\\ of\\ good\\ x}\$]{.math.inline} = [\$\\frac{\\%\\ \\bigtriangleup \\text{Qd}}{\\% \\bigtriangleup P}\$]{.math.inline} Under 1 is inelastic. Above 1 is elastic. Inelastic vs Elastic -------------------- Elastic goods include luxury items and certain food and beverages, as price changes can have an impact on demand to a great extent. Inelastic goods may include items such as tobacco and prescription drugs, as demand often remains constant despite price changes. An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small. ### ### Inelastic - - - - - - Elastic - - - - - - Determinants of PED ------------------- - - - -  Total Revenue Test ------------------ If the demand for medicine is inelastic, what ahppens to TR for medicine stations if price increases? +-----------------------+-----------------------+-----------------------+ | Inelastic | Elastic | Unit Elastic | +=======================+=======================+=======================+ | Price - increase | Price - increase | Price - | | | | increase/decrease | | TR - increase | TR - decrease | | | | | TR - no change | +-----------------------+-----------------------+-----------------------+ | Price - decrease | Price - decrease | | | | | | | TR - decrease | TR - increase | | +-----------------------+-----------------------+-----------------------+ Total Revenue - money a business earns from operating. Price \* quantity produces/sold Profit - money a business retains after subtracting operating and other expenses. Income elasticity of demand (YED) - a measure of how much the quantity demanded of a good will change in response to a change in consumers' incomes. ---------------------------------------------------------------------------------------------------------------------------------------------------- [\$YED\\ = \\ \\frac{\\%\\ change\\ in\\ quantity\\ demanded\\ of\\ good\\ x}{\\%\\ change\\ in\\ income}\$]{.math.inline} If coefficient is negative (inverse relationship) the good is inferior If coefficient is positive (direct relationship) then the good is normal Engel Curve To illustrate YED, we use an Engel Curve. An Engel Curve is used to show the relationship between income and quantity demanded. Income is placed on the vertical axis. Quantity demanded on the horizontal axis. YED\>0 YED\