Unit 2 Economics Resource Sheet PDF

Unit 2: Economics - Resource Sheet Economic Systems What is an Economic System? An economic system is a structured way in which a society organizes its economic activities. It determines how resources are allocat...

Unit 2: Economics - Resource Sheet Economic Systems What is an Economic System? An economic system is a structured way in which a society organizes its economic activities. It determines how resources are allocated and how the fundamental economic questions are answered: 1. What goods and services should we produce? 2. How should we produce these goods and services? 3. For whom are we producing these goods and services? The answers to these questions shape the economy and influence the daily lives of individuals. Command Economy Definition: A command economy, also known as a planned economy, is characterized by government ownership of all resources and means of production. In this system, the government makes all economic decisions, determining what to produce, how to produce it, and who receives the goods and services. Characteristics: - Government Ownership: The government owns all businesses and resources. - Centralized Planning: Economic decisions are made by a central authority, often leading to a lack of flexibility. - Price Controls: The government sets prices for goods and services, which can lead to shortages or surpluses. - Limited Consumer Choice: Consumers have fewer options as the government decides what is available in the market. Examples of Command Economies: Historical Examples: - Soviet Union: A prominent example of a command economy where the government controlled all aspects of the economy. - Cuba under Fidel Castro: The government nationalized industries and controlled economic activities. Current Examples: - North Korea: The government maintains strict control over all economic activities. - Cuba: While it has introduced some market reforms, it still retains many command economy characteristics. - China: Initially a command economy, it has transitioned to a mixed economy with market elements. Implications for Daily Life: Advantages: Welfare motive Equal distribution of income and wealth Planning helps to avoid wastage of resources No competition Quality products and services Reasonable price Disadvantages: Chances for corruption Firms may not be efficient Consumer has no choice Less freedom for people No competition, so the price may not come down. Market Economy Definition: A market economy, often referred to as capitalism or a free-market economy, is characterized by individual and business decision-making. In this system, economic decisions are driven by supply and demand, with minimal government intervention. Characteristics: - Private Ownership: Individuals and businesses own resources and property. - Freedom of Choice: Consumers and producers have the freedom to make choices about what to buy, sell, and produce. - Competition: Businesses compete with one another, leading to better products and services. - Profit Motive: The desire to earn profits drives economic activity and innovation. Examples of Market Economies: - United States: A leading example of a market economy with a high degree of economic freedom. - United Kingdom: Features a market economy with some government regulations. - Japan: Known for its advanced technology and competitive industries. - Germany: Combines a strong market economy with social welfare programs. - Australia: A market economy with a focus on free trade and competition. Implications for Daily Life: Advantages: Encourages innovation and efficiency Consumer satisfaction Lots of varied goods and services Disadvantages: Income inequality Lack of public services Economic instability (boom and bust cycles)  Factors of Production The Four Main Factors of Production Land: Definition: This includes all natural resources and raw materials found in nature. Examples: Soil for farming, water for irrigation, minerals for manufacturing, and forests for timber. Importance: The availability of land affects agricultural output, natural resource extraction, and overall economic development. Labor: Definition: Labor refers to all human effort used in production, including both physical and mental work. Examples: Farmers, factory workers, teachers, and engineers. Importance: The skills, education, and training of the workforce enhance the value of labor. Capital: Definition: Capital consists of man-made tools and equipment used to produce goods and services. Examples: Machinery in factories, computers in offices, and vehicles for transportation. Importance: Investing in capital goods can lead to increased efficiency and productivity in businesses. Entrepreneurship: Definition: This is the ability to combine the other factors of production to create new products and services. Examples: Business founders like Steve Jobs (Apple) or Elon Musk (Tesla). Importance: Entrepreneurs take risks, innovate, and organize resources to meet market demands. Interaction of Factors All four factors of production work together in the production process. For example, a farm requires: - Land for crops, - Labor from farmers, - Capital in the form of tractors and equipment, - Entrepreneurship to manage operations and make decisions. A shortage in one factor can significantly impact the others. For instance, if there is not enough labor, crops may not be harvested in time, leading to waste and loss. Technology and the Factors of Production Technology plays a crucial role in enhancing the efficiency of all factors of production. It can: - Increase the productivity of land by improving agricultural techniques. - Enhance labor efficiency through automation and training. - Improve capital utilization with advanced machinery and software. The Importance of Balance Efficient use of all factors of production is crucial for economic growth. Over-reliance on one factor can lead to economic challenges, such as unemployment or resource depletion. Sustainable development requires careful management of all factors to ensure a balanced approach.  Production Possibility Curve (PPC) What is the Production Possibility Curve (PPC)? The Production Possibility Curve (PPC) is a fundamental concept in economics that illustrates the maximum potential output combinations of two goods that an economy can produce with its available resources and technology. The PPC helps us understand key economic concepts such as scarcity, opportunity cost, and efficiency. Key Features of the PPC: - Axes: The two axes of the PPC represent the quantities of two different goods. - Curve: The curve itself represents the production frontier, showing the maximum possible production combinations. - Points on the Curve: Every point on the curve indicates maximum efficiency in resource utilization. - Points Inside the Curve: Points that lie inside the curve indicate underutilization of resources, meaning the economy is not producing to its full potential. - Points Outside the Curve: Points outside the curve are unattainable with current resources and technology. Key Concepts Related to the PPC Scarcity and Trade-offs: - Scarcity: Resources are limited, which means we cannot have unlimited amounts of everything we want. - Trade-offs: When we choose to produce more of one good, we typically have to produce less of another. This relationship is known as a trade-off. Example: If an economy decides to produce more guns, it may need to reduce the production of butter. This trade-off is illustrated on the PPC. Opportunity Cost: - Opportunity Cost: This is the value of the next best alternative that must be given up when a choice is made. - On the PPC, opportunity cost is represented by the slope of the curve. As more of one good is produced, the opportunity cost of producing an additional unit of that good typically increases. Example: If you choose to spend time studying instead of sleeping, the opportunity cost is the sleep you miss out on. Economic Efficiency: - Efficient Production: Producing at a point on the PPC means all resources are being used fully and efficiently. - Inefficient Production: Producing at a point inside the curve indicates that not all resources are being utilized effectively. Example: Producing at Point A (inside the curve) is inefficient, while producing at Points B, C, or D (on the curve) is efficient. Movement and Shifts in the PPC Movement Toward Efficiency: Moving from a point inside the curve (like Point A) to a point on the curve indicates an improvement in efficiency. Economic Growth: - Economic Growth: This occurs when an economy can produce beyond its current PPC, typically due to an increase in resources or improvements in technology. - Shifts in the PPC: The entire PPC can shift outward (indicating growth) or inward (indicating decline). Example of Shifts: An outward shift could occur if a country discovers new oil reserves (increasing resources), while an inward shift might happen due to a natural disaster that destroys infrastructure. Real-World Applications of the PPC The PPC is not just a theoretical concept; it has practical applications in understanding economic policy decisions. It illustrates the trade-offs between different economic goals, such as: - Military Spending vs. Civilian Goods: Governments must decide how much to allocate to defense versus consumer goods. - Present Consumption vs. Future Growth: Societies face choices about whether to invest in current consumption or save for future growth. Demand What is Demand? Demand refers to the amount of a product or service that consumers are willing and able to purchase at different prices. Example: If you want to buy a new video game, your demand for that game depends on whether you can afford it and whether you actually want it. The Law of Demand The Law of Demand states that when the price of a product goes up, the quantity demanded usually goes down. Conversely, when the price goes down, the quantity demanded usually goes up. Example: If a chocolate bar costs $2, you might buy 3 bars. But if the price rises to $4, you might only buy 1 bar because it’s more expensive. Why is Demand Downward Sloping? There are three main reasons why demand is downward sloping: Income Effect: When prices rise, consumers feel poorer and may buy less. Example: If the price of your favorite snack increases, you might buy fewer snacks because you have less money to spend on other things. Substitution Effect: If the price of one product goes up, consumers may choose a cheaper substitute. Example: If the price of Coca-Cola increases, you might buy Pepsi instead because it is cheaper. Law of Diminishing Marginal Utility: This means that as you consume more of a product, the satisfaction you get from each additional unit decreases. Example: The first slice of pizza might taste amazing, but by the fourth slice, you may not enjoy it as much. Determinants of Demand: Several factors can affect demand, including: - Income: If people have more money, they may buy more products. - Tastes and Preferences: If something becomes popular, more people will want to buy it. - Substitute Goods: If the price of a substitute good falls, demand for the original good may decrease. - Complementary Goods: If the price of a good that is often bought together with another good rises, demand for both may decrease. - Weather: Some products are affected by the weather, like ice cream in summer. - Number of Buyers: More buyers can increase demand. - Expectations: If people expect prices to rise in the future, they may buy more now. Shifts in Demand Changes in Quantity Demanded: When the price of a product changes, it causes a movement along the demand curve. Example: - If the price of a latte at Starbucks goes from BD3 to BD5, the quantity demanded will likely decrease. - If movie tickets drop from BD11 to BD5.50, the quantity demanded will likely increase. Changes in Demand: Changes in demand occur when the entire demand curve shifts due to factors other than price. Increase in Demand: When demand increases, the demand curve shifts to the right. This means consumers are willing to buy more of a good at every price level. Example: If a new health study shows that eating avocados is beneficial, more people may want to buy them, shifting the demand curve for avocados to the right. Decrease in Demand: When demand decreases, the demand curve shifts to the left, meaning consumers are willing to buy less of a good at every price level. Example: If a popular brand of soda is found to contain harmful ingredients, fewer people may want to buy it, shifting the demand curve for that soda to the left. Elasticity of Demand Elasticity of Demand specifically looks at how responsive the quantity demanded is when there is a change in price. It helps businesses and policymakers understand consumer behavior and make informed decisions. Types of Elasticity of Demand: 1. Elastic Demand Definition: Elastic demand occurs when a significant change in quantity demanded happens with a change in price. Elasticity Value: When elasticity is greater than 1 (Elasticity > 1). Characteristics: The demand curve is relatively flat, indicating that consumers are sensitive to price changes. Examples of Elastic Demand: Non-Necessities: Luxury items like designer handbags or expensive vacations. Goods with Substitutes: Products like soda, where consumers can easily switch to a different brand if the price increases. High-Income Impact: Items that take up a large portion of a consumer's income, like cars or electronics. 2. Inelastic Demand Definition: Inelastic demand occurs when there is minimal change in quantity demanded with a change in price. Elasticity Value: When elasticity is less than 1 (Elasticity < 1). Characteristics: The demand curve is steep, indicating that consumers are not very sensitive to price changes. Examples of Inelastic Demand: Necessities: Essential goods like food, water, and basic healthcare products. Goods with No Substitutes: Medications that are crucial for health and have no alternatives. Low-Income Impact: Items that represent a small portion of a consumer's income, like salt or matches. 3. Unitary Elastic Demand Definition: Unitary elastic demand occurs when the percentage change in quantity demanded is equal to the percentage change in price. Elasticity Value: Elasticity equals 1 (Elasticity = 1). This means that if the price increases by 10%, the quantity demanded will also decrease by 10%.  Supply What is Supply? Supply refers to the quantity of goods that a business is willing and able to sell at various prices. It is a fundamental concept in economics that helps us understand how markets function. The relationship between price and quantity supplied is crucial for both producers and consumers. The Law of Supply: The Law of Supply states that there is a direct relationship between price and quantity supplied. Key Concepts: - Price Increase: When prices rise, businesses are more likely to produce more of a good because they can earn higher profits. - Price Decrease: Conversely, when prices fall, the quantity supplied tends to decrease as businesses may not find it profitable to produce as much. Example: If the price of oranges increases from $1 to $2 per pound, farmers may decide to supply more oranges to the market because they can earn more money. Supply Graph: A supply graph visually represents the relationship between price and quantity supplied. The supply curve typically slopes upward from left to right, indicating that as prices increase, the quantity supplied also increases. Determinants of Supply Several factors can influence supply, known as determinants of supply. These include: Technology/Productivity: Advances in technology can make production more efficient, increasing supply. Example: The use of automated machinery in factories can boost production rates. Cost of Inputs/Factors of Production: If the cost of raw materials rises, it can decrease supply because it becomes more expensive to produce goods. Example: If the price of steel increases, car manufacturers might produce fewer cars. Number of Sellers: An increase in the number of sellers in a market can lead to an increase in supply. Example: If more farmers start growing corn, the overall supply of corn will increase. Producer Expectations: If producers expect prices to rise in the future, they might hold back some of their current supply to sell later at a higher price. Example: A farmer might store grain if they believe prices will increase next season. Government Interventions: Regulations, taxes, and subsidies can affect supply. Example: A government subsidy for solar panel production can increase the supply of solar panels. Price of Related Goods: If the price of a substitute good rises, producers might switch to producing that good instead. Example: If the price of beef rises, farmers might sell more beef and less chicken. Weather/Natural Disasters: Events like hurricanes or droughts can drastically affect supply. Example: A drought can reduce the supply of crops, leading to higher prices. Shifts in Supply vs. Changes in Quantity Supplied Changes in Quantity Supplied A change in quantity supplied occurs when the price of a good changes, leading to a movement along the existing supply curve. Example: If the price of apples increases, farmers may supply more apples because they can earn more revenue. This is represented by a movement from one point to another on the supply curve. Changes in Supply A change in supply means that the entire supply curve shifts either to the left or right, indicating that producers are willing to sell more or less of a good at every price level. Example: If new technology allows for more efficient production of smartphones, the supply curve for smartphones will shift to the right, indicating an increase in supply. Elasticity of Supply Elasticity of supply measures how responsive the quantity supplied of a good or service is to a change in its price. In simpler terms, it tells us how much more or less of something producers are willing to sell when the price changes. Elasticity of Supply (Es) = % Change in Quantity Supplied __________________________ % Change in Price Types of Elasticity of Supply: Elastic Supply When the elasticity of supply is greater than 1 (Es > 1), it means that a small change in price leads to a significant change in the quantity supplied. Characteristics: - Producers can quickly increase production. - Resources are readily available. Examples: - T-shirts: A clothing manufacturer can quickly produce more T-shirts if the price increases. - Bottled Water: If the price of bottled water rises, companies can quickly ramp up production using existing resources. Inelastic Supply When the elasticity of supply is less than 1 (Es < 1), it indicates that a change in price leads to a minimal change in the quantity supplied. Characteristics: - Production takes a long time. - Requires significant investment in resources. Examples: - Houses: The supply of houses cannot be quickly increased, even if prices rise, due to the time it takes to build. - Oil: Oil production is often constrained by the time and resources needed to extract and refine it. Perfectly Inelastic Supply In this case, the quantity supplied does not change at all when the price changes. The elasticity of supply is equal to 0. Characteristics: - Quantity supplied remains constant regardless of price changes. Examples: - Life-saving medications: The supply of certain medications may not increase even if prices rise because they are limited by production capacity. Unitary Elastic Supply When the percentage change in quantity supplied is equal to the percentage change in price, the elasticity of supply is equal to 1 (Es = 1). Characteristics: - The change in price results in a proportional change in quantity supplied. Examples: - Certain agricultural products: If the price of corn increases by 10%, the supply might also increase by 10% if farmers can adjust their production levels accordingly. Market Equilibrium Equilibrium Price: The equilibrium price is the price at which the quantity supplied equals the quantity demanded. This is the point where the supply and demand curves intersect. Equilibrium Quantity: The equilibrium quantity is the quantity that is supplied and demanded at the equilibrium price. Example of Market Equilibrium: If the equilibrium price for a book is $20, at this price, 100 copies are sold (equilibrium quantity). If the price were to rise to $25, the quantity demanded might drop to 80 copies while the quantity supplied could increase to 120 copies, leading to a surplus. Changes in Equilibrium Market equilibrium can change due to shifts in the supply and demand curves. Here are some factors that can cause these shifts: Increase in Demand: When demand increases (shifts to the right), it can lead to a higher equilibrium price and quantity. Decrease in Demand: When demand decreases (shifts to the left), it can lead to a lower equilibrium price and quantity. Increase in Supply: When supply increases (shifts to the right), it can lead to a lower equilibrium price and a higher equilibrium quantity. Decrease in Supply: When supply decreases (shifts to the left), it can lead to a higher equilibrium price and a lower equilibrium quantity.  Surpluses, Shortages, and Government Intervention Surpluses A surplus occurs when the quantity supplied of a good exceeds the quantity demanded at a given price. This situation arises when the price is set above the equilibrium price. Quantity Supplied (Qs) > Quantity Demanded (Qd): This means producers are willing to sell more of the goods than consumers are willing to buy. Price Above Equilibrium: When prices are too high, consumers may not purchase as much, leading to excess supply. Example: Consider a new video game console priced at $600. If the equilibrium price is $500, producers may supply 1 million units, but consumers may only want to buy 600,000 units. This creates a surplus of 400,000 consoles. Shortages A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price. This typically happens when the price is set below the equilibrium price. Quantity Demanded (Qd) > Quantity Supplied (Qs): This indicates that consumers want to buy more of the good than producers are willing to sell. Price Below Equilibrium: When prices are too low, demand increases, but supply does not keep up. Example: Imagine a popular smartphone priced at $300, while the equilibrium price is $400. If consumers want to buy 800,000 units at this lower price, but producers can only supply 500,000 units, there is a shortage of 300,000 smartphones.  Government Intervention Governments often intervene in markets to address surpluses and shortages. This intervention can take various forms, including price ceilings and price floors. Price Ceilings Definition: A price ceiling is a maximum price set by the government for a particular good. Purpose: To make essential goods affordable for consumers. Effect: If set below the equilibrium price, a price ceiling can lead to shortages. Example: Rent control is a common example of a price ceiling. If the government sets a maximum rent of $1,200 in a city where the equilibrium rent is $1,500, landlords may not supply enough apartments, leading to a housing shortage. Price Floors Definition: A price floor is a minimum price set by the government for a particular good. Purpose: To ensure producers receive a fair price for their goods. Effect: If set above the equilibrium price, a price floor can lead to surpluses. Example: Minimum wage laws serve as a price floor. If the minimum wage is set at $15 per hour, but the equilibrium wage for certain jobs is $12, employers may hire fewer workers, resulting in a surplus of labor (unemployment). Other Forms of Government Intervention Governments can also intervene through regulations, taxes, and subsidies to influence the economy. Regulations: Governments set rules that businesses must follow to ensure safety, fairness, and environmental protection. For example, regulations on pollution control require factories to limit emissions. Taxation: Taxes are collected by the government to fund public services such as education, healthcare, and infrastructure. For instance, sales tax is added to the price of goods, affecting consumer behavior. Subsidies: Subsidies are financial support provided by the government to encourage certain industries. For example, agricultural subsidies help farmers maintain stable prices for crops, ensuring food security.  Reasons for Government Intervention Governments intervene in the economy for several reasons: - Correct Market Failures: To address situations where the market does not allocate resources efficiently. - Promote Fairness: To ensure equitable access to essential goods and services. - Stabilize the Economy: To manage economic fluctuations during recessions or booms. - Protect Consumers and the Environment: To safeguard public interests and promote sustainability. Market Structures Types of Market Structures 1. Perfect Competition Perfect competition is a market structure where many sellers offer identical products. Characteristics: - Many Sellers: There are numerous sellers in the market. - Easy Entry and Exit: New businesses can easily enter the market, and existing businesses can leave without significant barriers. - Well-Informed Consumers: All participants have complete knowledge about prices and products. - Identical Products: The products offered are the same, making them perfect substitutes. - Price Determination: Prices are determined by supply and demand; individual sellers cannot influence the market price. Example: Agricultural markets often exhibit perfect competition. For instance, many farmers sell wheat, and no single farmer can set the price. 2. Monopolistic Competition Monopolistic competition is a market structure where many sellers offer products that are similar but not identical. Characteristics: - Easy Entry and Exit: Similar to perfect competition, it is easy for new firms to enter or exit the market. - Limited Price Control: Firms have some control over the price due to product differentiation. - Product Differentiation: Businesses differentiate their products through branding, quality, or features. - Nonprice Competition: Companies compete through advertising and marketing rather than price alone. Example: The fast-food industry is a good example. Chains like McDonald's and Burger King offer similar products but differentiate themselves through branding and menu options. 3. Oligopoly An oligopoly is a market structure characterized by a small number of large sellers. Characteristics: - Few Large Sellers: The market is dominated by a few companies. - Difficult Market Entry: High barriers make it challenging for new firms to enter the market.  - Differentiated Products: Products may be similar but are often differentiated in some way. - Price Maker: Firms have some control over prices and may engage in collusion to set prices. - Some Advertising: Companies use advertising to differentiate their products. Example: The automobile industry is an example of an oligopoly, with major players like Ford, General Motors, and Toyota dominating the market. 4. Monopoly A monopoly exists when a single seller controls the entire market for a product or service. Characteristics: - One Seller: There is only one provider of the product. - No Close Substitutes: Consumers have no alternatives for the product. - Price Setting: The monopolist can set prices without competition. - High Barriers to Entry: It is nearly impossible for new firms to enter the market. Example: Utility companies, such as water or electricity providers, often operate as monopolies in their regions. Types of Monopolies 1. Natural Monopoly A natural monopoly occurs when it is more efficient for a single firm to supply the entire market. Example: Public utilities like water services often function as natural monopolies because the infrastructure costs are high, making it impractical for multiple companies to provide the same service. 2. Geographic Monopoly A geographic monopoly exists when a business is the only provider of a good or service in a specific location. Example: A local gas station in a remote area may be the only option for residents, creating a geographic monopoly. 3. Technological Monopoly A technological monopoly arises when a company holds exclusive rights to a technology, often through patents or copyrights. Example: Pharmaceutical companies may have patents on specific drugs, giving them a monopoly on those medications until the patent expires. 4. Government Monopoly A government monopoly occurs when the government is the sole provider of a good or service. Example: Postal services in many countries are government monopolies, where the government operates the postal system.  Market Failures Market failures occur when the allocation of goods and services by a free market is not efficient. This means that resources are not being used in the best way possible, which can lead to negative consequences for society. 1. Inadequate Competition Inadequate competition happens when there are not enough businesses in a market to create a healthy competitive environment. This can lead to monopolies or oligopolies, where one or a few companies dominate the market. Consequences: - Inefficient Resource Allocation: Resources may not be used where they are most needed. - Higher Prices: Without competition, companies can charge higher prices. - Economic and Political Power: Large companies may gain too much influence over the economy and government. Example: A classic example is a local utility company that is the only provider of electricity in a region. Without competition, they can set high prices and may not be motivated to improve service quality. 2. Inadequate Information Inadequate information occurs when consumers or producers do not have enough information to make informed decisions. This can lead to poor choices in the market. Consequences: When individuals are unaware of market conditions, they may make decisions that do not reflect their true needs or preferences, leading to inefficiencies. Example: Consider a situation where consumers are not aware of the health risks associated with a certain product, like a food item containing harmful additives. They may continue to purchase it, thinking it is safe, leading to negative health outcomes. 3. Resource Immobility: Resource immobility refers to the difficulty in moving factors of production (like labor and capital) to areas where they are most needed. This can hinder economic growth. Consequences: When resources cannot move freely, it can lead to unemployment in some areas and labor shortages in others, resulting in inefficiencies. Example: If skilled workers in a declining industry (like coal mining) cannot relocate to areas with growing industries (like technology), both the workers and the economy suffer.  4. Externalities: Externalities are unintended side effects of an economic activity that affect third parties not involved in the activity. They can be either positive or negative. Consequences: The costs or benefits of externalities are not reflected in the market price, leading to overproduction or underproduction of goods. Examples: - Negative Externality: Pollution from a factory harms the health of nearby residents. The factory does not bear the full cost of the harm it causes. - Positive Externality: A homeowner plants a garden that beautifies the neighborhood, increasing property values for everyone, even those who did not contribute to the garden. 5. Public Goods Public goods are products that are collectively consumed by everyone. They are typically provided by the government because the market fails to supply them efficiently. Characteristics: - Non-excludable: No one can be excluded from using the good. - Non-rivalrous: One person's use of the good does not reduce its availability to others. Examples: - National Defense: Protects all citizens regardless of individual contributions. - Public Parks: Available for everyone to enjoy without diminishing the experience for others. Practice Worksheets Shifts in Demand Shifts in Supply Market Equilibrium