Notesale: Turn your study into money

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Standard Level
Scarcity
The basic economic problem that arises because
people have unlimited wants but resources are
limited
...
Because of
this we have to make choices
...


Free Good
Goods which are unlimited in supply and have no
opportunity cost
...
Economic growth
that relies on non renewable resources or depletes
renewable resources too quickly is therefore not
sustainable development
...
Conservation of resources
2
...

3
...
e
...


PPFs demonstrate the concept of opportunity and
efficiency
...

Sacrificing consumer goods to produce more capital
goods today will increase the PPF in the future
...
If a country produces bread and guns, as it
produces more and more guns the resources used for
producing bread will have to be turned over to
producing guns (at which they will be less efficient)
and there will be a decreasing amount of guns produced
for every loaf of bread given up
...


Shifts in demand
These are the non-price determinants of demand:
1
...
Prices of related goods (complements and
substitutes)
3
...
Demographic changes
2
...
Example:
Tennis racket and tennis balls
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Law of demand
As price rises less is demanded and vice versa
...
A movement
down the demand curve
...
This is referred to as a decrease
in the quantity demanded
...

Price is the only thing that causes a movement up
or down the demand curve
...
Income
As income rises the demand for normal goods rises
and vice versa
...

2
...
Example:
butter and margarine
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3
...
Demographic changes:
Changes in the following will change the demand for
(preferences):
Over time the demand for goods such as flared
products:
trousers and wigs changes, as these items go in and
a
...

b
...
Changes in income distribution
Derived Demand
Supply
Goods/services demanded because they are needed The quantities of a product firms are willing and able
for the production of other goods/services (labour
to sell at each price
...
A These are the non-price determinants of supply:
movement up the supply curve
...
Costs
A contraction in supply – a decrease in the
2
...
A
3
...

4
...
Subsidies
A change in price is the only thing that causes
6
...

1
...
Improvements in technology
Costs increase – supply curve shifts to left –
Means that more can be produced therefore supply
supply decreases
...

Costs decrease – supply curve shifts to right –
supply increases
...
The prices of other possible outputs
Changes in the prices of some goods can affect the
supply of other goods - if the price of beef
increases significantly there will be an increase in
the quantity supplied
...
As a result there will also be an
increase in supply of leather
...
Indirect taxes
Indirect tax increases - costs increase – supply curve
shifts to left – supply decreases
...


5
...

Subsidies decrease - costs increase – supply curve
shifts to left – supply decreases
...
Expectations
In general if a firm expects lower prices for their
goods in the future they will reduce production, and
if they expect higher prices in the future they will
expand production
...


Excess demand
Excess demand occurs when a maximum price is set
below the equilibrium price
...

Excess supply
Excess supply occurs when a minimum price is set
above the equilibrium price
...


Consumer surplus
Consumer surplus is the difference between what
consumers are willing to pay (shown by the
demand curve) and the market price
...

Demand/supply decreases – consumer and
producer surplus decreases
...
Signalling
Price signals what is available giving information
which allows all traders to coordinate their
economic activities
...
Providing incentives
Price creates incentive for buyers and sellers
...
Rising prices act as a disincentive for
consumers to purchase
...
Perfectly inelastic demand
Definition: A percentage in price leads to no
change in quantity demanded
...
Area between demand curve
and equilibrium price
...

Price elasticity of demand
Measure the responsiveness of demand to a change
in price
...
Perfectly inelastic demand
2
...
Unitary elastic demand
4
...
Perfectly elastic demand

2
...
Unitary elastic demand
Definition: A percentage change in price leads to
the same percentage in quantity demanded
...
Elastic demand
Definition: A percentage in price leads to a greater
percentage in quantity demand
PED: >1
Example diagram: p
d
q

q
5
...

PED: infinite
Example diagram:
p

d
q

Price elasticity of demand and sales revenue
Good with price inelastic demand:
- an increase in price will increase sales revenue
- a decrease in price will decrease sales revenue
Good with price elastic demand:
- an increase in price will decrease sales revenue
- a decrease in price will increase sales revenue
While PED is important for decision making for a
firm other factors affect decision making eg
competition, state of economy etc
...
Number of substitutes; if many substitutes
good likely to be elastic in demand, if few
substitutes or none good likely to be inelastic
2
...
Proportion of income: if good takes low
proportion of income then more likely to be
inelastic (change in price hardly noticed), if good
takes high proportion of income then more likely
to be elastic in demand
4
...
In the short run, goods and more inelastic
in demand
...
In the longer run,
consumers will find substitutes and demand for the
good will be more elastic
...

PES: 0
Example diagram:
p
s

in order to raise lots of tax revenue
...
Formula:
% change in Quantity Supplied
% change in Price
Types of PES
1
...
Inelastic supply
3
...
Elastic supply
5
...

PES: 1
p
s
Example diagram:
q
Perfectly elastic supply
Definition: A percentage change in price leads to
an infinite change in quantity supplied
...
Time
...
In the long run they are
likely to be more elastic in supply
...

2
...
In other words, the resources are
used for a number of different purposes
...
Formula:
% change in quantity demanded
% change in income
1
...
Normal
good
...

3
...
This makes the good more elastic in supply
4
...

Types of income elasticities of demand
1
...
Income elastic demand

2
...
Normal good that is a
luxury
...
If incomes rise the demand
for these goods will rise (and vice versa)
...


Inferior good
Inferior goods have a negative income elasticity of
demand
...


Income elasticities and the trade cycle
Income elastic goods (luxury) sell very well in a
Boom when incomes are rising fast
...

Negative income elasticity goods (inferior) sell
better in a Recession when incomes may be
decreasing and they sell poorly in a Boom
...
Necessities
...
If income change there will be a smaller
change in the demand for these goods
...
Luxuries
...

Therefore if incomes change the demand for these
goods will change be a greater amount
...
Production planning
...

2
...
Some firms have flexible
factors of production and may move production from
an income inelastic good to income elastic good
when the economy is moving into a boom
...


Cross elasticities of demand:
XED measures the responsiveness of quantity
demanded for product X to a change in price of
product Y
...

Goods with a negative cross elasticity are
complements
...


d

P

Negative Cross Elasticity
If however the two goods are complements, for example
cars and petrol, then a rise in price of one will cause a fall
in demand for the other; i
...
a negative cross elasticity
...
For
example, a rise in the price of cheese is unlikely to have
an effect on the demand for bicycles
...

p
d

Uses of XED
Useful for a firm
...

For example if a close competitor increases their prices,
the firm can expect increasing demand
...
It increases
the cost of production and therefore causes a
leftwards shift in the supply curve
...
Such a tax has the effect of
shifting the supply curve up, parallel to the original
supply
P

S1

s
q

Ad valorem tax
Tax set as a percentage of the price of a good
...

P

S1

s
q

If demand is inelastic then the consumer will pay the
majority if the tax imposed
...

Government tend to tax goods which as highly
inelastic such as cigarettes (especially when they are
bad for peoples’ health)
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Subsidies
If a government subsidises production of a good
the supply curve shifts outwards because each
good now costs less money to produce
...
If demand is elastic then the
producer will pass most of the subsidy onto the
consumer
...

- subsidising exporting firms can be seen as
dumping and may provoke a protective response
...

Therefore subsidies will increase the taxation they
pay

Government may give subsidies for a number of
reasons:
 To lower the price of essential goods, such as
milk, to consumers
...
Therefore their
demand will increase
...
Therefore if and when the subsidy is
removed the firm may find itself unable to compete
...

Also, decreases imports/increases exports of the
subsidised good therefore improves B of P
...
Opportunity cost of
spending on healthcare/education which would
increase the supply side of the economy
...
It is usually set above the equilibrium
...
Causes
excess supply
...
It is usually set below the equilibrium
...

Causes excess demand
...
The shortages can
lead to:
 the emergence of a black market where the
product is sold at a higher price
 there may be queues outside shops
 seller may decide on other criteria (usually
unfair) than price as a means of allocating the

Market Failure
A situation where the market leads to a under
allocation or over allocation of a good
...
e
...

Private costs of consumption: The money paid
for the purchase of a good
...
Existence of externalities (SL)
2
...
Common access resources and the threat to
sustainability (SL)
External costs of production: these are costs to
those other than the producer
...
The paint manufacturer
does not pay for any air pollution they cause
...

External costs of consumption: costs bourn by
people other than the consumer of a good i
...
passive
smoking

Private Costs + External Costs = Social Costs
Social costs are the costs to society from the
production or consumption of a good
...
e
...


Private benefits of production: sales revenue to the
firm from selling a good
...

Goods that society believes brings lower than
expected benefits to consumers
...


Merit goods
Goods that society believes bring unanticipated
benefits to the consumer
...


How to decrease the negative externalities of
production:
- Taxation
- Government legislation
- Tradable permits

How to decrease negative externalities of
consumption (consumption of demerit goods):
- Taxation
- Government legislation
- Advertising to influence behavior

How to increase the production of positive
externalities goods:
- Subsidies
- Direct provision

How to increase the consumption of merit goods:
- Direct provision
- Subsidies
- Government legislation

Private benefits of consumption: benefit to
consumer from consuming a good
...
e
...


-

Advantages of taxation
- Provides an incentive for firms to reduce their
pollution (less pollution = less tax)
- Increases costs for firms who pollute heavily and
therefore their price, decreasing the product’s
demand, which reduces the pollution from the
production of the product
- Provides revenue for the government which can
then be used to clean up the pollution caused by
the firm (if that’s possible)
Disadvantage of taxation
- May not decrease demand for polluting goods by
much if the PED is inelastic (price up, but demand
down by a smaller percentage)
- Difficult to put a monetary value on pollution and
therefore difficult to find the right level of tax
Advantages of permits:
- Places an absolute limit on pollution
- Heavy polluters have to buy permits, which adds
to their costs and therefore prices
...

- Light polluters sell their permits to heavy
polluters
...

Disadvantages of permits:
- The cost of running the scheme can be
prohibitive
...

Advantages of subsidies:
-Increases output of firm and therefore decreases
market failure
...

- There is an opportunity costs for the money used
for subsidies
...

Goods which are non rivalrous and non excludable
by price
...
e
...

Disadvantages of advertising:
Demerit goods are usually addictive so
advertising will do little to influence people
who already consume them to quit
...


Advantages of direct provision:
Guarantees provision
Enormous economic benefits from training
and especially re-training
Disadvantages of direct provision:
- Expensive
- Firms may not bother to train if the
government is providing it
-

Non-rivalrous means that consumption of a
good/service by one person does not prevent another
person from also consuming that good/service, e
...

streetlight
...


Non-excludable means that once a good is
provided, it is impossible (or prohibitively
expensive) to stop people who have not paid for
the service from using it
...

However, a car manufacturer can exclude people
from using their cars by charging a selling price
for its use
...

1
...
Examples include
fishing grounds, forests and jungle
...
Poverty in LDCs (less developed
countries)
Poverty is poor countries results in the over
exploitation of land which leads to soil erosion,
land degradation and deforestation
...

Governments are keen to promote the use of clean
technology alternatives such as solar/wind/hydro
power by giving these industries subsidies
...


Threats to sustainability
We will cover three threats:
1
...
The use of fossil fuels
3
...
The use of fossil fuels
When fossil fuels are burned greenhouse gases are
emitted and this causes climate change
...

Government responses to the threats to
sustainability
1
...
Legislation
3
...
Funding for clean technologies
Advantages of subsidies for clean technology:
- Increases output of clean technology firms and
therefore decreases use of fossil fuels
...

- There is an opportunity costs for the money used
for subsidies

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