Unit 1 - Economics of the Market Flashcards
Basic Economic Problem
Scarcity - arises because human wants for goods and services are unlimited due to greed. However resources are limited. Therefore all countries, rich and poor, are affected by scarcity.
Resources
Used to produce goods and services - i.e factors of production (Land, Labour, Capital and Enterprise)
Land
Naturally occurring resources, such as oil. Also includes minerals from the land or anything from the sea/air or sunlight etc.
Labour
The human workforce available to produce goods and services. Can be manual - e.g. working in a factory, or mental - e.g. designing/planning
Capital
Man-made resources that are used to produce goods and services. They are not wanted for themselves - they aid production.
Fixed Capital
Resources that can be used again and again over a long period of time For example a nail gun or robotic machinery.
Working Capital
Resources that are used up in the production process. i.e raw materials such as aluminium.
Enterprise
Refers to the decisions and risks taken by the entrepreneur (This is the business know-how) The entrepreneur decides what to produce? how to produce? and for whom to produce? They combine the other three factors of production (inputs) to produce goods and services (outputs) in the most profitable way.
Need
Essential for survival - e.g. water
Want
Non-essential for survival i.e. Something that makes life more pleasant - e.g. WiFi
Opportunity Cost - Definition
Sacrifice of the next best alternative foregone
Opportunity Cost - Individual
Aim to maximise our satisfaction (utility) but we are limited by our budget. For example, If I choose to buy a laptop, then the opportunity cost may be the utility I would have gained having bought a tablet instead.
Opportunity Cost - Firm
Aim to maximise profit but limited by the amount of factors of production it has. For example, producing a laptop may have the opportunity cost of the profit that would have been made if a tablet was produced instead
Opportunity Cost - Government
Aim to maximise welfare of its citizens but limited by taxation revenue. For example, providing schools may have the opportunity cost of hospitals.
Reasons to Spend (Individual)
To purchase goods/services that give them utility
Reasons to Save (Individual)
To help purchase an expensive item (that they cannot afford now) in the future - instead of borrowing to buy now. Also, someone may save to protect against uncertainty - e.g. losing their job.
Reasons to Borrow (Individual)
To help them buy a good or service now. For example, most people cannot afford to purchase a house straight away and it would take a long time to save for one. So, they take out a mortgage (which is a loan for a house) This means that they can buy the house now and pay it off over time
Income
Money made from the factors of production. For example, most people earn an income by working - this is known as their wage or salary.
Disposable Income
The money a consumer has left to spend of goods ands services after deductions such as income tax, and national insurance have been made.
Discretionary Income
Disposable income minus essential bills such as mortgage, gas, electricity, heating etc. i.e. The money a consumer has left to spend on “luxury” goods/services - e.g. eating out
Interest Rate
The price of money. This is the % charge on borrowing and the % returns on savings.
Interest Rate Rises - Impact on Individuals
More likely to save - greater returns
Less likely to borrow - more to be paid back
Interest Rate Falls - Impact on Individuals
Less likely to save - lower returns
More likely to borrow - less to be paid back
Borrowing
Involves someone (such as a bank) agreeing to give you a sum of money which you have to pay back over time. Money is paid back with interest so you pay back more than you borrowed
Savings
An option to take with discretionary income. In return for savings, banks will give interest - so your money will grown in value each year.
Savings - Instant Access Savings Account
Bank account that allows you to access money whenever you want and you can save as much as you want.
Instant Access Savings Account - Benefits
Can access money very quickly and easily
Instant Access Savings Account - Disadvantages
Very low rate of interest on savings
Savings - Regular Savings Account
Bank account that gets you to commit to saving a certain amount each month.
Regular Savings Account - Benefits
Encourages you to save a certain amount each month
Pays a higher rate of interest than an instant access account.
Regular Savings Account - Disadvantages
You can lose money if you withdraw from the account
Savings - New Individual Savings Account (New ISA)
Allows you to save money and not pay tax on your interest.
NISA - Benefits
Pays a good rate of interest
NISA - Disadvantages
You can only save up to £20,000 per annum
Savings - Premium Bonds
Interest decided by lottery. Can be bought from post office
Premium Bonds - Benefits
Can win anything from £25 to £1,000,000 each month. They are very safe because they are provided by the government.
Premium Bonds - Disadvantages
Very low odds of winning (1 in 30,000 chance of winning £25 per £1 Bond) and minimum holding is £100
Borrowing - Overdraft
Form of loan from the bank - allows you to take out more money (out of your current account) than you have. Must be agreed with the bank and the maximum figure is set - known as the overdraft limit
Overdraft - Benefits
Easily arranged and flexible
Overdraft - Disadvantages
Interest charged on amount borrowed
Daily rate is charged for each day you are overdrawn
Interest rates can be quite high
Borrowing - Bank Loan
A fixed sum of money is borrowed and paid back over a fixed period of time. A fixed amount is paid back each month and interest is added to the amount to be repaid.
Bank Loan - Benefits
Interest rate is fixed
Fixed amount paid each month
Fairly easy to obtain
Bank Loan - Disadvantages
Must keep making payments
Interest rates may be high
Borrowing - Mortgage
A loan on on property only. You have to pay it back with interest. Usually paid back over a long time - e.g. 25 years
Mortgage - Benefits
Substantial amount of money can be borrowed - to buy a house
Mortgage - Disadvantages
If payments are not kept up then the property may be repossessed
The amount paid each month may go up and down - but this depends on the type of mortgage you have.
Borrowing - Credit Card
A card you can use to purchase items and pay for them at a later date. There will be a limit on how much you can spend, known as your credit limit. Cash can also be obtained
Credit Card - Benefits
Quick and easy to make purchases
You can buy goods without using your own money
You can buy goods that you may not have the cash to afford at the time
Credit Card - Disadvantages
Will pay a higher rate of interest back on debt
Debt can accumulate easily because it is easy to overspend.
Borrowing - Hire Purchase
Used to buy large items, such as a car. You agree to pay set amounts for the use of the product until full amount is cleared or product replaced by a newer model.
Hire Purchase - Benefits
Quick and easy to set up
Fixed amount paid monthly
Hire Purchase - Disadvantages
Loan company owns the item you have purchased until the agreement is fully paid.
If payments are missed then the item may be repossessed
Borrowing - Pay Day Loan
Short-term loans which allow people to access cash that will be paid back when they receive their wages.
Pay Day Loan - Benefits
Quick and easy to obtain
Can provide a quick solution to cash-flow problems
Pay Day Loan - Disadvantages
Companies charge extremely high rates of interest
Can create a larger, long-term debt issue
Total Utility
Total satisfaction someone receives from the consumption of all units of a good or service
Marginal Utility
The added satisfaction gained from the consumption of one additional unit of a good or service
Utility
Total satisfaction someone receives from consuming a good or service
Demand Curve Shape - Diminishing Marginal Utility
A decline in the extra satisfaction gained from the consumption of additional units of a good or service
Demand Curve Shape - Substitution Effect
If the price of a good rises, the we will switch demand to a substitute (similar) good. Thus, as prices rise, quantity demanded decreases
Demand Curve Shape - Income Effect
If real incomes fall then the quantity of goods and services we can buy falls - due to a fall in purchasing power. If the price of a good rises, then we can buy less of it due to reduced purchasing power
Determinants of Demand
Population Advertising Substitutes (price of) Interest Rates Fashion and Trends Income Tax Complementary Goods (price of)
Substitute Goods
Alternative goods, i.e the next best alternative on a consumer’s scale of preference (based on utility gained)
Complementary Goods
Goods that are consumed together - e.g. consoles and games.
So if the price of one rises, demand for both will fall
Effective Demand
The quantity of a good or service which consumers are willing and able to buy at a particular price
Supply
The quantity of a good or service that firms are willing and able to provide (or supply) at a particular price
Supply Curve Shape - Law of Supply
As price rises firms (who are motivated by profit) will supply more. Also are price rises, a greater number of firms will enter the market to supply.
Law of Demand
As the price of a good or service increases, consumers will demand less of it
Determinants of Supply
Productivity Indirect Tax Number of Firms Technology Subsidies Weather Costs of Production
Market
Where buyers and seller come together to agree on a price and exchange goods and services.
Fixed Costs
Costs that do not change with output - e.g. rent of land and salaries
Variable Costs
Costs that change directly with output - e.g. raw materials and wages
Short Run
Period of time where at least one factor of production is fixed
Long Run
All factors of production are variable - therefore costs are variable
Total Cost
Variable Costs + Fixed Costs
How to lower costs
Reduce wages Invest in technology Find cheaper suppliers Improving training Greater specialisation
AFC
Average Fixed Cost. Fixed cost per unit of output
Calculated using AFC = FC/O
AVC
Average Variable Cost. Variable cost per unit of output
Calculated using AVC = VC/O
ATC
Average Total Cost. Total cost per unit of output.
Calculated using ATC = TC/O = AFC + AVC
Total (Sales) Revenue
The total receipts from sales of a given quantity of goods or services
Calculated using TR = No. of units sold x Price of 1 unit
Average (Sales) Revenue
Revenue per unit of output.
Calculated using AR = TR/O
Profit/Loss
Calculated using Total Revenue - Total Costs.
Positive = Profit
Negative = Loss
Interest Rates Fall - Impact on Households
Mortgage payments would decrease so the family would have more discretionary income to spend at the end of each month
Borrowing becomes cheaper so households borrow more and spend more
Income from savings is reduced so the family budget would decrease
Interest Rates Rise - Impact on Households
Mortgage payments would increase, so the family would have less discretionary income at the end of each month to spend
Borrowing becomes dearer so households borrow less and spend less
Income from savings is increased, so the family budget would increase
Income Tax Rises - Impact on Consumers
Reduces disposable income therefore consumers have less to save
Reduces disposable income therefore people will dip into savings to fund regular spending
Reduces disposable income therefore consumers have less to spend
Income Tax Falls - Impact on Consumers
Increases disposable income therefore consumers have more to save
Increases disposable income therefore people will not dip into savings to fund regular spending
Increases disposable income therefore consumers have more to spend
Unemployment - Impact on Budget
Reduce amount of disposable income available for spending.
Even if not made unemployed, if unemployment is rising, we are likely to see greater levels of precautionary saving.
Factors affecting Consumer Confidence
Uncertainty in the economy ie recession Changing rates of Inflation Changing rates of income tax Changing rates of unemployment Changing interest rates Changes in government borrowing Growth Exchange rate fluctuations
Planning for uncertainty
Saving more Spending less Not borrowing Avoiding use of credit card Keeping to a budget
Economic Systems - Free Market
Consumer demand decides what to produce
Firms arrange factors of production so they produce what is demanded at minimum cost - to maximise profit
Those who can afford it buy the good/services
This is the most efficient system - producing goods and services that people most want at minimum cost
Economic Systems - Planned/Command
Government decides what to produce
Government give factories quotas on what to produce
Everyone gets equal entitlement to goods/services
Sectors of Industry - Primary
The acquiring of raw materials i.e. resource extraction
e.g. coal mining, oil drilling, farming etc
Sectors of Industry - Secondary
The manufacturing and assembly process
e.g. car production, oil refining, food production, making paper
Sectors of Industry - Tertiary
The commercial services that support the production and distribution process i.e. providing a service
e.g. financial services such as banking
