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IGCSE ECONOMICS 1. The Basic Economic Problem 1.1 Nature of the economic problem ● Problem: an economy’s finite resources are insufficient to satisfy all human wants & needs ○ Finite resources can’t meet infinite wants ● Decide the best allocation of resources for society as a whole ○ Resources: Inputs available for production of g/s ● Economic goods: scarce resources that have opportunity costs (eg. clothing, food) ○ A sacrifice must be made to obtain it (eg. money, effort) ○ Scarce resources: factors of production that are limited in supply ● Free goods: an abundant resource that has no opportunity cost (eg. seawater, sunlight) ○ No sacrifice must be made in order attain it ● Purpose of economic activity ○ Produce goods & service to provide for wants & needs ○ Become more efficient to maximise economic welfare & satisfaction ○ Identify what goods should be produced & how/for whom they should be produced ○ Economic activity isn’t just production for recorded monetary gain ■ Includes DIY, subsistence farming, charity work, barter & illegal trade 1.2 Factors of production ● Known as inputs ○ Building blocks used to produce output (g/s) ○ Eg. Creating a farm ■ Farmland (land) ■ Farmer’s physical labour (labour) ■ Tools used- shovels, tractors, ploughs etc. (capital) ■ Sale of the products in exchange for money; profit (enterprise) ● Land ○ All natural resources & premises ○ Eg. coal, water, forests, minerals, oil etc. ○ Fixed supply ○ Quality ■ Soil type, fertility, weather etc. ○ Mobility ■ Some are geographically immobile; others are difficult (not impossible) ■ Many types of land have changed their use (occupational mobility) ○ Reward: rent ● Labour ○ All human resources (mental & physical efforts of labourers) ○ Eg. farming (physical efforts), lawyer (thinking skills) etc. ○ Supply ■ Number of workers available- ■ Number of hours they work ■ Influenced by population size, no. of years of schooling, retirement age, structure of population etc. ○ Quality ■ Skill, education & qualification of labour ○ Mobility ■ High occupational mobility (ability to change jobs) ■ Geographic mobility (ability to move to a place for a job) ○ Reward: wages ● Capital ○ Capital good: Human made good used in production of other g/s ○ Eg. hammers, computers, delivery vans, conveyor belts etc. ○ Becomes obsolete (replaced by more modern versions) ○ Supply ■ Demand for g/s ■ Success of business ○ Quality ■ No. of good quality products that can be produced using the given capital ○ Mobility ■ Depends on nature/use of capital ● Eg. office building is geographically immobile but occupationally mobile ● Occupational mobility (machine can be used for several industries) ○ Reward: interest ● Enterprise ○ Ability to take risks & run a business venture/firm ■ Organise all other factors of production & makes the necessary decisions ○ Risks: failure, losses, bankruptcy, rival producing better product, costs rising ○ Eg. earning a profit out of a sale of a product/service ○ Supply ■ Entrepreneurial skill (risk-taking, innovation, effective communication etc.) ■ Education ■ Corporate taxes ● If taxes on profits are too high, no one will want to start a business ○ Quality ■ How well it is able to satisfy & expand demand in the economy in cost-effective ○ Mobility ■ Highly mobile (geographically & occupationally) ○ Reward: profit 1.3 Opportunity Cost ● Next best alternative that is forgone when making an economic decision ● Cost of goods measured in terms of what must be sacrificed for other goods ● Real cost of any economic decision ● Main groups in the economy ○ Consumers ○ Workers ○ Producers ○ Govt ○ Financial institutions ● Eg. Govt. could spend on 2 options: build a school or a hospital ○ Decides to build a hospital ○ Opportunity cost: education the children could have received 1.4 Production Possibility Curve (PPC) ● A curve showing the maximum output of two types of products that can be produced at a given time using all the resources available to their maximum potential ● All points on PPC shows maximum production efficiency given the resources currently available ● Not possible to achieve output levels outside the PPC ● Shows economic problem, opportunity cost, employment, specialisation & economic growth ● Position of points ○ Inside PPC → Inefficient use of existing resources compared with what is possible (A) ■ Indicates under-utilised assets, unemployment ○ On the PPC → Efficient (B, D, C) ○ Outside PPC → Impossible (X) ● Shifts along the PPC reflect an opportunity cost ○ Outward shift (right) → higher production possibility = efficiency ■ New technology ■ New resources (gold discovery) ■ Increases supply of labour (birth rate, migration) ■ Improved labour force (education, training) ■ Better use of labour (division of labour & specialisation) ■ More entrepreneurism ○ Inward shift (left) → lower production possibility = inefficiency ■ Natural disasters (ruined infrastructure, loss of population) ■ Low investment in new technologies (causes productivity to fall over time) ■ Running out of resources (particularly non-renewables eg. oil/water) ● Opportunity cost is measured along the curve in terms of the sacrifice in the quantity of one good when you choose to allocate more resources to an alternative good 2. The Allocation of resources 2.1 Microeconomics & Macroeconomics ● Microeconomics: study of individual markets ○ Deals with individual firms, consumers, & markets making individual decisions within the economy ○ Eg. effect of a price change on the demand/supply of a good ● Macroeconomics: study of the entire economy as a whole ○ Deals with aggregates (total supply/demand for g/s in an economy at a particular time) ○ Eg. level of inflation, national spending, national output, economic development etc. ○ Decisions are made by govt in managing the economy as a whole 2.2 Role of markets in allocating resources ● Resource allocation: the way in which markets decide what goods & services to provide, how to produce them & who to produce them for ○ Price mechanism ■ Prices respond to shortages & surpluses ● Price rises: consumers ration ● Reduces amount they are willing/able to buy ○ Tells producers there is excess supply in the market ● Gives suppliers incentive to decrease supply ■ Shortages causes price to rise ■ Surpluses causes prices to fall ● Market system ○ Any place where buyers & sellers meet to exchange goods & services ○ G/s are bought/sold in a market at an equilibrium price ■ Producers produce goods that consumers demand the most ○ Market equilibrium ■ Demand = supply for a good ■ Demand changes (eg. income rises: people can afford more goods) ■ Supply changes (eg. weather impacts supply (drought) = decrease in crops) ■ Market is more likely to be in state of disequilibrium than equilibrium ● Demand & supply constantly change ● Mixed economy ○ Decisions are made by a combination of the govt & the private sector (market) ○ Eg. USA, India, China, Singapore, Japan etc. 2.3 Demand ● Want & willingness of consumers to buy a good or services at a given price ○ Effective demand: willingness to buy is backed by the ability to pay for the purchase ○ Quantity demand: effective demand for a particular g/s ○ Eg. Want a phone but don't have the money to buy (demand) ■ Have the money to buy (effective demand) ○ Individual demand: demand from one customer ○ Market demand: total (aggregate) demand; sum of all individual demands of consumers ● Demand curve ○ Shows effective demand ○ Law of demand ■ Increased price = decreased demand ■ Decreased price = increased demand ○ Slopes down from left to right ■ Demand increases as price falls (vice versa) ○ Movements are due to change in price ■ Price rise = contraction along demand curve (less demand) ■ Price falls = extension along demand curve (more demand) ○ Reasons for shifts ■ Consumer incomes ● Increased income = people can afford more ● Eg. bicycle replaced by motorcycle ■ Tax on incomes (more/less disposable income) ■ Rise/fall in the price of substitute (eg. tea & coffee) ■ Rise in the price of complements (eg. printers & ink cartridge) ● Two products used/consumed together ● As demand for 1 product increases, demand for other product increases ■ Successful/unsuccessful advertising ■ Weather ■ Legislation ■ Age distribution ● Fashion/trends ● Demand varies depending on age group ● Eg. trainers are more popular amongst young people ○ Majority of population is young people = high demand ○ Example: ■ Diagram X: ● Decreased price (80 to 60) = increased demand (300 to 500) ○ Extension in demand from A to B ● Increase in price (60 to 80) = decrease in demand (500 to 300) ○ Contraction in demand from B to A ■ Diagram Y: ● Increased demand (500 to 600) ○ Increased demand due to changes in other factors (excluding price) causes shift to the right (A to B) ■ Diagram Z: ● Reduced demand (500 to 400) without change in price ○ Fall in demand for a product due to changes in other factors (excluding price) causes shift to the left (A to B) 2.4 Supply ● Want & willingness of producers to supply a g/s at given price ● Quality supplied: amount of g/s producers are willing to make & supply ● Market supply: amount of g/s all producers supplying the product are willing to supply ● Supply curve ○ Slopes down from right to left
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