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ECONOMICS THEME 1 - Coggle Diagram

- - - - Key terms:
        Ceteris Paribus - assuming all other variables are held constant
        Positive statement - an objective statement that can be tested against the facts to be declared either true or false
        Normative statement - a subjective opinion or value judgement that cannot be declared either true or false
        
        Factors of Production - a country's productive economic resources, divided into capital, enterprise, land and labour
      - The Economic Problem
        
        The Problem of Scarcity
        
        Scarcity means economic resources are limited relative to society wants
        
        Choices are made when allocating resources
        
        We must consider the three fundamental economic questions:
        
        What to produce and in what quantities?
        
        How should goods and services be produced?
        
        To whom should goods and services be allocated?
        
        Economic Resources
        
        A country's resources are referred to as factors of production
        
        Renewable resources can be replaced naturally after use, e.g. solar energy
        
        Non-renewable resources are those that will eventually be exhausted, e.g. oil
        
        Opportunity cost, economic goods and free goods
        
        Key Terms:
        
        Opportunity cost - the cost of the next best alternative you give up when you have to make a choice
        
        Economic good - A good that has an opportunity cost in consumption because it uses up scarce resources, e.g. most consumer goods
        
        Free Good - A good that does not have an opportunity cost in consumption because it does not use up scarce resources, e.g. sunlight on air
        
        Factor of Production
        
        Definition
        
        Example
        
        Capital
        
        Enterprise
        
        Land
        
        Labour
        
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        All naturally occurring resources
        
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        Individuals who take a business risk in combining the other three factors of production in order to produce a good or service
        
        Jeff Bezos, Richard Branson, James Dyson, Karren Brady, Deborah Meaden, Michelle Mone
        
        Manmade physical equipment used to make other goods and services
        
        Machinery and computer equipment
  - - - Capital Goods - Those required to produce other goods, e.g. machinery
        
        Consumer Goods - Those that give satisfaction to consumer, e.g. chocolate bars
        
        Points that are below the PPF Curve mean that an economy is operating inefficiently, with unused labour, e.g. unemployed labour
        
        Any point on the Curve mean all factors of production are fully employed
        
        Any points above the Curve are currently unobtainable but could be achieved with economic growth
        
        economic growth - An increase in the productive capacity of an economy over time
    - - Shifts of the PPF
        
        Factors causing outward shift of the PPF
        
        Technological improvements
        
        Discovery of new resources, e.g. oil and gas
        
        Improvements in education and training
        
        Demographic changes, e.g. increases in immigration or an increased retirement age
        
        Factors causing inward shift of the PPF
        
        Natural disasters, e.g. earthquakes or floods
        
        Wars
        
        Global warming/climate change leading to loss of farmland, rising sea levels and extreme weather
        
        A prolonged recession, which may lead to permanent loss of productive capacity
        
        Using a PPF diagram to show economic growth
        
        An improvement in technology or any of the factors that lead to an outward shift of the PPF means that there has been an increase in the productive capacity of the economy (i.e. Economic growth)
        
        Economic Efficiency and PPF diagrams
        
        Productive efficiency - When maximum output is produced from the available factors of production and when it is not possible to produce more of one good or service without producing less of another
        
        Allocative efficiency - when an economy's factors of production are used to produce the combination of goods and services that maximise society's welfare
  - - - Division of Labour is specialisation at the level of the individual worker, as identified by Adam Smith in The wealth of Nations
    - - Reduced time spent moving between different tasks or workstations means increased productivity
        
        Repetition of a limited range of activities can increase skill and aptitude, leading to a worker becoming an expert, e.g. a leading neurosurgeon
        
        As tasks are broken up into smaller ones, it becomes efficient to use specialist machinery
        
        Allows people to work to their natural strengths
        
        Disadvantages
        
        Monotony and boredom, leading to reduced productivity
        
        Loss of Skills
        
        Strikes could stop production
      - The functions of money
        
        A medium of exchange
        
        A store of value
        
        A measure of value
        
        A means of deferred payment
  - - - Market Economies
        
        Advantages
        
        Consumer Sovereignty
        
        Flexibility
        
        Competition
        
        Choice
        
        Economic and Political freedom
        
        Disadvantages
        
        Inequality
        
        Imperfect information
        
        Externalities
        
        Monopolies
        
        Macroeconomic instability
        
        Command Economies
        
        Advantages
        
        Equality
        
        Macroeconomic stability
        
        Fewer externalities
        
        Full employment
        
        Disadvantages
        
        Inefficiency
        
        Lack of incentives
        
        Reduced choice
        
        Shortages and surpluses
- - - - Economists are concerned with effective demand
        
        Effective Demand - Consumers' desire to buy a good, backed up by the ability to pay
        
        Shape of the Demand Curve
        
        The 'law' of demand states that as the price of a good or service falls, the quantity demanded increases
        
        An increase in the quantity demanded resulting from a fall in price is known as an extension of demand, whereas a fall in quantity demanded resulting from an increase in price is known as a contraction in demand
        
        Shifts in the Demand Curve
        
        Factors that shift a demand curve:
        
        real disposable incomes
        
        tastes and preferences (fashions)
        
        advertising
        
        population
        
        price of substitute products
        
        price of complementary products
        
        Interest rates
        
        If any of these conditions of demand change, the demand curve for the good or service will change
        
        This leads to a rightward or leftward shift of the demand curve
        
        A rightward shift is an increase in demand, whereas a leftward shift is a decrease in demand
        
        Substitute Products - Goods that may be consumed as an alternative to another good
        Complementary Products - Goods that tend to be consumed together with other goods
        
        Diminishing Marginal Utility
        
        Total Utility - the amount of satisfaction a person derives from the total amount of a product consumed
        
        Marginal Utility - the satisfaction gained from consuming an additional unit of a good or service
        
        Diminishing Marginal Utility - As individuals consume more units of a good or service, the additional units give successfully smaller increases in total satisfaction
        
        DMU is a way of deriving an individual's downward-sloping demand curve for a good or service
        
        As marginal Utility declines, the price the consumer is willing to pay for additional units decreases
  - - - Formula = PED = % change in Quantity demand / % change in Price
        
        The value of PED usually negative due to the assumed inverse relationship between price and quantity demanded
        
        We tend to ignore the minus sign in any calculation
    - - Term
        
        Explanation
        
        Example
        
        Price inelastic demand
        
        Price elastic demand
        
        Unitary elastic demand
        
        Perfectly inelastic demand
        
        Perfectly elastic demand
        
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        When Demand is perfectly inelastic, the value of PED is 0
        
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        When Demand is unitary elastic, the value of PED is exactly 1, ignoring the minus sign
        
        A 20% increase in price of mobile phones leads to a 20% decrease in quantity demanded
        
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        When Demand is price elastic, the value of PED is greater than 1, ignoring the minus sign
        
        A 10% reduction in price of cars leads to a 15% increase in quantity demanded
        
        PED = +15 / -10 = -1.5
        
        When Demand is price inelastic, the value of PED is between 0 and 1, ignoring the minus sign
        
        A 50% increase in price of petrol leads to 10% fall in quantity demanded
        
        PED = -10 / +50 = -0.2
      - Factors influencing PED
        
        Availability of close substitutes
        
        Percentage of income spent on the product
        
        Nature of the product
        
        Durability of the product
        
        Time period
        
        Broad or specific market definition
        
        PED & Total Revenue
        
        The PED of a product determines what happens to consumer spending (and therefore total revenue) following a price change
        
        If demand price elastic, a reduction in price leads to an increase in total revenue
        
        If demand price inelastic, a reduction in price leads to a decrease in total revenue
        
        If demand price elastic, a price increase leads to a reduction in total revenue
        
        If demand price inelastic, a price increase leads to an increase in total revenue
        
        Significance of PED for firms and governments
        
        If demand is price inelastic, firms can increase revenue by increasing price
        
        Government scan maximise tax revenue by placing indirect taxes on inelastic goods
  - - - Formula =YED= % change in Quantity demanded / % change in real income
    - - For YED the sign is important
        
        If value is positive, i.e. greater than 0, the product is a normal good. This means rise in income leads to increase in demand.
        
        If value negative, i.e. less than 0, product is inferior good. This means rise in income leads to fall in demand
      - Term
        
        Explanation
        
        Example
        
        Income elastic demand
        
        Income inelastic demand
        
        Negative income elastic demand
        
        When demand negative income elastic, value of YED negative, i.e. less than 0. Negative income elastic products referred to as inferior goods
        
        A 20% increase in real income leads to 10% fall in demand for supermarket's value brand of beans
        YED = -10 / +20 = -0.5
        
        When demand income inelastic, value of YED between 0 and +1. Income inelastic products often referred to as basic goods or necessities
        
        A 10% increase in real income leads to 2% increase in demand for cartons of milk
        YED = +2 / +10 = +0.2
        
        When demand income elastic, value of YED greater than +1. Income elastic products often referred to as luxury goods
        
        A 10% increase in real income leads to 20% increase in demand for foreign holidays
        YED = +20 / +10 = +2.0
      - If firms know that their products are income elastic, they can expect revenues to increase during periods of economic growth but fall during a recession
        
        Similarly, governments can maximise tax revenue by placing indirect taxes on income elastic goods during an economic boom
        
        Significance of YED for firms and governments