Please enable JavaScript.
Coggle requires JavaScript to display documents.
Econs - Coggle Diagram
Econs
Chapter 1: Central Problem of Economics
Scarcity
Unlimited wants
Wants are satisfied by consumption of goods and services
Desire for higher levels of consumption leads to unlimited wants
Limited resources
Land
Labour
Capital (factories/machines/tools)
Entrepreneurship
Choice
Resources have alternative uses
Choices must be made to achieve the highest possible level of satisfaction
Choices to make:
What and how much to produce
How to produce
For whom to produce
Opportunity cost
Next best alternative forgone
Free goods (air, dead leaves) have no opp cost as it can satisfy all existing wants so nothing is given up
Law of increasing opp cost
As more of one good is produced, larger and larger quantities of alternative goods are sacrificed
Production Possibility Curve
Shows all the different maximum attainable combinations of goods and services that can be produced in an economy when all available resources are fully and efficiently used at a given state of technology
Points inside curve are attainable but inefficient
Points outside are preferred but unattainable
Illustrating CPE
Scarcity
Combinations outside the PPC cannot be obtained although the economy may desire it
Choice
All combinations of goods on or bounded by PPC are attainable, but the economy can only have one of the alternatives
Opp cost
Negative slope of PPC, increasing one good decreases the other
Law of increasing opp cost
Concave PPC (relative to origin), each additional unit of capital goods produced requires the sacrifices of more and more consumer goods and vice versa
Constant opp cost, straight line PPC
Illustrating economic growth
Actual growth
Outward movement of point inside PPC
Potential growth
Increase in production of both goods
Outward shift of PPC
Increase in production of one good
Pivotal shift of PPC
Current consumption vs economic growth
Choosing to produce more consumer goods leads to less economic growth, smaller outward shift in PPC
Choosing to produce more capital goods leads to larger outward shift in PPC
Economic growth
Increase in an economy's level of output or GDP over time
Actual growth
If economy is not fully utilising its resources, actual growth is achieved by encouraging greater use of existing resources or utilising resources more efficiently resources
Potential growth
Increase in quantity of available resources
More intensive exploration to discover new mineral deposits
Greater investment of resources into capital goods
Encourage population growth to grow workforce
Improvement in quality of available resources
Upskilling workforce
Irrigation/fertiliser application
Improvement of technology
Framework for economic decision making
Information
Perspectives
Intended Consequences
Costs
Unintended Consequences
Benefits
Changes (internal/external)
Constraints
Chapter 2: Theory and Applications of Demand and Supply
Demand and Supply
Demand: quantities of a good/service that consumers are willing and able to buy at various prices over a given time period, ceteris paribus
Supply: quantities of of a good/service producers are willing and able to offer for sale at various prices over a period of time, ceteris paribus
Demand and supply curves
Demand curve
Law of diminishing marginal utility
As more and more units of a good/service are consumed, additional utility a consumer derives from successive units eventually decreases
As marginal utility falls, willingness to pay decreases so price decreases
Law of demand
There is an inverse relationship between price and quantity demanded of a good, c.p., resulting in negative slope of demand curve
Demand curve represents the maximum price consumers are willing and able to pay for each quantity of a good/service
Supply curve
Law of supply
There is a direct relationship between price and quantity supplied of a good, c.p., resulting in positive slope of supply curve
Supply curve represents the minimum price at which producers are willing and able to supply at each quantity
Equilibrium price and quantity
The supply curve and demand curve intersect at a point which corresponds to the equilibrium price and equilibrium quantity
Quantity demanded=quantity supplied at equilibrium price
Surplus and shortage
Surplus
When price is above Peq, Qs>Qd
Signals to producers to lower prices to increase Qd, Qs will decrease
Shortage
When price is below Peq, Qs<Qd
Signals to producers to increase prices to increase Qs, Qd will decrease
Total revenue/total expenditure
Area (0PeEQe)
Consumer surplus
Difference between what buyers are willing and able to pay and what they actually pay
Producer surplus
Difference between what a producer is willing and able to put up for sale and the actual price charged
Shifts in vs movements along S and D curves
Change in quantity demanded/supplied (caused by price)
Movement along curve
Change in demand/supply (caused by non-price factors)
Shift in curve (right or left)
Factors affecting demand
Consumer Income (see YED)
Inferior goods (public transport)
As income increases, demand for inferior goods increases
Normal goods (car)
As income increases, demand for normal goods increases
Prices of related goods (see CED)
Substitutes (coke and pepsi)
Increase in price of substitutes cause increase in demand
Complements (burger and fries)
Increase in price of complement leads to decrease in demand
Tastes and preferences
Fashion/trend
Advertising
Government policies
Seasons/Festivals
Demographics (market size, age, gender)
Consumer's expectations (expected income, prices, demand)
Factors affecting supply
No. of producers (intuitive)
Cost of production (intuitive)
inputs (raw materials), state of technology, efficiency, government policies
Prices of related goods
Competitive supply (corn and wheat)
Joint supply (beef and leather)
Supply shocks
Climatic conditions
Abnormal circumstances
Producers' expectations
Simultaneous shifts
either change in Peq or Qeq will be indeterminate
Elasticities
Cross elasticity of demand (CED)
dor of demand to changes in price of related goods
Positive cross elasticity
Strong substitute CED>1
Weak substitute 0<CED<1
Negative cross elasticity
Weak complement -1<CED<0
Strong complement CED<-1
Income elasticity of demand (YED)
dor of demand to changes in income
Positive income elasticity
Income elastic (YED>1)
Luxury goods
Income inelastic (0<YED<1)
Necessities
Negative income elasticity
Inferior goods
Factors affecting YED
Nature of the good
Level of income of customers (affects what is perceived as necessities/luxury/inferior)
Price elasticity of demand (PED)
degree of responsiveness (dor) of quantity demanded to changes in price (dQd/Qd)/(dP/P)
Elastic (|PED|>1)
change in price results in more than proportionate change in quantity demanded
Inelastic (0<|PED|<1)
change in price results in less than proportionate change in quantity demanded
PED is always negative since increase in quantity demanded leads to decrease in price
Factors affecting PED
Availability of substitutes (number and closeness)
Degree of necessity
Proportion of income
Price elasticity of supply (PES)
dor of quantity supplied to changes in price
Always positive since increase in quantity supplied leads to increase in price
Inelastic (PES<1)
Elastic (PES>1)
Factors affecting PES
Spare capacity (unused manpower/resources)
Nature of production
Degree of factor mobility (how fast you can move resources and increase productivity)
Length of production period (Crops take a while to grow so a few years needed to adjust, supply is price inelastic)
Ease of accumulating inventory
Time period (most goods elastic in long run and inelastic in short term)
Limitations
Ceteris paribus assumption
Demand elasticities neglect cop
Lack of perfect information
Government intervention
Tax
Direct tax
Indirect tax
Specific (fixed amount)
Upward parallel (leftward) shift in supply curve
Vertical distance between S0 and S1 is the tax amount
Ad valorem (percentage)
Supply curve pivots about origin
Purpose of indirect tax
Raise tax revenue
Reduce consumption of undesirable goods
Subsidy
Artificially lower costs
Downwards (rightwards) shift in supply curve
Consequences of subsidy
Producer income increased
Lower price for consumers
Higher quantity exchanged
Transfer of income from taxpayers to producers
Allocation of resources to subsidised industries
Strain on govt budget
Price control
Price floor
Legally established minimum price above the market equilibrium price
Purpose
Protect producer income
Create surplus to store for future shortages
Minimum wage to reduce poverty and inequality
Effects
Change in expenditure depends on PED
Creates surplus (unemployment in the case of min wage)
Decrease in consumer surplus
If govt buys up excess
Producer surplus increase
Revenue increases
Excess not bought
Black market, goods sold illegally below minimum price
Price ceiling
Legally established maximum price below market equilibrium price
Purpose
Keep price of good affordable to majority
Prevent exploitation by suppliers during times of shortage
Stabilise prices
Effects
Shortage (rationing)
Consumer surplus increase
Producer surplus decrease
Decrease in expenditure/revenue
Quantity control
Quota