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THEME 1 - Coggle Diagram
THEME 1
THEORY OF DEMAND
Demand for a product is the quantity that purchasers are willing and able to buy at a given price in each time period
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As the price of a good decreases it’s more attractive compared to other similar products. Consumers are more likely to switch to the cheapest option, increasing demand
When price of a good falls, consumers have more real purchasing power allowing them to buy more of the good increasing demand
As people consume more of a good, the satisfaction gained begins to diminish meaning they’re willing to pay less for each unit
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JOINT DEMAND
When demand for one product is directly and positively related to market demand for a related good or service
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SHIFTS IN DEMAND
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Interest rates affecting the cost of credit, demand for mortgages
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EXTERNALITIES
Refer to the unintended side effects or consequences of an economic activity or transaction that affect third parties who are not directly involved in that activity or transaction
These can be either positive or negative and are not typically not reflected in the costs or benefits considered by the individuals or entities involved in the activity
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Market failure occurs when the allocation of goods and services in a free market economy is not efficient or equitable, leading to outcomes that are not in the best interest of society meaning they lead to a net loss of social welfare
Can lead to market failures as the prices and quantities determined by supply and demand in the market do not account for these external costs or benefits
PRIVATE COSTS
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MARGINAL PRIVATE COST
The internal cost to a producer or consumer from supplying or consuming one extra unit of a good or service
EXTERNAL COSTS
Occur when the activity of one agent has a negative effect on the wellbeing of a third party. They impose costs on other agents. This causes social cost over private costs
PRIVATE BENEFITS
The benefit, satisfaction, or utility that an individual agent such as a consumer or a business derives from producing or consuming something
MARGINAL PRIVATE BENEFIT
The extra benefit, satisfaction or utility gained by a consumer or producer through consuming or producing one extra unit of a good or service
EXTERNAL BENEFITS
Social benefits include private, but also add the external benefits that may occur from production and/or consumption
POSITIVE EXTERNALITIES
Positive externalities exist when third parties benefit from the spill over effects of production/consumption. When there are positive externalities, social benefits exceed private benefits
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INDIRECT TAXES
Tax imposed by the government that increases the supply costs of producers. The amount of tax is always shown by the vertical distance between pre and post tax supply curves
Taxes imposed on the consumption, sale or use of goods and services
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EXCISE DUTY
Indirect taxes levied on three major categories of goods, alcohol, tobacco and fuels
AD VALOREM TAX
Ad valorem tax imposes a tax on a good or asset, depending on its value. The tax is often expressed as a percentage
REGRESSIVE TAX
A regressive tax is a tax imposed by a government which takes a higher percentage of someone’s income from those on low incomes meaning those with lower incomes pay more in tax relative to their income
ADVANTAGES
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Can be used to change consumer and producer behaviour which may alter the pattern of demand for goods
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BEHAVIOURAL ECONOMICS
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Behavioural economics recognises that humans are not always rational and can be influenced by a range of factors
Behavioural economics recognises that people have cognitive biases, that can lead to irrational decisions
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Research that adds elements of psychology to traditional models to better understand decision-making by investors, consumers and other economic participants
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BEHAVIOURAL NUDGES
A nudge is a technique used by choice architects to change someone’s behaviour in an easy and low cost way, without reducing the number of choices available
INFORMATION GAPS
IMPERFECT INFORMATION
When there is imperfect information, market failure can occur
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Without information it’s impossible to properly evaluate costs and benefits or make informed choices
When people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially wrong choices in markets
ASYMMETRIC INFORMATION
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Can lead to issues in decision making as the party with less information may not have all information needed to make the best choice
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Choice overload can distort our decisions, most people have bounded rationality
Fake news and misleading advertising damage consumer sovereignty and lead to a loss of allocative efficiency
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UTILITY THEORY
Utility refers to the satisfaction, wellbeing or value that an individual derives from consuming goods and services
Used to quantify the subjective preferences and choices of individuals when they make decisions about what to consumer or how to allocate their resources
Not directly measurable but serves as a theoretical construct to help economists understand and model human behaviour
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DISUTILITY
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The negative feelings, discomfort or displeasure associated with certain activities, goods or services
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THEORY OF SUPPLY
Supply is defined as the quantity of a good that producers are willing and able to supply at a given price in each time period
As the product price rises, so businesses expand supply, higher prices provide a profit incentive for firms to expand production
Profit motive describes the driving force behind most private sector businesses engaging in different markets and industries
Standard theory assumes that rational firms choose an output and price that aims to maximise profits
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JOINT SUPPLY
Where an increase or decrease in supply of one good leads to an increase or decrease in supply of a by product
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PRICE MECHANISM
Fundamental concept that uses the forces of supply and demand to allocate resources and determine prices in a market economy
Relies on the interaction between buyers and sellers to determine the equilibrium price and quantity of goods and services
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RATIONING
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When there’s a shortage, market price is big up, leaving only those consumers with both willingness and ability to pay to buy
SIGNALLING
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Rise in price encourages producers to switch into making that good but it is also a signal that encourages consumers to use an alternative substitute product
INCENTIVES
When the price of a product rises, quantity supplied increases as businesses respond
IRRATIONAL BEHAVIOUR
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Some people make choices based on their emotional reactions to risk rather than a rational assessment of the probabilities
People often develop habits around purchasing and consuming certain products and services, which can influence demand
Habits can be powerful forces in the economy because they can be difficult to break and can influence behaviour in a predictable and consistent way
PUBLIC GOODS
Public goods are non-rivalrous and non-excludable, usually provided collectively by the state which can lead to the free-rider problem
Taxation ensures that everyone contributes to the funding of public goods, preventing free-riding and ensuring that the costs are distributed across the entire population
Producing public goods for a larger population can lead to lower per capita costs. Taxation allows governments to collect funds from a broad tax base, which can be more cost effective in providing these goods compared to private firms or individual transactions
Taxation allows governments to allocate resources based on societal priorities and ensure that public goods are provided in a way that promotes social welfare and equity
QUASI PUBLIC GOODS
A near-public goods, it has some characteristics of a public good
They are semi non-rivalrous, up to a point
Semi non-excludable, it is possible but difficult or costly
FREE RIDER PROBLEM
As public goods are non-excludable it is difficult to charge people for benefitting once a product is available
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PRICE DETERMINATION
MARKET EQUILIBRIUM
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Forces of supply and demand are in balance, leading to price stability and quantities exchanged in the market
MARKET DEMAND
Sum of the individual demand for a product from buyers in the market. Individual demand is the prices a consumer is willing and able to pay for a good or service in each time period
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SUBSIDIES
A subsidy is any form of government support, financial or other, offered to producers and sometimes consumers. Subsidies to producers reduce the marginal cost of supply. A subsidy usually leads to an increase in the output sold of a good or service at a lower market price
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DISADVANTAGES
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Subsidies can be expensive, taxpayers bear the cost
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OPPORTUNITY COST
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Represents the benefits that could have been gained from choosing an alternative course of action but were given up in favour of the chosen option
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CONSUMER SURPLUS
Measures the economic gain that consumers get when they can buy a product or service at a price that’s lower than the maximum price they’re willing to pay
Represents the difference between what consumers are willing to pay for a good or service and what they must pay in the market
PRODUCER SURPLUS
Difference between price producers are willing and able to suppl a product for and the price they receive in the market