Essential economics for businesses summary
Chapter 1
Scarcity: the excess of human wants over what can be actually produced to
fulfill these wants.
How do we satisfy those wants? factors of production: inputs into the
production of goods and services
Factors of production:
Human resources labour: all forms of human input, both physical and
mental, into current production.
Natural resources land and raw materials: inputs into production that
are provided by nature.
Manufactural resources capital: all inputs that themselves had to be
produced first.
2 key elements in satisfying wants consumption and production
Consumption: the act of using goods and services to satisfy wants. This
will normally involve purchasing the goods and services.
Production: the transformation of inputs into outputs by firms in order to
earn profit.
There are 2 ways of looking at this supply and demand.
At a microeconomic level firms are affected by their competitors, technology,
and changing consumer tastes. At a macroeconomic level they are affected by
the state of the economy, government macroeconomic policies, and the global
economy.
Economics studies how demand adjusts to available supplies, and supply to
consumer demands.
Opportunity cost: the production/consumption of one thing involves the
sacrifice of another. This sacrifice of alternatives is called the opportunity cost.
100 jackets or 200 trousers? The opportunity cost for producing 1 jacket is
2 trousers.
Rational choices involve weighing up marginal cost and marginal benefit (it are
the cost and benefit of doing a little bit more of a given activity).
If the marginal benefit exceeds the MC it is rational to do the activity. If MC
exceeds the marginal benefit it is not.
Chapter 2
Paragraph 1
In a free market, individuals can make their own decisions. There is no
government intervention.
In a perfectly competitive market both producers and consumers are too
numerous to have any control over prices (they are price takers). In such
,markets, the demand and supply decisions of consumers/firms are transmitted to
each other through their effect on prices (price mechanism).
A shortage causes its market price to rise. The price will continue rising until the
shortage has thereby been eliminated.
A surplus causes its market price to fall. The price will continue falling until the
surplus has thereby been eliminated.
Equilibrium price: the price where demand equals supply.
Equilibrium: a position of balance.
Paragraph 2
Law of demand: when the price of a good rises the quantity demanded will fall.
There are 2 reasons behind it:
1. Income effect: the effect of a change in price on quantity demanded
arising from the consumer becoming better or worse off as a result of the
price change.
2. Substitution effect: the effect of a change in price on quantity
demanded arising from the consumer switching to or from substitutes
(alternative goods).
Quantity demanded refers to the amount of a good that a consumer is willing
to pay at a given price over a given period of time.
Demand schedule for individual: a table showing the different quantities of a
good that a person is willing and able to buy at various prices over a given period
of time.
Market demand schedule: a table showing the different total quantities of a
good that consumers are willing and able to buy at various prices over a given
period in time.
It can be represented graphically as a demand curve:
Price at the vertical axe, quantity at the horizontal axe.
Some factors that might affect your demand for a product:
Tastes
The number and price of substitute goods
The number and price of complementary goods
Income
- Normal goods: goods whose demand rises as people’s incomes rise.
They have a positive income elasticity of demand. Luxury goods will
have a higher income elasticity of demand than more basic goods.
- Inferior goods: goods whose demand falls as people’s incomes rise.
Such goods have a negative income elasticity of demand.
Expectations of future price changes
Substitute goods: a pair of goods which are considered by consumers to be
alternatives to each other. As the price of one goes up, the demand for the other
rises.
, Cigarettes vs. e-cigarettes
Complementary goods: a pair of goods consumed together. As the price of one
goes up, the demand for both goods will fall.
Coffee and coffee milk
A demand curve is constructed on the assumption that “other things remain
equal” (ceteris paribus). It is assumed that none of the determinants of demand,
other than price, change. The effect of a change of price is then simply illustrated
by a movement along the demand curve. If another determinant changes, we
have to construct a whole new demand curve (the curve shifts).
Demand rises curve shifts right
Demand falls curve shifts left
The difference between change in demand and the change in quantity demanded
is important:
Change in demand: the term used for a shift in the demand curve. It
occurs when a determinant of demand OTHER than price changes.
Change in quantity demanded: the term used for a movement along
the demand curve to a new point. It occurs when there is a change in
price.
Paragraph 3
When the price of a good rises, the quantity supplied will also rise. There are 3
reasons for this:
1. As firms supply more, they are likely to find that, beyond a certain level of
output, costs rise more and more rapidly. Only if price rises will it be worth
producing more and incurring these higher costs.
2. The higher the price of the good, the more profitable it becomes to
produce.
3. Given time, if the price of a good remains high, new producers will be
encouraged to set up in production. The total market supply thus rises.
The first 2 determinants affect supply in the short term. The third affect supply in
the long run.
Supply schedule: a table showing the different quantities of a good that
producers are willing and able to supply at various prices over a given period of
time. A supply schedule can be for an individual producer or group of producers,
or for all producers (the market supply schedule).
The supply schedule can be represented graphically as a supply curve.
Price at vertical axe, quantity at horizontal axe.
Other determinants of supply than just price:
The cost of production
The profitability of alternative goods (substitutes in supply)
- Substitutes in supply: 2 goods where an increased production of one
means diverting resources away from producing another.
The profitability of goods in joint supply
Chapter 1
Scarcity: the excess of human wants over what can be actually produced to
fulfill these wants.
How do we satisfy those wants? factors of production: inputs into the
production of goods and services
Factors of production:
Human resources labour: all forms of human input, both physical and
mental, into current production.
Natural resources land and raw materials: inputs into production that
are provided by nature.
Manufactural resources capital: all inputs that themselves had to be
produced first.
2 key elements in satisfying wants consumption and production
Consumption: the act of using goods and services to satisfy wants. This
will normally involve purchasing the goods and services.
Production: the transformation of inputs into outputs by firms in order to
earn profit.
There are 2 ways of looking at this supply and demand.
At a microeconomic level firms are affected by their competitors, technology,
and changing consumer tastes. At a macroeconomic level they are affected by
the state of the economy, government macroeconomic policies, and the global
economy.
Economics studies how demand adjusts to available supplies, and supply to
consumer demands.
Opportunity cost: the production/consumption of one thing involves the
sacrifice of another. This sacrifice of alternatives is called the opportunity cost.
100 jackets or 200 trousers? The opportunity cost for producing 1 jacket is
2 trousers.
Rational choices involve weighing up marginal cost and marginal benefit (it are
the cost and benefit of doing a little bit more of a given activity).
If the marginal benefit exceeds the MC it is rational to do the activity. If MC
exceeds the marginal benefit it is not.
Chapter 2
Paragraph 1
In a free market, individuals can make their own decisions. There is no
government intervention.
In a perfectly competitive market both producers and consumers are too
numerous to have any control over prices (they are price takers). In such
,markets, the demand and supply decisions of consumers/firms are transmitted to
each other through their effect on prices (price mechanism).
A shortage causes its market price to rise. The price will continue rising until the
shortage has thereby been eliminated.
A surplus causes its market price to fall. The price will continue falling until the
surplus has thereby been eliminated.
Equilibrium price: the price where demand equals supply.
Equilibrium: a position of balance.
Paragraph 2
Law of demand: when the price of a good rises the quantity demanded will fall.
There are 2 reasons behind it:
1. Income effect: the effect of a change in price on quantity demanded
arising from the consumer becoming better or worse off as a result of the
price change.
2. Substitution effect: the effect of a change in price on quantity
demanded arising from the consumer switching to or from substitutes
(alternative goods).
Quantity demanded refers to the amount of a good that a consumer is willing
to pay at a given price over a given period of time.
Demand schedule for individual: a table showing the different quantities of a
good that a person is willing and able to buy at various prices over a given period
of time.
Market demand schedule: a table showing the different total quantities of a
good that consumers are willing and able to buy at various prices over a given
period in time.
It can be represented graphically as a demand curve:
Price at the vertical axe, quantity at the horizontal axe.
Some factors that might affect your demand for a product:
Tastes
The number and price of substitute goods
The number and price of complementary goods
Income
- Normal goods: goods whose demand rises as people’s incomes rise.
They have a positive income elasticity of demand. Luxury goods will
have a higher income elasticity of demand than more basic goods.
- Inferior goods: goods whose demand falls as people’s incomes rise.
Such goods have a negative income elasticity of demand.
Expectations of future price changes
Substitute goods: a pair of goods which are considered by consumers to be
alternatives to each other. As the price of one goes up, the demand for the other
rises.
, Cigarettes vs. e-cigarettes
Complementary goods: a pair of goods consumed together. As the price of one
goes up, the demand for both goods will fall.
Coffee and coffee milk
A demand curve is constructed on the assumption that “other things remain
equal” (ceteris paribus). It is assumed that none of the determinants of demand,
other than price, change. The effect of a change of price is then simply illustrated
by a movement along the demand curve. If another determinant changes, we
have to construct a whole new demand curve (the curve shifts).
Demand rises curve shifts right
Demand falls curve shifts left
The difference between change in demand and the change in quantity demanded
is important:
Change in demand: the term used for a shift in the demand curve. It
occurs when a determinant of demand OTHER than price changes.
Change in quantity demanded: the term used for a movement along
the demand curve to a new point. It occurs when there is a change in
price.
Paragraph 3
When the price of a good rises, the quantity supplied will also rise. There are 3
reasons for this:
1. As firms supply more, they are likely to find that, beyond a certain level of
output, costs rise more and more rapidly. Only if price rises will it be worth
producing more and incurring these higher costs.
2. The higher the price of the good, the more profitable it becomes to
produce.
3. Given time, if the price of a good remains high, new producers will be
encouraged to set up in production. The total market supply thus rises.
The first 2 determinants affect supply in the short term. The third affect supply in
the long run.
Supply schedule: a table showing the different quantities of a good that
producers are willing and able to supply at various prices over a given period of
time. A supply schedule can be for an individual producer or group of producers,
or for all producers (the market supply schedule).
The supply schedule can be represented graphically as a supply curve.
Price at vertical axe, quantity at horizontal axe.
Other determinants of supply than just price:
The cost of production
The profitability of alternative goods (substitutes in supply)
- Substitutes in supply: 2 goods where an increased production of one
means diverting resources away from producing another.
The profitability of goods in joint supply
