AS Economics Notes (1)
UNIT 1
The fundamental economic problem
– The fundamental economic problem arises because resources are scare while people’s
wants are unlimited.
– The fundamental economic problem means that individuals, firms and governments have
to make choices due to scarcity of resources.
– A luxury for one individual may be considered an essential for others. This is because
everyone has a scale of preference.
– Resources: Inputs available for production of goods and services
– Wants: Goods and services that people may like to have but are not always realised
– Needs: Things that are not necessary for survival
– Scarcity: A situation in which wants & needs are > resources available
Unlimited wants
– While businesses are continually finding new, more efficient ways to produce more and
more goods and services with the resources available, society is still faced with the FEP of
limited resources and unlimited wants
Choice and opportunity cost
– Individuals, firms and governments have to make make a choice between alternative wants
What, How and for Whom to produce?
– What to produce: Economies cannot produce everything, so they must decide what to
produce and in what quantities
– How to produce: Firms have to consider how resources are used so that they achieve the
best outcome (e.g. cheap labour -> Nike in China)
– Whom to produce: Governments have to decide whether everyone is going to have a more
or less equal share of what is produced
– Some economies aim to create a more equal society through policies that redistribute
wealth and income from the rich to the poor. This could be achieved through the use of
taxation
– Inequalities is a significant issue in most emerging economies (e.g. Brazil, China) where
there is a widening gap between rich people and people living in poverty
Models
– Models are a simplified representation of what has taken place and are usually explained
mathematically. The value of models is that they can be used repeatedly to test a theory in
many different contexts.
Positive and normative statements
– Positive = empirical (thực nghiệm) = evidence = facts
+) Positive statements tell us something about the world around us, normative statements tells
about people's view of the world.
+) Positive statements can be proved true or false using eveidence that most reasonable people
,can agree with.
– Normative = opinions = value judgements
+) Normative statements can never be definitely T or F
e.g. Is there life on other planets? —> Positive, although we don't know the answer.
e.g. Is this table made of wood? —> positive question? We can TEST the table for example if it
burns
e.g. Is this a beautiful table? —> Normative
The importance of time period
– Short run: a time period -> possible to change only some inputs (labours)
– Long run: possible for all FoP or resources to change (capital)
– Very long run: Not only are all FoP but also key inputs (technology, government
regulations and social concerns) are variable.
Human capital vs Physical capital
– Physical capital: factories, machinery and infrastructure
– Human capial: skills, knowledge, experience
Specialisation vs division of labour
– Specialisation refers to a situation where individuals and firms, regions and entire
economies concentrate on producing some goods and services rather than others.
– cons of spec: At regional and national levels, changes in consumers’ wants can sometimes
mean that the goods and services produced are no longer required in the same quantity ->
unemployment
– Economist Adam Smith, writing at the end of the 18th century, showed how the production
of pins would benefit from the application of the division of labour in a factory. (1920s ->
USA -> Henry Ford -> mass production: Ford Model T cost $300 -> affordable -> Ford
needed fewer skilled workers, which cut the cost of paying wages.
Market economy
– How the price mechanism works: Excess supply from firms -> fall in price -> firms less
willing to supply -> increase in price -> more firms now willing to supply -> increase in
supply
– e.g. Hong Kong, USA
Exludability vs rivalry
– Excludability means that producers can prevent some people from consuming the good or
service based on their ability or willingness to pay
– Rivalrous indicates that one person's consumption of a product reduces the amount
available for consumption by another.
Private goods (economic goods)
– Excludability: If the price is not acceptable, then the good will not be consumed
– Rivalry: The consumption by one person reduces the availability for others.
Public goods
– Non-excludable: Once the good has been provided for one consumer, it is
impossible to stop anyone else from benefiting from the good.
, – Non-rival: As more and more people consume the good, the benefit to those already
consuming the product must not be reduced.
– Quasi-public good: public transportation, roads, libraries
Information failure
– Information failure arises because consumers do not recognise how good or bad a
particular product is for them. —> merit vs demerit goods
UNIT 2
Learn the definitions of
– Demand: The amount of goods and services that consumers are willing and able to buy at
any given price.
– Demand curve: A graph shows the relationship between the price and the quantity
demanded of a good.
– Individual demand: Effective demand of one consumer.
– Individual supply: Effective supply of a firm.
– Market demand: Effective demand of all economics units in a specific market.
– Market supply: Effective supply of all economics units in a specific market.
Functions of the price mechanism
– Signalling function: price signals increased => product is more valuable for sellers & more
costly for buyers.
– Incentive function (movement along the supply curve): price increases => more
incentive to produce
– Rationing function (movement along the demand curve): price increases => more
rationing => decreased in quantity demanded
– Allocation of resources
Factors affect demand
– Income
– Price and availability of ralated product
– Fashion, taste and attitudes
Factors affect supply
– Cost
– The size and nature of the industry
– The change in price of other products
– Government policy
– Other factors: nature,…
Causes of a shift in the demand curve
– A shift to the right in the demand curve may mean:
+) An increase in income
+) An increase in the price of substitutes
+) A decrease in the price of complements
+) A favourable change in fashion, taste and attitudes
, – A shift to the left in the demand curve may mean:
+) A decrease in income
+) A decrease in the price of substitutes
+) An increase in the price of complements
+) An unfavourable change in fashion, taste and attitudes
Causes of a shift in the supply curve
– A shift to the right in the supply curve may mean:
+) A decrease in costs of production
+) A growth in the size of industry
+) A decrease in the price of competitor’s goods
+) A decrease in an indirect tax or increase in subsidy
– A shift to the left in the supply curve may mean:
+) An increase in costs of production
+) Decline in the size of the industry
+) An increase in the price of competitor’s goods
+) Increase in an indirect or fall in subsidy
PED
– PED = % change in quantity demanded / % change in price
– PED = 0 —> perfect inelastic, e.g. rare medicine, fresh water in drought time
– PED = infinity —> perfect elastic, e.g. luxury products
– PED = 1 —> unitary elastic
– PED > 1 —> relatively elastic
– PED < 1 —> relatively inelastic
– Factors affecting PED:
+) The availability and attractiveness of substitutes
+) The relative expense of the product
+) Time period
Income elasticity of demand
– YED: measures how the quantity demanded is affected by a change in consumer’s income
– YED = % change in quantity demand / % change in income
– 4 types of good can be indentified using YED:
+) Normal good (0 < YED < 1): quantity demanded increases as income increases.
+) Inferior good (YED < 0): quantity demanded decreases as income increases.
+) Necessity good (YED > vs close to 0): a type of normal good for which the quantity demanded
is unlikely to change when income changes. A low value for the YED indicates that there is a limit
to the quantity of these goods that households purchase even when the change in income might
seem to be substantial.
+) Superior or luxury good (YED > 1): a normal good where the quantity demanded is responsive
to changes in income.
UNIT 1
The fundamental economic problem
– The fundamental economic problem arises because resources are scare while people’s
wants are unlimited.
– The fundamental economic problem means that individuals, firms and governments have
to make choices due to scarcity of resources.
– A luxury for one individual may be considered an essential for others. This is because
everyone has a scale of preference.
– Resources: Inputs available for production of goods and services
– Wants: Goods and services that people may like to have but are not always realised
– Needs: Things that are not necessary for survival
– Scarcity: A situation in which wants & needs are > resources available
Unlimited wants
– While businesses are continually finding new, more efficient ways to produce more and
more goods and services with the resources available, society is still faced with the FEP of
limited resources and unlimited wants
Choice and opportunity cost
– Individuals, firms and governments have to make make a choice between alternative wants
What, How and for Whom to produce?
– What to produce: Economies cannot produce everything, so they must decide what to
produce and in what quantities
– How to produce: Firms have to consider how resources are used so that they achieve the
best outcome (e.g. cheap labour -> Nike in China)
– Whom to produce: Governments have to decide whether everyone is going to have a more
or less equal share of what is produced
– Some economies aim to create a more equal society through policies that redistribute
wealth and income from the rich to the poor. This could be achieved through the use of
taxation
– Inequalities is a significant issue in most emerging economies (e.g. Brazil, China) where
there is a widening gap between rich people and people living in poverty
Models
– Models are a simplified representation of what has taken place and are usually explained
mathematically. The value of models is that they can be used repeatedly to test a theory in
many different contexts.
Positive and normative statements
– Positive = empirical (thực nghiệm) = evidence = facts
+) Positive statements tell us something about the world around us, normative statements tells
about people's view of the world.
+) Positive statements can be proved true or false using eveidence that most reasonable people
,can agree with.
– Normative = opinions = value judgements
+) Normative statements can never be definitely T or F
e.g. Is there life on other planets? —> Positive, although we don't know the answer.
e.g. Is this table made of wood? —> positive question? We can TEST the table for example if it
burns
e.g. Is this a beautiful table? —> Normative
The importance of time period
– Short run: a time period -> possible to change only some inputs (labours)
– Long run: possible for all FoP or resources to change (capital)
– Very long run: Not only are all FoP but also key inputs (technology, government
regulations and social concerns) are variable.
Human capital vs Physical capital
– Physical capital: factories, machinery and infrastructure
– Human capial: skills, knowledge, experience
Specialisation vs division of labour
– Specialisation refers to a situation where individuals and firms, regions and entire
economies concentrate on producing some goods and services rather than others.
– cons of spec: At regional and national levels, changes in consumers’ wants can sometimes
mean that the goods and services produced are no longer required in the same quantity ->
unemployment
– Economist Adam Smith, writing at the end of the 18th century, showed how the production
of pins would benefit from the application of the division of labour in a factory. (1920s ->
USA -> Henry Ford -> mass production: Ford Model T cost $300 -> affordable -> Ford
needed fewer skilled workers, which cut the cost of paying wages.
Market economy
– How the price mechanism works: Excess supply from firms -> fall in price -> firms less
willing to supply -> increase in price -> more firms now willing to supply -> increase in
supply
– e.g. Hong Kong, USA
Exludability vs rivalry
– Excludability means that producers can prevent some people from consuming the good or
service based on their ability or willingness to pay
– Rivalrous indicates that one person's consumption of a product reduces the amount
available for consumption by another.
Private goods (economic goods)
– Excludability: If the price is not acceptable, then the good will not be consumed
– Rivalry: The consumption by one person reduces the availability for others.
Public goods
– Non-excludable: Once the good has been provided for one consumer, it is
impossible to stop anyone else from benefiting from the good.
, – Non-rival: As more and more people consume the good, the benefit to those already
consuming the product must not be reduced.
– Quasi-public good: public transportation, roads, libraries
Information failure
– Information failure arises because consumers do not recognise how good or bad a
particular product is for them. —> merit vs demerit goods
UNIT 2
Learn the definitions of
– Demand: The amount of goods and services that consumers are willing and able to buy at
any given price.
– Demand curve: A graph shows the relationship between the price and the quantity
demanded of a good.
– Individual demand: Effective demand of one consumer.
– Individual supply: Effective supply of a firm.
– Market demand: Effective demand of all economics units in a specific market.
– Market supply: Effective supply of all economics units in a specific market.
Functions of the price mechanism
– Signalling function: price signals increased => product is more valuable for sellers & more
costly for buyers.
– Incentive function (movement along the supply curve): price increases => more
incentive to produce
– Rationing function (movement along the demand curve): price increases => more
rationing => decreased in quantity demanded
– Allocation of resources
Factors affect demand
– Income
– Price and availability of ralated product
– Fashion, taste and attitudes
Factors affect supply
– Cost
– The size and nature of the industry
– The change in price of other products
– Government policy
– Other factors: nature,…
Causes of a shift in the demand curve
– A shift to the right in the demand curve may mean:
+) An increase in income
+) An increase in the price of substitutes
+) A decrease in the price of complements
+) A favourable change in fashion, taste and attitudes
, – A shift to the left in the demand curve may mean:
+) A decrease in income
+) A decrease in the price of substitutes
+) An increase in the price of complements
+) An unfavourable change in fashion, taste and attitudes
Causes of a shift in the supply curve
– A shift to the right in the supply curve may mean:
+) A decrease in costs of production
+) A growth in the size of industry
+) A decrease in the price of competitor’s goods
+) A decrease in an indirect tax or increase in subsidy
– A shift to the left in the supply curve may mean:
+) An increase in costs of production
+) Decline in the size of the industry
+) An increase in the price of competitor’s goods
+) Increase in an indirect or fall in subsidy
PED
– PED = % change in quantity demanded / % change in price
– PED = 0 —> perfect inelastic, e.g. rare medicine, fresh water in drought time
– PED = infinity —> perfect elastic, e.g. luxury products
– PED = 1 —> unitary elastic
– PED > 1 —> relatively elastic
– PED < 1 —> relatively inelastic
– Factors affecting PED:
+) The availability and attractiveness of substitutes
+) The relative expense of the product
+) Time period
Income elasticity of demand
– YED: measures how the quantity demanded is affected by a change in consumer’s income
– YED = % change in quantity demand / % change in income
– 4 types of good can be indentified using YED:
+) Normal good (0 < YED < 1): quantity demanded increases as income increases.
+) Inferior good (YED < 0): quantity demanded decreases as income increases.
+) Necessity good (YED > vs close to 0): a type of normal good for which the quantity demanded
is unlikely to change when income changes. A low value for the YED indicates that there is a limit
to the quantity of these goods that households purchase even when the change in income might
seem to be substantial.
+) Superior or luxury good (YED > 1): a normal good where the quantity demanded is responsive
to changes in income.
