Chapter 2:
o General relationship between price and consumption: When the price of a good
rises, the quantity demanded (=Amount consumers are willing and able to
purchase at a given price over a given period) will fall Law of demand.
Reasons for this law:
o People will feel poorer = income effect
o The good will now be dearer relative to other goods = substitution effect
o The demand schedule can be presented graphically as a demand curve. Price is on
vertical axis, quantity demanded at horizontal axis.
o Other determinants of demand Not only price:
Tastes: If people desire the good, the more they will demand
Number and price of substitute (=competitive) goods
Number and price of complementary goods: Are consumed
together.
Income: If income rises, the demand will rise for normal goods. If
people get richer, they will spend less on inferior goods.
Distribution of income
Expectations of future price changes
o Movements along and shifts in the demand curve:
o This curve is constructed on the assumption that ‘other things remain
equal’ = ceteris paribus.
o Movement along the curve (=Change in the quantity demanded) Effect
of change in price
o Shift in the demand curve (=Change in demand) Change of other
determinant
o General relationship between price and supply: When the price of a good rises, the
quantity supplied will also rise. Reasons for this:
o As firms supply more, they are likely to find that beyond a certain level of
output costs rise more and more rapidly. If higher output involves higher
costs of production, producers will need to get a higher price.
o The higher the price of the good, the more profitable it become to produce.
o Given time, if the price of a good remains high, new producers will be
encouraged to set up in production.
o Other determinants of supply:
Cost of production. Reasons for change in costs:
Change in input prices Organisational changes
Change in technology Government policy
Profitability of alternative products (=substitutes in supply)
Profitability of goods in joint supply: Sometimes when one good is
produced, another good is also produced at the same time (=goods
in joint supply).
Nature, ‘random shocks’ and unpredictable events
Aims of producers
Expectations of future price changes
Number of suppliers: If new firms enter the market, supply is likely
to rise.
, o Movements along and shifts in supply curve:
o Movement along the curve (=Change in the quantity supplied) Effect of
change in price
o Shift in the demand curve (=Change in supply) Change of other
determinant. Rightward illustrated increase in supply.
o The price where demand equals supply is called the equilibrium price.
o Advantages of free-market economy:
o Functions automatically
o No one has great power
o The more efficiency firms can combine their factors of production, the
more profit they will make
o Helps to minimize the central economic problem of scarcity
o Problems with free-market economy:
o Competition between firms is often limited
o Lack of competition and high profits may remove the incentive for firms to
be efficient
o Power and property may be unequally distributed
o Practices of some firms may be socially undesirable or have adverse
environmental consequences.
o Some socially desirable goods will simply not be produced by private
enterprise
o Free-market economy may lead to macroeconomic instability
o Ethical objection that a free-market economy, by rewarding self-
interested behaviour, may encourage selfishness, greed, materialism and
the acquisition or pursuit of power.
o Explaining ‘irrational’ consumer choices:
o How options are framed: People will make different choices when they are
presented, or framed, in different ways.
o Too much choice: Choice should allow us to maximise our utility by
making ‘better’ decisions.
o Bounded rationally: Sometimes it would be possible to obtain better
information, but the individual decides it is not worth the time and effort
and perhaps expense
o Relatively matters: Income, tastes.
o Herding and groupthink: Being influenced what other people buy.
o Sunk costs: Weight up the marginal costs and benefits. Costs that already
incurred in the past are irrelevant.
Chapter 3:
o If price of good rises, how much will the quantity demanded fall? Want to
know how responsive demand is to a rise in price = Price elasticity of demand
o Measuring the price elasticity of demand: PɛD= % ⍙ Qd / % ⍙ P
o Elasticity is measured in proportions or percentage terms for reasons:
It allows comparison of changes in 2 qualitatively different things; it
allows comparison of quantity changes with monetary changes.
It is the only sensible way of deciding how big a change in price or
quantity is.
o The value:
Elastic demand (ɛ >1) : Bigger change in quantity demanded
o General relationship between price and consumption: When the price of a good
rises, the quantity demanded (=Amount consumers are willing and able to
purchase at a given price over a given period) will fall Law of demand.
Reasons for this law:
o People will feel poorer = income effect
o The good will now be dearer relative to other goods = substitution effect
o The demand schedule can be presented graphically as a demand curve. Price is on
vertical axis, quantity demanded at horizontal axis.
o Other determinants of demand Not only price:
Tastes: If people desire the good, the more they will demand
Number and price of substitute (=competitive) goods
Number and price of complementary goods: Are consumed
together.
Income: If income rises, the demand will rise for normal goods. If
people get richer, they will spend less on inferior goods.
Distribution of income
Expectations of future price changes
o Movements along and shifts in the demand curve:
o This curve is constructed on the assumption that ‘other things remain
equal’ = ceteris paribus.
o Movement along the curve (=Change in the quantity demanded) Effect
of change in price
o Shift in the demand curve (=Change in demand) Change of other
determinant
o General relationship between price and supply: When the price of a good rises, the
quantity supplied will also rise. Reasons for this:
o As firms supply more, they are likely to find that beyond a certain level of
output costs rise more and more rapidly. If higher output involves higher
costs of production, producers will need to get a higher price.
o The higher the price of the good, the more profitable it become to produce.
o Given time, if the price of a good remains high, new producers will be
encouraged to set up in production.
o Other determinants of supply:
Cost of production. Reasons for change in costs:
Change in input prices Organisational changes
Change in technology Government policy
Profitability of alternative products (=substitutes in supply)
Profitability of goods in joint supply: Sometimes when one good is
produced, another good is also produced at the same time (=goods
in joint supply).
Nature, ‘random shocks’ and unpredictable events
Aims of producers
Expectations of future price changes
Number of suppliers: If new firms enter the market, supply is likely
to rise.
, o Movements along and shifts in supply curve:
o Movement along the curve (=Change in the quantity supplied) Effect of
change in price
o Shift in the demand curve (=Change in supply) Change of other
determinant. Rightward illustrated increase in supply.
o The price where demand equals supply is called the equilibrium price.
o Advantages of free-market economy:
o Functions automatically
o No one has great power
o The more efficiency firms can combine their factors of production, the
more profit they will make
o Helps to minimize the central economic problem of scarcity
o Problems with free-market economy:
o Competition between firms is often limited
o Lack of competition and high profits may remove the incentive for firms to
be efficient
o Power and property may be unequally distributed
o Practices of some firms may be socially undesirable or have adverse
environmental consequences.
o Some socially desirable goods will simply not be produced by private
enterprise
o Free-market economy may lead to macroeconomic instability
o Ethical objection that a free-market economy, by rewarding self-
interested behaviour, may encourage selfishness, greed, materialism and
the acquisition or pursuit of power.
o Explaining ‘irrational’ consumer choices:
o How options are framed: People will make different choices when they are
presented, or framed, in different ways.
o Too much choice: Choice should allow us to maximise our utility by
making ‘better’ decisions.
o Bounded rationally: Sometimes it would be possible to obtain better
information, but the individual decides it is not worth the time and effort
and perhaps expense
o Relatively matters: Income, tastes.
o Herding and groupthink: Being influenced what other people buy.
o Sunk costs: Weight up the marginal costs and benefits. Costs that already
incurred in the past are irrelevant.
Chapter 3:
o If price of good rises, how much will the quantity demanded fall? Want to
know how responsive demand is to a rise in price = Price elasticity of demand
o Measuring the price elasticity of demand: PɛD= % ⍙ Qd / % ⍙ P
o Elasticity is measured in proportions or percentage terms for reasons:
It allows comparison of changes in 2 qualitatively different things; it
allows comparison of quantity changes with monetary changes.
It is the only sensible way of deciding how big a change in price or
quantity is.
o The value:
Elastic demand (ɛ >1) : Bigger change in quantity demanded
