mashal iqbal economics exam revision 2018
unit 1: how markets work
intro to economics
what is an economy? an economy is a an area where there is production and exchange of goods and
service
- production: any activity that satisfies people’s wants. the people who make and sell goods and services
are called producers.
- consumption: the using up of goods and services. the people who buy goods and services are called
consumers and their spending is called consumption expenditure.
- exchange: the purchase of goods and services that they do not produce. in modern economy people
exchange money for goods and services
economic problem asserts that an economy's finite resources are insufficient to satisfy all human wants and
needs. it assumes that human wants are unlimited, but the means to satisfy human wants are scarce.
factors of production resources required to produce goods and services to satisfy the needs and wants
- capital: man-made resources [fridges, computers, cars]
- land: natural resources [wood, timber, livestock]
- enterprise: business owned by entrepreneurs [coca cola]
- labor: human resources [police]
public and private sector
- public sector: government-owned organizations and government-provided services
- private sector: organizations that are not government owned and the goods and services provided by
organizations outside of the government.
need for exchange very few people can make all the things they want. in order to obtain the goods and
services they cannot produce themselves they must engage in trade or exchange. in modern economies
most people are able to do this by going to work to earn money. they then exchange this money for the
goods and services they want that are produced by other workers.
what do entrepreneurs do? an entrepreneur is the person who invests money into the business and invests
his own money into the business and has the risk ability to conduct his businesses.
• identify a gap in the market for a product/service
• use the factors of production to produce a product or service
• if they are successful they make a profit
what do resources produce?
consumer goods; consumer durables [fridges], consumer non-durables [fruits/veg], consumer services [jobs]
types of goods
- capital: not wanted for themselves but for what they can produce. the buying of capital goods is called
investment.
- merit: goods and services that benefit people but they cannot afford to pay for them, and so they are
provided by the government [education]
- public: goods and service provided from the government because everyone benefits from them even if
they don’t pay for them [the army of a nation]
a need is something that is required for survival, a want is something that you desire but not need
scarcity & [limited] choices
1. physical or natural resources [oil, climate, minerals, forests, fisheries]
2. human resources [people and their various skills]
- scarce resources: resources, which are limited in, supply and can run out
- opportunity cost: next best alternative chosen instead [finite/limited]
division of labor is when the production process is broken down according to different tasks
- self suffiency: when each person or community produced all the things they wanted for themselves
- specialization: when people concentrate on doing things that they are best at
• advantages: more goods and services can be produced, time is saved, full use is made of everyone’s
ability, allows the use of machinery
• disadvantages: work may become boring, workers may feel alienated, people become too dependent on
each other, products are all the same
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,mashal iqbal economics exam revision 2018
unit 2: the market system
what is demand?
demand
• demand: amount of a good that will be bought at given prices over
a period of time
• effective demand: amount of a good people are willing to buy at
given prices over a given period of time backed by the ability to pay
• market demand: consists of the sum of all individual demand
schedules in the market
law of demand
the law of demand states that all other factors being equal/remain
constant [ceteris paribus], price and quantity demanded of any good
and service are inversely related to each other
• when the price of a product increases, the demand for the same product will fall
• when the price of a product decreases, the quantity demanded will rise
factors affecting demand
1. change in people’s income: the more the people, earn they will spend
and thus the demand will rise thus the demand curve will shift to the
right. a fall in income will see a fall in demand shifting to the left.
2. changes in population: an increase in population will result in a rise in
demand so the demand curve shifts to the right. a decrease in population
will result in a fall in demand so the demand curve shifts to the left.
3. change in fashion & taste: a change in fashion and taste can increase
demand so demand curve shifts to the right
4. changes in income tax: an increase in income tax will see a fall in
demand as people will have less money left in their pockets to spend, so
demand curve shifts to the left, and vice versa
5. change in price of complementary goods: complementary goods or
services are demanded along with other goods and services. demand for cars is affected if there is a
change in the price of petrol. if petrol prices fall, demand for cars will increase so demand curve for cars
in the market will increase thus shifting demand curve to the right. [same way, demand for DVD players
will rise if the price of DVDs fall]
- advertising: a successful advertising campaign may affect the demand for a product or service and thus
increases demand thus causing it to shift to the right
- climate: changes in climate affects the demand for certain goods and services [sweaters]
- interest rates: a fall in interest rate will see a rise in demand for goods and services, this makes the
demand curve shift to the right. but increase in interest rate will make it shift to the left.
6. changes in prices of substitute goods: substitute goods or services are those that can replace the want
of another good or service.
extension/contraction of demand
- extension: [increase in demand] refers to the way in which quantity demanded changes with a fall in price
with no change in any other factor.
- contraction: [decrease in demand] refers to the way in which quantity demanded changes when price rises
with no change in any other factor.
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, mashal iqbal economics exam revision 2018
what is supply?
supply
• supply: the amount of a good or a service producers are willing to
make and sell at different prices
• individual supply: supply of an individual producer at each price
whereas market supply of the individual supply schedules of all
producers in industry.
• the market supply of a product will consist of the amount supplied by
all the individual producers competing to supply that product
supply curve
supply curve for any product will slope upwards as there is a direct
relationship between the price of a product and quantity supplied [law of
supply]. hence, as price increases supply increases and when price decreases supply decreases [positive
relationship between price and quantity]
extension/contraction of supply
• extension: refers to how supply increases with the rise in the price of a product, ceteris paribus
• contraction: refers to how supply contracts with a fall in the
price of a product, ceteris paribus. hence there is a
movement of the supply curve because supply changes due
to a change in price only.
factors affecting supply
1. cost of production: [raw materials, wages, rents, etc] if the
cost of production is high, suppliers will not find it profitable
to supply goods and so the supply curve shifts to the left. but if the cost of production is reduced then
the supplier will be able to supply the goods at a profitable rate and hence supply will shift to the right.
2. level of technology: if machines are used, the supplier will
be able to supply the goods faster at a lower cost and
make quick profit, hence supply curve will shift to the right.
3. changes in price of other goods: price changes acts as an
incentive to the firm to produce those goods, which are
more profitable. hence resources will be allocated to the
most profitable goods and services. a fall in the price of one
product may cause suppliers to cut production and supply
more of the profitable product
4. business optimism:
- fears of an economic recession may cause the firm to
shift resources to supply those products, which will not be
affected by a fall in consumer income [luxury cars and
foreign holidays are badly affected by recessions].
- in times of boom disposables incomes are usually high
and more goods and services are demanded, so
producers tend to move their scarce resources into new
markets thus causing the supply curve to shift to the right
5. other factors:
- other global factors such as climate changes, natural
disasters, wars, political factors can have an impact on
the supply of many goods and services.
- bad weather conditions can affect the supply of
agricultural products and reduce its supply thus shifting
the supply curve to the left.
6. taxes: indirect taxes are taxes imposed by the government
on spending [VAT, excise duties on petrol tobacco etc] when they are imposed the cost increases and
this will push the supply curve to the left.
7. subsidies: the government gives money to businesses to help them. this is done to encourage them to
produce more. this subsidy helps to reduce the cost of production and hence supply shifts to the right.
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unit 1: how markets work
intro to economics
what is an economy? an economy is a an area where there is production and exchange of goods and
service
- production: any activity that satisfies people’s wants. the people who make and sell goods and services
are called producers.
- consumption: the using up of goods and services. the people who buy goods and services are called
consumers and their spending is called consumption expenditure.
- exchange: the purchase of goods and services that they do not produce. in modern economy people
exchange money for goods and services
economic problem asserts that an economy's finite resources are insufficient to satisfy all human wants and
needs. it assumes that human wants are unlimited, but the means to satisfy human wants are scarce.
factors of production resources required to produce goods and services to satisfy the needs and wants
- capital: man-made resources [fridges, computers, cars]
- land: natural resources [wood, timber, livestock]
- enterprise: business owned by entrepreneurs [coca cola]
- labor: human resources [police]
public and private sector
- public sector: government-owned organizations and government-provided services
- private sector: organizations that are not government owned and the goods and services provided by
organizations outside of the government.
need for exchange very few people can make all the things they want. in order to obtain the goods and
services they cannot produce themselves they must engage in trade or exchange. in modern economies
most people are able to do this by going to work to earn money. they then exchange this money for the
goods and services they want that are produced by other workers.
what do entrepreneurs do? an entrepreneur is the person who invests money into the business and invests
his own money into the business and has the risk ability to conduct his businesses.
• identify a gap in the market for a product/service
• use the factors of production to produce a product or service
• if they are successful they make a profit
what do resources produce?
consumer goods; consumer durables [fridges], consumer non-durables [fruits/veg], consumer services [jobs]
types of goods
- capital: not wanted for themselves but for what they can produce. the buying of capital goods is called
investment.
- merit: goods and services that benefit people but they cannot afford to pay for them, and so they are
provided by the government [education]
- public: goods and service provided from the government because everyone benefits from them even if
they don’t pay for them [the army of a nation]
a need is something that is required for survival, a want is something that you desire but not need
scarcity & [limited] choices
1. physical or natural resources [oil, climate, minerals, forests, fisheries]
2. human resources [people and their various skills]
- scarce resources: resources, which are limited in, supply and can run out
- opportunity cost: next best alternative chosen instead [finite/limited]
division of labor is when the production process is broken down according to different tasks
- self suffiency: when each person or community produced all the things they wanted for themselves
- specialization: when people concentrate on doing things that they are best at
• advantages: more goods and services can be produced, time is saved, full use is made of everyone’s
ability, allows the use of machinery
• disadvantages: work may become boring, workers may feel alienated, people become too dependent on
each other, products are all the same
1 of 20
,mashal iqbal economics exam revision 2018
unit 2: the market system
what is demand?
demand
• demand: amount of a good that will be bought at given prices over
a period of time
• effective demand: amount of a good people are willing to buy at
given prices over a given period of time backed by the ability to pay
• market demand: consists of the sum of all individual demand
schedules in the market
law of demand
the law of demand states that all other factors being equal/remain
constant [ceteris paribus], price and quantity demanded of any good
and service are inversely related to each other
• when the price of a product increases, the demand for the same product will fall
• when the price of a product decreases, the quantity demanded will rise
factors affecting demand
1. change in people’s income: the more the people, earn they will spend
and thus the demand will rise thus the demand curve will shift to the
right. a fall in income will see a fall in demand shifting to the left.
2. changes in population: an increase in population will result in a rise in
demand so the demand curve shifts to the right. a decrease in population
will result in a fall in demand so the demand curve shifts to the left.
3. change in fashion & taste: a change in fashion and taste can increase
demand so demand curve shifts to the right
4. changes in income tax: an increase in income tax will see a fall in
demand as people will have less money left in their pockets to spend, so
demand curve shifts to the left, and vice versa
5. change in price of complementary goods: complementary goods or
services are demanded along with other goods and services. demand for cars is affected if there is a
change in the price of petrol. if petrol prices fall, demand for cars will increase so demand curve for cars
in the market will increase thus shifting demand curve to the right. [same way, demand for DVD players
will rise if the price of DVDs fall]
- advertising: a successful advertising campaign may affect the demand for a product or service and thus
increases demand thus causing it to shift to the right
- climate: changes in climate affects the demand for certain goods and services [sweaters]
- interest rates: a fall in interest rate will see a rise in demand for goods and services, this makes the
demand curve shift to the right. but increase in interest rate will make it shift to the left.
6. changes in prices of substitute goods: substitute goods or services are those that can replace the want
of another good or service.
extension/contraction of demand
- extension: [increase in demand] refers to the way in which quantity demanded changes with a fall in price
with no change in any other factor.
- contraction: [decrease in demand] refers to the way in which quantity demanded changes when price rises
with no change in any other factor.
2 of 20
, mashal iqbal economics exam revision 2018
what is supply?
supply
• supply: the amount of a good or a service producers are willing to
make and sell at different prices
• individual supply: supply of an individual producer at each price
whereas market supply of the individual supply schedules of all
producers in industry.
• the market supply of a product will consist of the amount supplied by
all the individual producers competing to supply that product
supply curve
supply curve for any product will slope upwards as there is a direct
relationship between the price of a product and quantity supplied [law of
supply]. hence, as price increases supply increases and when price decreases supply decreases [positive
relationship between price and quantity]
extension/contraction of supply
• extension: refers to how supply increases with the rise in the price of a product, ceteris paribus
• contraction: refers to how supply contracts with a fall in the
price of a product, ceteris paribus. hence there is a
movement of the supply curve because supply changes due
to a change in price only.
factors affecting supply
1. cost of production: [raw materials, wages, rents, etc] if the
cost of production is high, suppliers will not find it profitable
to supply goods and so the supply curve shifts to the left. but if the cost of production is reduced then
the supplier will be able to supply the goods at a profitable rate and hence supply will shift to the right.
2. level of technology: if machines are used, the supplier will
be able to supply the goods faster at a lower cost and
make quick profit, hence supply curve will shift to the right.
3. changes in price of other goods: price changes acts as an
incentive to the firm to produce those goods, which are
more profitable. hence resources will be allocated to the
most profitable goods and services. a fall in the price of one
product may cause suppliers to cut production and supply
more of the profitable product
4. business optimism:
- fears of an economic recession may cause the firm to
shift resources to supply those products, which will not be
affected by a fall in consumer income [luxury cars and
foreign holidays are badly affected by recessions].
- in times of boom disposables incomes are usually high
and more goods and services are demanded, so
producers tend to move their scarce resources into new
markets thus causing the supply curve to shift to the right
5. other factors:
- other global factors such as climate changes, natural
disasters, wars, political factors can have an impact on
the supply of many goods and services.
- bad weather conditions can affect the supply of
agricultural products and reduce its supply thus shifting
the supply curve to the left.
6. taxes: indirect taxes are taxes imposed by the government
on spending [VAT, excise duties on petrol tobacco etc] when they are imposed the cost increases and
this will push the supply curve to the left.
7. subsidies: the government gives money to businesses to help them. this is done to encourage them to
produce more. this subsidy helps to reduce the cost of production and hence supply shifts to the right.
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