Glossary:
- Capital-Intensive Production - Use of a high proportion of capital relative to labour
- Labour-Intensive Production - Use of a high proportion of capital relative to labour
- Market → any place that brings buyers and sellers together
- Consumer sovereignty → economic power exerted by consumers in a market
- Ceteris Paribus → All other factors being equal
- Extension of Demand → When price decreases, consumers buy more, causing a
movement down the demand curve.
- Contraction of Demand → When price increases, consumers buy less, causing a
movement up the demand curve.
- Extension of Supply → When price increases, producers supply more, causing a
movement up the supply curve.
- Contraction of Supply → When price decreases, producers supply less, causing a
movement down the supply curve.
Different Economic Systems:
Economic System → Emerge to solve the basic economic problem, consist of agents like
consumers, producers and the government and aim to allocate scarce factors of production
- Planned economic system : government makes all the decisions, state owns all (or
most) of the land and gives directions to state owned enterprises on what to produce
and how to produce it
- Mixed Economic System : private and public sectors play an important role
- Market Economic System : consumers determine what is produced, resources
allocated by price mechanism and land and capital are privately consumed.
Three Key Allocation Decisions:
1. What to produce?
- Planned economy: Government decides.
- Market economy: Demand and supply decide.
- Mixed economy: Both government and market decide.
2. How to produce?
- Planned economy: Ensures jobs for everyone.
- Market economy: Focuses on efficiency and profit.
- Mixed economy: Balances efficiency with social welfare.
, 3. Who to produce for?
- Planned economy: For everyone.
- Market economy: For those who can afford it.
- Mixed economy: For those who can afford it, plus basic goods for all.
Market Economic System:
The price mechanism determines prices through demand and supply.
Shortage → Prices rise to limit demand
Surplus → Prices fall to increase demand
Falling prices encourage firms to shift resources to more profitable markets.
High competition makes firms reduce costs and improve quality.
- Prices signal where resources are needed (high prices) and where they are not (low
prices).
- People with higher incomes have greater influence over what is produced.
An example of consumer sovereignty (check glossary): if consumers do not agree with the
price of the product, they do not buy it, thus exerting their consumer sovereignty.
Price Mechanism:
● Demand: Willingness and ability to buy a product.
● Supply: Willingness and ability to sell a product.
● Market equilibrium: When demand equals supply at the current price.
● Market disequilibrium: When there is excess demand (shortage) or excess
supply (surplus).
Market Disequilibrium:
● Excess demand:
○ Occurs when demand exceeds supply.
○ Happens if prices are too low or demand is too high.
○ Sellers raise prices to increase revenue and profit.
Glossary:
- Capital-Intensive Production - Use of a high proportion of capital relative to labour
- Labour-Intensive Production - Use of a high proportion of capital relative to labour
- Market → any place that brings buyers and sellers together
- Consumer sovereignty → economic power exerted by consumers in a market
- Ceteris Paribus → All other factors being equal
- Extension of Demand → When price decreases, consumers buy more, causing a
movement down the demand curve.
- Contraction of Demand → When price increases, consumers buy less, causing a
movement up the demand curve.
- Extension of Supply → When price increases, producers supply more, causing a
movement up the supply curve.
- Contraction of Supply → When price decreases, producers supply less, causing a
movement down the supply curve.
Different Economic Systems:
Economic System → Emerge to solve the basic economic problem, consist of agents like
consumers, producers and the government and aim to allocate scarce factors of production
- Planned economic system : government makes all the decisions, state owns all (or
most) of the land and gives directions to state owned enterprises on what to produce
and how to produce it
- Mixed Economic System : private and public sectors play an important role
- Market Economic System : consumers determine what is produced, resources
allocated by price mechanism and land and capital are privately consumed.
Three Key Allocation Decisions:
1. What to produce?
- Planned economy: Government decides.
- Market economy: Demand and supply decide.
- Mixed economy: Both government and market decide.
2. How to produce?
- Planned economy: Ensures jobs for everyone.
- Market economy: Focuses on efficiency and profit.
- Mixed economy: Balances efficiency with social welfare.
, 3. Who to produce for?
- Planned economy: For everyone.
- Market economy: For those who can afford it.
- Mixed economy: For those who can afford it, plus basic goods for all.
Market Economic System:
The price mechanism determines prices through demand and supply.
Shortage → Prices rise to limit demand
Surplus → Prices fall to increase demand
Falling prices encourage firms to shift resources to more profitable markets.
High competition makes firms reduce costs and improve quality.
- Prices signal where resources are needed (high prices) and where they are not (low
prices).
- People with higher incomes have greater influence over what is produced.
An example of consumer sovereignty (check glossary): if consumers do not agree with the
price of the product, they do not buy it, thus exerting their consumer sovereignty.
Price Mechanism:
● Demand: Willingness and ability to buy a product.
● Supply: Willingness and ability to sell a product.
● Market equilibrium: When demand equals supply at the current price.
● Market disequilibrium: When there is excess demand (shortage) or excess
supply (surplus).
Market Disequilibrium:
● Excess demand:
○ Occurs when demand exceeds supply.
○ Happens if prices are too low or demand is too high.
○ Sellers raise prices to increase revenue and profit.
