EC2 ECONOMICS

COMMAND WORDS REVIEW

CHAPTERS 1 – 16 REVISIONS
 WHAT IS ECONOMICS?
• It's about making decisions to answer an essential problem in a
society.
What's an example of a problem?

Many people want a

house on the lake of
Zurich, but not
everyone can have
a house on the lake.
Question: Why Not?

Land is a resource.
Land around the lake
of Zurich is finite
(limited). There isn't
enough for everyone
who wants (infinite) a
house on the lake to
have one.
How do we decide who gets a house
on the lake of Zurich?

The Market decides

based on supply and
demand.
 What
is a
Market?
THE MARKET
• The market exists to allow
• a buyer (consumer) and a seller (producer)
• to communicate and to exchange (goods and
services for money)

• It can be found in many forms: stock market, online websites,

market squares, shopping malls (example, Glatt), catalogues, barber
shops, real estate market (house on the lake), etc.
 DEMAN
SUPPLY
D

The perspective The perspective

of the of the
seller/producer/firm/business buyer/consumer/individual
 THE LAW OF SUPPLY & DEMAND

Prices go up when:

Supply is low Demand is high

HAND SANITISERS NEW IPHONE

DURING NEW AIR JORDANS
THE CORONAVIRUS RELEASED
OUTBREAK TODAY!
Prices go down when:

Supply is high Demand is low

CRUDE OIL AIRPLANE TICKETS
DURING DURING
THE CORONAVIRUS THE CORONAVIRUS
OUTBREAK OUTBREAK
 Why Do I Need To Know How To Use Graph?
•Economists often analyse supply and demand behaviours by using graphs (pictures) instead of words.
•We will learn how to construct them in Chapters 3 – 5.
•By using graphs, you can make predictions about what will happen in the future to help you make better choices today.

S2

Example: Rice is a food staple in your country. You are the head of the government. Bad weather for growing rice is
expected this year. What will happen to the price of rice this year?
Prediction: The price of rice will go up significantly this year. To prepare, your government decides to buy rice to store
before the increase in price worldwide. You know about the shortage before other countries do. Aren’t you wise!
 Elasticity, What Is It Good For?
• Economists also use elasticity factors to help with
making better decisions.
• Elasticity factors can be calculated for every product and
service related to consumer income, consumer demand,
and producer supply.
• We will learn how to construct them in Chapters 8 – 10.
• Knowing the elasticity factors for a product/service can
help you make better decisions.

Example: You own a convenience shop like Migrolino that

sells two products (milk and chewing gum). Incomes in your
area have dropped significantly because of the
Coronavirus. You have to decide whether to lower the
supply of one of your products.

Prediction: Since chewing gum is not a necessity, but milk

is, you decide to stop selling chewing gum and start selling
bread (another necessity)!
CHAPTER 1 – BASIC ECONOMIC PROBLEM
Basic Economic Problem (Page 6)
Infinite Finite/scarce
Wants/Needs resources (4 factors of production)

DEMAND (Consumers) SUPPLY (Producers)

BASIC ECONOMIC PROBLEM
OPPORTUNITY
CHOICES CHOICES CHOICES COSTS
(WEIGH THEM

What How For whom TO MAKE SURE

to
Produce?
Can’t produce all the goods that
people want, so must decide which
goods will be produced.
YOU MADE THE
BEST CHOICE)
to to
Produce? Produce?
Many ways to produce (labor vs. robots; How to distribute the goods once they
government vs. private, etc.). Must are produced? Who should get them?
decide how to allocate the four factorsof How much should they get?
production the most efficiently.
Activity 2:Three Questions - Switzerland
• How
do Switzerland try to answer these questions?
 What to produce?
 Cheese, Chocolates, Weapons, Blood (largest exporter)
 How to produce?
 Watch factory in Switzerland, Cacao farm in Ghana, etc.
 For whom to produce?
 House on the lake of Zurich: highest bidder
 Public parks for everyone
 SBB transports: fares kept low to keep them affordable for most people
What are Resources?

• Resources are inputs used to produce

goods and services to fulfill a societies
wants and needs.

• All resources can fit into one of these four

categories called THE FOUR FACTORS
OF PRODUCTION.
 INPUT OUTPUT
(RESOURCES) (GOODS & SERVICES)

FACTORS OF PRODUCTION
 FOUR FACTORS OF PRODUCTION (Page 5)

1. CAPITAL 2. ENTERPRISE

• Anything made by man • Risk-taking, seeing opportunities,

• Tools, equipment, buildings, machinery, etc.. organizing production
 FOUR FACTORS OF PRODUCTION (Page 5)
3. LAND 4. LABOUR
• The land and anything come from the land • Human resource
(existing in nature)
• Skilled and unskilled
• Wild plants, land, mineral deposits (gold,
diamonds, crystals, etc.), petroleum, wind, • Physical and mental effort of people,
water, solar, etc. knowledge, skills
 OPPORTUNITY COSTS (Pages 6-8)
• Same is true with all economic agents.
• Can't do everything.

Economic Scarcity Choice Opportunity Cost

Agent
Producer Wants to produce everything that Enough money to build a car Can't build a car factory in
(Business) is profitable. factory in Zurich. Germany.
Consumer Unlimited wants and needs, but Must save to buy a house. So can't go out to eat every
(Individual) most have limited resources. night.
Worker Wants to earn money and have Must work 40 hours a week Can't relax at home during
(Individual) unlimited free time. to earn money. those 40 hours.
Government Long list of public service project Enough to spend on a new Not enough to spend on a
with limited tax dollars. school. new hospital.
 THE SUN IS
PRODUCTION POSSIBILITY CURVE (PPC) RISING CURVE

What you need to know:

• A and D are options along the PPC
8
*
7 A • Moving from A to D or D to A creates
Consumer Goods

opportunity costs
6 C
• B is possible, but not all resources are
being used (unemployment); could also
Millions of units ($)

move there with economic decline

3
B D
• C isn't possible without economic growth.

• The curve shifts left or right over time

(economic growth) and (economic
0
0 5 8 *9 decline)

Capital Goods Millions of units ($)

CHAPTER 2 – ECONOMIC ASSUMPTIONS
CHAPTER 3 – THE DEMAND CURVE

https://www.youtube.com/watch?v=kUPm2tMCbGE
CHAPTER 3 – THE DEMAND CURVE
CHAPTER 4 – THE DEMAND FACTORS

Demand
Factors
CHAPTER 4 – THE DEMAND FACTORS
CHAPTER 5 – THE SUPPLY CURVE

https://www.youtube.com/watch?v=nKvrbOq1OfI
CHAPTER 5 – THE SUPPLY CURVE
CHAPTER 6 – THE SUPPLY FACTORS

Supply
Factors
CHAPTER 6 – THE SUPPLY FACTORS
CHAPTER 7 – MARKET EQUILIBRIUM

https://www.youtube.com/watch?v=7eZcPs9z9OA
CHAPTER 7 – MARKET EQUILIBRIUM
1. Market Equilibrium can be used with any product or service
Used to show point where
consumers (quantity demanded) and
producers (quantity supplied) match

Also called the Market Clearing

Price

Used to show total revenue

(Total Revenue = Price X Quantity)

CHAPTER 7 – MARKET EQUILIBRIUM
Used to show excess supply

Used to show excess demand

 CHAPTER 7 – MARKET EQUILIBRIUM

How do market forces  Lower price to the equilibrium level

remove excess supply?
 Store the excess supply until later (if
not fresh products)

How do market forces  Raise price to the equilibrium level

remove excess demand?
 Producers can create more supply to
meet the demand
 Price Elasticity of Demand (PED) Price Elasticity of Supply (PES) Income Elasticity
(YED)
Chapter 8 Chapter 9 Chapter 10
Definition The responsiveness of demand to a change The responsiveness of supply to a change in The responsiveness of demand to a change in
in price price income
Point of view Buyer – How much will quantity bought Producer – How fast can the producer Buyer – How much will quantity bought change
change when prices change? change production in the short run? when income changes?

Curve Impacted
Formula
To calculate % change when the
percentages are not already given
(When % Are Given, Don't Need to
Do This!!!!)
Interpreting results
Large = Elastic/Small = Inelastic
How quantity demanded will increase or
decrease depending on how prices increase
or decrease
Affects the STEEPNESS of the Demand
Curve
% Change in Quantity Demanded
% Change in Price
(always a negative number because quantity
demanded and price have an inverse
relationship)
(New - Old) * 100
Old
*If the new amount is smaller than old
amount, the % change will have a minus
(decrease). DON'T FORGET!!!
 Less than 1 (Inelastic); example -0.5
 Greater than 1 (Elastic); example (-
2.5)***remember ignore minus
 Infinity (Perfectly Elastic) (perfect
competition, can't charge more than the
market price)
 Zero (Perfectly Inelastic) (example,
insulin, no matter the price, you will still
demand it)
 Exactly -1 (Unitary Elastic) (10% price
increase leads to a 10% reduction in
demand)
Fast = Elastic / Slow = Inelastic
How quantity supplied will increase or
decrease depending on how much prices
increase or decrease
Affects the STEEPNESS of the Supply Curve
% Change in Quantity Supplied
% Change in Price
(always a positive number because quantity
supplied and price have an proportionate
relationship)
(New - Old) * 100
Old
*If the new amount is smaller than old
amount, the % change will have a minus
(decrease). DON'T FORGET!!!
 Less than 1 (Inelastic); example 0.5
 Greater than 1 (Elastic); example 2.5
 Infinity (Perfectly Elastic) (example,
minimum wage supply curve at the point
of minimum wage…can't supply for less
than the minimum wage)
 Zero (Perfectly Inelastic)
 Exactly +1 (Unitary Elastic)
Will always be a positive number
(proportionate relationship)
Large = Elastic/Small = Inelastic
How quantity demanded will increase or
decrease depending on how incomes increase
or decrease
n/a
% Change in Quantity Demanded
% Change in Income
(can be positive or negative depending on
whether the good is a normal good or an
inferior good)
(New - Old) * 100
Old
*If the new amount is smaller than old amount,
the % change will have a minus (decrease).
DON'T FORGET!!!
 Less than + 1 but greater than -1
(Inelastic; example, 0.5
 +1 or greater; - 1 or less (Elastic);
example, - 2.5
 Zero or greater (Normal Good); example,
0.5
 Less than zero (Inferior Good); example,
- 0.5
 Greater than + 1 (Luxury Good);
example, 2.5
 EXPLAIN… (3 MARKS)
A firm has decided to purchase a new computer system.
Explain one possible opportunity cost for the firm of this decision. (3)

One possible opportunity costs would be new desks. (1 mark) Because the
company has spent the money on the new computer system (1 mark), they no
longer have money to spend (1 mark) on new desks.
 ANALYSE… (6 MARKS)

In the Republic of Korea, firms such as Hyundai and Kia produce

cars. In addition, the Republic has 28,951 farms producing organic
fruits such as strawberries. It is one of the most important organic
producers in Asia.

With reference to the data above and your knowledge of economics,

analyse whether the price elasticity of supply (PES) is likely to be
more price elastic for cars than for organic strawberries. (6)
 ANALYSE… (6 MARKS)
STEP 1: Define the key
term
STEP 2: Explain with a
graph or calculation (if
possible)
STEP 3: Analyse two
reasons including chains of
reasoning for each.
Price elasticity of supply is the responsiveness of the quantity supplied to a change
in price. A good or service is elastic when producers can quickly increase the
production (increase the supply) of it when prices change. There are several reasons
why cars are more elastic than fresh strawberries.
N/A
One reason is that you can store cars for longer than you can store fresh, organic
strawberries. This is because fresh strawberries are perishable and need to be sold
right away while cars can be stored for a long period of time after they are produced.
Therefore, if prices change, producers can increase supply by retrieving the cars in
storage.
Another reason is that it takes less time to produce cars. Organic strawberries have a
natural growing time and can't be sped up for much longer than this time. On the
other hand, cars can be manufactured quickly in a factory. Therefore, if price change,
resources can be allocated to produce more cars quickly.
 ASSESS… (9 MARKS)

STEP 4: Assess a
balanced counter-
argument. Include 2
advantages,
disadvantages, features
including chains of
reasoning.
 EVALUATE… (12 MARKS)

STEP 5: Draw a conclusion