Economics tuition notes

11th/June/2024
Demand - willingness and ability to buy a product. Demand and price are inversely related.
Demand will rise as price falls and fall as prices rise.
Extension in demand - a rise in the quantity demanded caused by a fall in the price of the
product itself.

Extension in demand

Contraction in demand

Conditions of demand/ determinants of demand

Non price determinants (shift of demand)
● Changes in consumers’ income - a rise in consumer income will increase their ability
to pay and therefore is likely to increase their demand.
● Increase or decrease in taxes on income - disposable income refers to the amount of
income people have left to spend or save after any taxes on their income have been
deducted. If income tax rises demand will decrease and vice versa
● Change in the price of substitute goods - if the price of product x increases then
demand for product y (a substitute) will increase and the demand curve will shift
rightwards.
● Change in price of complementary goods, for example if the price of butter increases
then demand of bread also decreases (consumed together) and demand curve will
shift leftwards.
● Changes in taste, habits and fashion
● Population change
● Other factors - advertisements
Supply - refers to the amount of goods or service firms or producers are willing to make and
sell at different prices.
Law of supply - as price increases supply increases.
The supply curve for any product will slope upwards, showing that as price rises, quantity
supplies extend (increase), and as price falls quantity supplies contracts (decrease).

9.3
Moving from market disequilibrium to market equilibrium
Excess supply - the amount by which supply is greater than demand.

Excess supply
As supply > demand then a downwards pressure is created equilibrium price decreases and
equilibrium quantity will decrease.

Return to equilibrium

Excess demand - the amount by which demand is greater than supply.

When demand is greater than supply a shortage is created which causes an upward
pressure on the price and the price increases.

Demand exceeding supply

10.1
Effect of changes in demand
10.3 effect of increase in supply
 Chapter 11
Price elasticity of demand

Elastic diagram graph

 Price elasticity of supply (PES)

Elastic supply
Reasons for elastic supply-
● Availability of space capacity
● Stock of finished goods
● In the long run elastic
● Factors mobility - if labour can switch one production line to another

Inelastic supply
Reasons for inelastic supply-
● No space capacity
● No stock of finished goods
● In the short run, supply inelastic
 Chapter 13
Market economic system

1)Market economic system

● In a market economic system, all firms aim to make a profit and own the resources
(land, labour, capital, ent.) from producing things people will not buy into the
production of goods/services that they will buy.
● What is produced in a market economy depends therefore on what consumers want
and are willing to pay for.

Advantages-
Wide variety of goods/services produced
Responds quickly to customer demand/wants

Disadvantages-
May encourage consumption of harmful goods
Social cost may be ignored
Poor are discriminated against rich

2) Planned economies
● What, how and for whom to produce is decided and planned centrally by the
government.
● Central government has ownership and control of all resources
● Firms aim to produce what the government wants

Advantages-
Less pollution
Less consumption of harmful goods
Controlled externalities
Public goods provided (road,street light, park, flood defence etc)

Disadvantages-
Goods may not satisfy consumer demand
Shortage of consumer goods
Poor quality production
Less incentive to work

3) Mixed economic system

● Combines govt. planning with the use of the free market.
● Private sector and public sector both produce, with different aims each.
● A mixed economy attempts to overcome the disadvantage of a market economic
system by using govt. Intervention to control/regulate different markets.
Public goods: goods that can be used by the general public, from which they will benefit.
Their consumption can’t be measured, and thus cannot be charged a price for (this is why a
market economy doesn’t produce them). Examples include street lights and roads.

Merit goods: goods which create a positive effect on the society and ought to be consumed
more. Examples include schools and hospitals. The opposite is called demerit goods which
include alcohol and cigarettes.

External costs (negative externalities) are the negative impacts on society (third-parties)
due to production or consumption of goods and services. Example: the pollution from a
factory.- cigarette smoking

External benefits (positive externalities) are the positive impacts on society due to
production or consumption of goods and services. Example: better roads in a neighbourhood
due to the opening of a new business.

Private costs are the costs to the producer and consumer due to production and
consumption respectively. Example: the cost of production.

Private benefits are the benefits to the producer or consumer due to production and
consumption respectively. Example: the better immunity received by a consumer when he
receives a vaccine.

Market failure-
Causes of market failure are:

● When social costs exceed social benefits

● Overprovision of demerit goods
● Under-provision of merit goods
● Lack of public goods
● Immobility of resources
● Information failure
● Abuse of monopoly* powers: