Scarcity Leads to Choice
Scarcity |
The fundamental economic problem. There are not enough resources to satisfy the unlimited needs and wants of the population. |
For Example |
Time, skills, income, and people are all limited means so they cannot satisfy all of our needs and wants. |
Choice |
As a result of unlimited wants and scarce resources, consumers and producers have to make choices; their choices are influenced by their means, tastes, and values. |
For Example |
I have limited income so I can buy a pizza or a burger but not both. I have to make a choice based on what I like more or which is cheapest. |
Choice leads to opportunity cost. This is the next best alternative missed out on when the best alternative what selected. Eg. I can go to the beach or go to work. I choose to go to the beach because it's sunny. My opportunity cost is the money I would have earnt at work.
Factors of Demand
Price Factors |
-price increase |
-price decrease |
Non-Price Factors |
-price of substitutes (eg. coke price falls, pepsi demand falls) |
-price of complements (eg. sauce price falls, pasta demand rises) |
-income |
-tastes and preferences |
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Conflicts and Compromises
Values |
Ideas/beliefs that people consider important in their lives, that influence their decisions. |
Conflict |
We do not have enough time, money, or skills to do everything that we value. Conflict may occur within our values when a hard decision needs to be made. |
Compromise |
An agreement that is reached when concessions are made, to resolve conflict. Make sure your compromise includes an aspect of both alternatives. |
Types of Goods
Necessity Goods |
Basic goods required for survival. As income increases demand will only increase less than proportionally. |
Inferior Goods |
Goods with a limited quantity or quality. As income increases demand for inferior goods fall. |
Luxury Goods |
A good with superior features eg. higher quality or quantity. As income increases demand for luxury goods increases more than proportionally as luxury goods tend to be more expensive.. |
Go on to discuss any further flow on effects and shifts in demand- refer to graph and income ratio. |
Change in Income Model Answer
Disposable income is income earned, plus any transfer payments, minus tax. In this case, disposable income has increased/decreased due to... |
Explain the shift: As income has increased/decreased [X's] demand for product, shown as a shift in demand to the left/right (D1 to D2). This means [X] is more/less willing and able to pay for product at each and every price level. |
Go on to explain flow on effects. |
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Law of Demand
Demand |
Individual demand is defined as the quantity of a good or service an individual is willing and able to buy at a range of prices. |
↪️ |
a want backed up by their ability. |
Law of Demand |
As the price of a good or service increases, the quantity demanded decreases. Vice versa ceteris paribus. |
For Example |
As the price falls/rises from $A (P1) to $B (P2) the quantity demanded of product has increased/decreased from A (Q1) to B (Q2). Vice versa ceteris paribus. |
Income and Substitution Effects
Income Effect |
We are more willing to buy more as the cheaper price makes the good more desirable. |
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We are now more able to buy more with our current level of income (income effect). |
Substitution Effect |
The good is now relatively more expensive than other goods (substitution effect). |
Flow on Effects
↪️What other things change because of a price change? |
For example, if coke is cheaper what will be the flow on effects? Unhealthier? Happier? More friends? |
The Four Flows |
-health |
-socialising and leisure |
-spending or saving |
-compliments or other things you have with the good |
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