National Year 10 Economics

Chapters: 6

1. 3.1.1 Economic foundations

3.1.1.1 Economic activity · 3.1.1.2 Factors of production · 3.1.1.3 Making choices

The Problem of Choice: Scarcity and Opportunity Cost – Our wants are unlimited but resources like money, time, land and workers are limited. This is scarcity, and it forces us to choose. The value of the next best option we give up is the opportunity cost. Economists study how people and societies make these choices. Every society must decide what, how and for whom to produce. Market, planned and mixed economies answer these differently, and a welfare state makes sure basic needs of all are met.
Factors of Production: Land, Labour, Capital and Enterprise – Factors of production are the resources used to make goods and services. There are four: land (natural resources, rewarded with rent), labour (human effort, rewarded with wages), capital (man-made tools and machines, rewarded with interest) and enterprise (organising the others and taking risk, rewarded with profit). Because wants are unlimited but these resources are scarce, every society must choose what to produce, how and for whom. The purpose of economic activity is to satisfy as many wants as possible.

2. 3.1.2 Resource allocation

3.1.2.1 Markets and allocation · 3.1.2.2 Economic sectors · 3.1.2.3 Specialisation and exchange

Sectors of the Indian Economy – Economic activities are grouped into three sectors: primary (using nature), secondary (making goods) and tertiary (services). GDP counts the value of final goods and services. In India the tertiary sector produces the most, but the primary sector employs the most, with much disguised unemployment. Activities are also divided into organised and unorganised, and public and private sectors.
Division of Labour and Specialisation – Specialisation means a person, firm, region or country concentrates on making one thing (or a few things). Division of labour is specialisation inside a workplace: a big job is split into small tasks and each worker does one task. Workers get skilled and fast, no time is lost switching tasks and special machines can be used, so output per worker rises and the cost per item falls. The costs: boring repetitive work, the whole line stops if one worker is missing, narrow skills and dependence on others. Because a specialist makes more of one thing than they need and none of the other things they need, specialisation forces exchange, and money makes exchange easy by removing the need for a double coincidence of wants.

3. 3.1.3 How prices are determined

3.1.3.1 Demand · 3.1.3.2 Supply · 3.1.3.3 Equilibrium price · 3.1.3.4 Intermarket relationships · 3.1.3.5 Price elasticity of demand · 3.1.3.6 Price elasticity of supply

Demand, Supply and Market Equilibrium – The law of demand says buyers want less when the price rises; the law of supply says sellers offer more. The market price settles at equilibrium, where quantity demanded equals quantity supplied, and shifts in demand or supply move it. Some goods break the usual laws (Giffen, Veblen, panic buying). A price ceiling set below equilibrium causes shortages. Markets can also fail, for example with pollution or public goods like street lights, so the government steps in.
Related Markets: Substitutes, Complements and Other Links – Markets are linked, so a change in one market moves demand or supply in others. Substitutes (competitive demand) are goods used instead of each other: if the price of one rises, demand for the other rises. Complements (joint demand) are goods used together: if the price of one rises, demand for the other falls. Derived demand is demand for something because it helps make another good (bricks for houses, workers for output). Composite demand is one good wanted for several uses, so more of one use leaves less for others. Joint supply means making one good also makes another (meat and leather). These links cause knock-on effects that spread from market to market.
Price Elasticity of Demand and Supply – Elasticity measures how strongly quantity reacts when price changes. Price elasticity of demand (PED) = % change in quantity demanded ÷ % change in price; it is negative but usually written without the sign. PED > 1 is elastic (buyers react a lot), PED < 1 is inelastic (buyers hardly react), PED = 1 is unit elastic. Demand is more elastic when there are close substitutes, the good is a luxury, it takes a big share of income, or buyers have more time. If demand is elastic, a price cut raises total revenue; if inelastic, a price rise raises total revenue. Price elasticity of supply (PES) = % change in quantity supplied ÷ % change in price; supply is more elastic with spare capacity, stocks, easy inputs and more time.

4. 3.1.4 Production, costs, revenue and profit

3.1.4.1 Costs, revenue and profit · 3.1.4.2 Production and productivity · 3.1.4.3 Economies of scale

Cost and Revenue: TC, AC, MC and TR, AR, MR – Cost is what a firm spends on inputs. Total cost (TC) = total fixed cost (TFC) + total variable cost (TVC). Dividing by output gives AFC, AVC and AC; marginal cost (MC) is the extra cost of one more unit. AFC keeps falling; AVC, AC and MC are U-shaped, and MC cuts AVC and AC at their minimum. Revenue is money from sales: TR = P × q, AR = TR/q = price, MR = extra TR from one more unit. With a fixed price AR = MR; with a falling price MR lies below AR and TR is highest where MR = 0.
Productivity: Getting More Output from Each Input – Production is the total amount made. Productivity is output per unit of input, for example boxes per worker per hour. Labour productivity = output ÷ workers (or worker-hours). It rises with training, better machines and technology, motivation, better methods and specialisation. Higher productivity lowers cost per unit, can raise wages and profits, and helps a country grow. Businesses also watch capacity utilisation (actual ÷ maximum output × 100) and choose between labour-intensive and capital-intensive methods.
Economies of Scale: Why Bigger Can Be Cheaper – Average cost = total cost ÷ output. Economies of scale are the falls in long-run average cost that come from growing bigger. Internal economies happen inside one firm: purchasing, technical, financial, marketing, managerial and risk-bearing. External economies come from the whole industry growing in one area: skilled labour, suppliers, infrastructure, shared research. If a firm grows too big, diseconomies of scale (poor communication, coordination and motivation) push average cost up. The long-run average cost (LRAC) curve is often U-shaped or L-shaped; the minimum efficient scale (MES) is the lowest output where average cost is at its minimum.

5. 3.1.5 Competitive and concentrated markets

3.1.5.1 Market structures · 3.1.5.2 Competitive markets · 3.1.5.3 Non-competitive markets · 3.1.5.4 The labour market

Market Structures: From Perfect Competition to Monopoly – A market structure describes how many firms sell, how alike their products are, and how easy it is to enter. Perfect competition: many firms, identical goods, free entry, price takers, normal profit in the long run. Monopolistic competition: many firms, differentiated goods, easy entry, some price power. Oligopoly: a few interdependent firms, high barriers, strategic behaviour (game theory, collusion, price leadership). Monopoly: one firm, no close substitutes, high barriers, price maker with possible supernormal profit and price discrimination. Contestable markets show that the threat of entry also limits power.
The Labour Market – The labour market is where workers sell their time and skills and employers buy them. Firms demand labour because people buy their products (derived demand). Workers supply labour, and more people offer work at higher wages. The wage settles where demand meets supply. A minimum wage above that level can raise pay but may cut jobs. Trade unions, a single big employer (monopsony), skills, discrimination and new technology all change wages and jobs.

6. 3.1.6 Market failure

3.1.6.1 Misallocation of resources · 3.1.6.2 Externalities

Market Failure – A market fails when buying and selling on its own does not give the best result for society. Resources are used in the wrong amounts: too much of some goods (pollution, cigarettes), too little of others (street lights, vaccines, education). Main causes: externalities, public goods, merit and demerit goods, imperfect information, market power and unfair inequality. Governments try to fix it with taxes, subsidies, rules, direct provision and information, but government action can also fail.