1. AS Economics Module 1 revision Have you bothered yet?

2. List 4 factors that cause a shift in demand… Price of substitutes Price of substitutes Consumer tastes/ changes in fashion Consumer tastes/ changes in fashion Consumer confidence ‘feel good factor’ Consumer confidence ‘feel good factor’ Consumer income Consumer income Changes in the population Changes in the population Changes in legislation Changes in legislation Advertising Advertising

3. Show on a demand curve a contraction in quantity demanded.

4. Draw a demand and supply curve for housing, label the equilibrium price as P1 and the quantity as Q1. Now show the effect of a rise in the cost of land Now show the effect of a rise in the cost of land an increase in disposable income. an increase in disposable income. Label the new equilibrium price as P2 and the quantity as Q2. Label the new equilibrium price as P2 and the quantity as Q2.

5. What is meant by the term joint supply – provide an example.

6. Draw a consumer surplus diagram – shade in the area. Explain what the consumer surplus concept means to a seller…. Explain what the consumer surplus concept means to a seller….

7. List 4 factors that cause a shift in supply… Changes in production costs Changes in production costs Wages, raw materials and components, energy, rents, interest rates Wages, raw materials and components, energy, rents, interest rates Government taxes and subsidies Government taxes and subsidies Changes in technology – ICT can reduce long term costs but are expensive in SR Changes in technology – ICT can reduce long term costs but are expensive in SR Climatic conditions (important for agricultural supply) Climatic conditions (important for agricultural supply) Changes in the number of producers in the market Changes in the number of producers in the market Changes in the objectives of suppliers in the market Changes in the objectives of suppliers in the market Changes in the prices of substitutes in production Changes in the prices of substitutes in production The profitability of alternative products (substitutes) or those with joint supply (crude oil = petrol and paraffin and diesel) The profitability of alternative products (substitutes) or those with joint supply (crude oil = petrol and paraffin and diesel) Expectation of future price changes Expectation of future price changes

8. Equilibrium Draw a D & S diagram and show on it excess demand and excess supply. Draw a D & S diagram and show on it excess demand and excess supply. Label market shortage and glut. Label market shortage and glut.

9. What does elasticity mean to sellers? If product is elastic or inelastic? If product is elastic or inelastic? If the product has more elastic PeD then the seller has to be careful with increasing the price as consumers will substitute the product with a cheaper alternative. However, if the product has inelastic PeD– then the seller can ‘abuse’ the position and increase prices and gain more profits… if they dare…. As it may signal for more suppliers to enter the market to take advantage of the profit potentials.

10. Income elasticity - Which goods have positive and which have negative income elasticity? A positive sign denotes a normal good A positive sign denotes a normal good A negative sign denotes an inferior good A negative sign denotes an inferior good

11. Significance of Income Elasticity of Demand High Income Elasticity High Income Elasticity Demand is sensitive to changes in real incomes Demand is sensitive to changes in real incomes Demand is therefore cyclical – in an economic expansion, demand will grow strongly. In a recession demand may fall Demand is therefore cyclical – in an economic expansion, demand will grow strongly. In a recession demand may fall Can be difficult for businesses to accurately forecast demand and make capital investment decisions Can be difficult for businesses to accurately forecast demand and make capital investment decisions Low Income Elasticity Low Income Elasticity Demand is more stable during fluctuations in the economic cycle Demand is more stable during fluctuations in the economic cycle Over time, the share of consumer spending on inferior goods and normal necessities tends to decline Over time, the share of consumer spending on inferior goods and normal necessities tends to decline Long run – businesses need to invest in / focus on products with a higher income elasticity of demand if they want to increase total profits Long run – businesses need to invest in / focus on products with a higher income elasticity of demand if they want to increase total profits

12. PeS – what is the significance of an elastic or inelastic S? Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price. Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price. When supply is elastic, producers can increase production without a rise in cost or a time delay When supply is elastic, producers can increase production without a rise in cost or a time delay When supply is inelastic, firms find it hard to change their production levels in a given time period When supply is inelastic, firms find it hard to change their production levels in a given time period

13. What Determines Supply Elasticity? Factor substitution possibilities Factor substitution possibilities Spare production capacity available Spare production capacity available Stocks (inventories) available to meet demand Stocks (inventories) available to meet demand The time frame allowed (Short run (inelastic supply) Long run (elastic supply)) The time frame allowed (Short run (inelastic supply) Long run (elastic supply)) Artificial limits on supply Artificial limits on supply

14. What does Cross elasticity measure? Cross price elasticity (CPed) measures the responsiveness of demand for good X following a change in the price of good Y (a related good) Cross price elasticity (CPed) measures the responsiveness of demand for good X following a change in the price of good Y (a related good)

15. CPeD shows substitutes and complements… so which is which? positive or negative? Substitutes: With substitute goods such as brands of cereal an increase in the price of one good will lead to an increase in demand for the rival product. Cross price elasticity will be positive Substitutes: With substitute goods such as brands of cereal an increase in the price of one good will lead to an increase in demand for the rival product. Cross price elasticity will be positive Complements: With goods that are in complementary demand when there is a fall in the price of e.g. DVD players we expect to see more DVD players bought, leading to an expansion in market demand for DVD videos. The cross price elasticity of demand for two complements is negative Complements: With goods that are in complementary demand when there is a fall in the price of e.g. DVD players we expect to see more DVD players bought, leading to an expansion in market demand for DVD videos. The cross price elasticity of demand for two complements is negative

16. Cobweb diagram Why does the govt intervene for consumers and for producers in these situations….? Why does the govt intervene for consumers and for producers in these situations….?

17. BUFFER STOCKS - what is it? Can you draw the diagram??? Can you draw the diagram??? And label clearly… And label clearly…

18. Monopoly D diagram – do you know what it means?

19. Monopolies use barriers to entry to protect their position – what are they? Patents - Patents are government enforced property rights to prevent the entry of rivals. They are generally valid for 17-20 years and give the owner an exclusive right to prevent others from using patented products, inventions, or processes. Patents - Patents are government enforced property rights to prevent the entry of rivals. They are generally valid for 17-20 years and give the owner an exclusive right to prevent others from using patented products, inventions, or processes. Vertical Integration - Control over supplies and distribution can be important. For example many major oil companies are fully vertically integrated. They control, oil extraction refining and retail outlets maintain their market power. Vertical Integration - Control over supplies and distribution can be important. For example many major oil companies are fully vertically integrated. They control, oil extraction refining and retail outlets maintain their market power. Predatory Pricing - Firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss. A high profile case came to a head in 1999 when the Office of Fair Trading found News International guilty of adopting predatory pricing policies in a bid to reduce competition in the market for broadsheet newspapers. Predatory Pricing - Firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss. A high profile case came to a head in 1999 when the Office of Fair Trading found News International guilty of adopting predatory pricing policies in a bid to reduce competition in the market for broadsheet newspapers. Advertising and Marketing - Developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive. Advertising can cause an outward shift of the demand curve and also make demand less sensitive to changes in price Advertising and Marketing - Developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive. Advertising can cause an outward shift of the demand curve and also make demand less sensitive to changes in price Brand Proliferation - In many industries multi-product firms engaging in brand proliferation can give a false appearance of competition to the consumer and disguises from consumers the actual degree of concentration within the industry. This is certainly true in markets such as detergents, confectionery and household goods – it is an essential part of non-price competition. Brand Proliferation - In many industries multi-product firms engaging in brand proliferation can give a false appearance of competition to the consumer and disguises from consumers the actual degree of concentration within the industry. This is certainly true in markets such as detergents, confectionery and household goods – it is an essential part of non-price competition.

20. Why are monopolies bad? Economic Case against Monopoly Economic Case against Monopoly A monopolist is able to enjoy and exploit some power over the setting of prices or output. The monopolist cannot, however, charge a price that the consumers in the market will not bear! In this sense, the elasticity of the demand curve acts as a constraint on the pricing behaviour of the monopolist. A monopolist is able to enjoy and exploit some power over the setting of prices or output. The monopolist cannot, however, charge a price that the consumers in the market will not bear! In this sense, the elasticity of the demand curve acts as a constraint on the pricing behaviour of the monopolist. The main case against a monopoly is that these businesses can earn higher than average profits at the expense of allocative efficiency. The main case against a monopoly is that these businesses can earn higher than average profits at the expense of allocative efficiency. The monopolist is seeking to extract a price from consumers that is above the cost of resources used in making the product. The monopolist is seeking to extract a price from consumers that is above the cost of resources used in making the product. Consumers’ needs and wants are not being satisfied, as the product is being under-consumed. Consumer sovereignty has been replaced by producer sovereignty. Consumers’ needs and wants are not being satisfied, as the product is being under-consumed. Consumer sovereignty has been replaced by producer sovereignty.

21. What is meant by increasing returns of scale? Increasing returns to scale Increasing returns to scale When the % change in output > % change in inputs When the % change in output > % change in inputs E.g. a 30% rise in factor inputs leads to a 50% rise in output E.g. a 30% rise in factor inputs leads to a 50% rise in output Long run average total cost will be falling Long run average total cost will be falling

22. So what factors influence economies of scale? Technical Economies of Scale Technical Economies of Scale The Law of Increased Dimensions The Law of Increased Dimensions Economies of linked processes Economies of linked processes Large-scale indivisible units of capital machinery Large-scale indivisible units of capital machinery Specialisation and Division of Labour Specialisation and Division of Labour Marketing Economies Marketing Economies Risk-Bearing Economies (lower risks) Risk-Bearing Economies (lower risks) Managerial Economies Managerial Economies Learning Economies Learning Economies Financial Economies Financial Economies

23. Draw an economies of scale diagram… Show 3 SRAC curves to the optimum productive efficiency point and another SRAC which illustrates diseconomies of scale. Show 3 SRAC curves to the optimum productive efficiency point and another SRAC which illustrates diseconomies of scale. Clearly label the LRAC curve as well… Clearly label the LRAC curve as well… Next slide has the answer… Next slide has the answer…

24. Costs Output (Q) SRAC1 SRAC2 SRAC3 Q1 Q2Q3 AC1 AC2 AC3 LRAC ILLUSTRATING ECONOMIES AND DISECONOMIES OF SCALE Productive efficiency in the long run is achieved when output is produced at the bottom of the long run average cost curve