Economics 101

Grade 12 Chapter 1 Summary With The Economics 101. Circular Flow. (Please tag all your classmates and share o your timeline)

*Economics* is the study of how individuals, businesses, government and other organisations choose to use the scarce resources in order to satisfy their needs and wants in the most effective and efficient manner.

*Macroeconomics* is the study of the economy as a whole, it look at the aggregate demand and supply.

*Microeconomics* is the study of the decisions taken by individual participants in the economy.

*Ceteris peribus* is applied in Microeconomics and it is when all other things remain the same or unchanged.

*Circular flow* is a model that shows how the economy works and the relationship between production, income and expenditure.

*4 participants in the circular flow*
- Households
- Businesses
- Government
- Foreign Sector

*Open and closed circular flow*

*2 flow*
- Real flow
- Money flow

*4 markets in the circular flow*.
- Factor market
- Product market
- Financial market (Money and Capital market)
- Foreign Exchange Market

*Injection and leakages*
*Injections*
- Investments (By businesses)
- Government spending
- Exports income

*Leakages*
- Savings
- Tax
- Import payments

*Autonomous consumption* means people do spend even if they have zero income. (They can spend from inheritance, savings,e.t.c)

*Induced consumption* means spending by people which is dependent on income.

*National Accounts* is the accounting record of the country's total production, income and expenditure.

*Gross Domestic Product (GDP)*
- It is the total value of *all final goods and services* produced within the *boundaries of the country* in a given period of time, which is usually a year.

*Gross National Product* is the value of all final goods and services produced by the factor of production of the country irrespective of the location.

*3 methods to calculate GDP or National Accounts.* *(USE CLEVER ECONOMICS TO PRACTICE THESE METHODS)*

1. Production Method or GDP(P)
*Everything in this method is production or goods produced*

2. Income Method or GDP (I)
*Everything in this method is money earned*

3. Expenditure Method or GDP (E)
- *This method is all about the money spent by different participants*

*Know how to convert from basic prices, to market prices and to GNI*. Check Clever Economics.

*The System of National Accounts (SNA)* is a set of international guidelines for the development of economic accounts and for reporting such statistics to international organisations in a manner comparable across countries.

*Multiplier* shows how one person's spending becomes another person's income which then lead to an increase in national income.

*Multiplier effect* shows how an increase in *spending* (by businesses or households) can lead to an increase in *National income.*

*Marginal propensity to save (MPS)* is the extent to which additional income is *saved.*

*Marginal propensity to consume (MPC)* is the extent to which additional income is *spent*.

All leakages leads to a decrease in the multiplier (national income decreases) and all injections leads to an increase in the multiplier (National income increases).

If MPC is bigger it will mean the people are spending more or there is more investments which in turn lead to a big multiplier (more national income)

If MPS is big then the multiplier will decrease as more money will be saved or leak from the economy which will then reduce the multiplier and National income.

*Why is the multiplier important?*
- It helps in determining the investments needed to grow our economy or National income.
- It helps to analyse the performance of the economy as it acts as a leading indicator which tells us on where the economy is headed.

*There are 3 methods to calculate the multiplier*

K= 1/1-MPC
*Used when MPC is given or when you have calculated MPC*
Also used when there is a graph, the number before *Y* represent MPC. E.g. (0.5Y, the 0.5 is MPC)

K = 1/MPS
*Used when you have MPS.*

K = ◇Y/◇J
*Only used when there is a graph*, ◇Y means change in income and ◇J means change in injections.

*If you are given a multiplier scenario you will have to find the value of MPC or MPS first*. MPC + MPS = 1 and this means that the value for MPC should always be between 0.1 and 0.9.

*Possible essays in order of priority on Thursday, any essay can still appear in your paper, you did ask on how I rate them, this is how I rate them*.

POSSIBLE ESSAYS FOR QUESTION 5
(Only 1 essay out of these will be on your paper)

4. Examine the various equilibrium positions of the perfect competition with the aid of graphs;
- Economic Profit
- Economic Loss
- Normal Profit

6. Discuss the monopoly in detail (with/without the aid of graphs):
- Concept
- Characteristics
- Economic profit, economic loss (short run)
- Economic profit (Long-run )

5. Examine the oligopoly in detail:
- Concept
- Characteristics
- Kinked-demand curve

3. *Compare and contrast any TWO types of market structures (perfect market structures to imperfect/imperfect to imperfect)* in detail in terms of the following.
- Number of businesses
- Nature of product
- Entrance
- Control over prices
- Information
- Examples
- Demand curve
- Economic profit/loss
- Decision-making
- Collusion
- Productive/Technical efficiency
- Allocative efficiency

2. *Discuss in detail how the following factors lead to the misallocation failures of resources in the market(Causes of market failure)*:
- Externalities
- Missing markets
- Imperfect competition
- Lack of information
- Immobility of factors of production
- Imperfect distribution of income and wealth

1. *Discuss in detail state or government intervention as a consequence of market failures, with the aid of relevant graphs*
- Direct control
- Imperfect markets
- Minimum wages
- Maximum prices
- Minimum prices
- Taxes and subsidies
- Subsidies on goods and services
- Redistribution of wealth
- Government involvement in production
*(This essay is super easy to study on the notes I gave you)*

POSSIBLE ESSAYS FOR QUESTION 6
(Only one essay out of these 6 will be on your paper)

1. *Discuss in detail the consequences of inflation.*

2. *Discuss in detail the measures to combat demand-pull and/or cost-push inflation.*

3. *Examine in detail the benefits of tourism.*

4. Examine in detail the effects of tourism.

5. Discuss in detail how the government can ensure sustainable development.

6. Discuss in detail the following problems and international measures taken to ensure sustainable development.

The end!

*Please make sure that you take no chances in essays*

Most Said this essay is also important for Thursday and I should update it, so I now give it to you. Discuss in detail state intervention as a consequence of market failure with the aid of graphs.

Some of you asked for this question 5 essay and another one for Thursday, there you go, I will post another one later. (All question 6 possible essays were posted on Sunday)

THE CAUSES OF MARKET FAILURES. (Discuss in detail how the following factors lead to the misallocation of resources in the market)

INTRODUCTION
- Market failure is when the free market fails to allocate the resources efficiently, the allocation of resources is not pareto efficient.

MAIN PART
THE CAUSES OF MARKET FAILURE IN DETAIL

1. EXTERNALITIES
-It is a cost of benefit that affects a party who was not part of the action or transaction. Two types:
1.1 Positive externality
-It is when one party benefit from the action of other parties even when they were not involved.
-The goods with positive externality are underproduced because the benefit is not included in the market price.
-Example includes, street lights and education.

1.2 Negative externality
-The costs suffered by someone who was not involved in the activity affecting them.
-With negative externality the goods are over-produced because the costs are not included in the market price.
-Examples includes air pollution caused by firms producing and the smoke from ci******es.

1.3. Social costs and Social benefits.

a) Private cost
-Internal costs are also known as private costs.
-They are the usual costs that producers incur when they buy intermediate goods and services or capital.

b) Private benefits
-These benefits accrue to the business that produce the goods.
- This is when the business received or earn profit.

c) Social costs
-This is the costs of goods or services to those who create them and to society at large.

d) Social Benefits
-The total benefits to the producer and also to the community in which the business operates.

2. MISSING MARKETS
-Free market does not produce certain goods because they have less demand which will yield less profits for the business.
- These includes;

2.1. Public goods/Community goods.
- *Non-rivalry* - which means the consumption by one person does not in any way reduce the consumption by another person.
-E.g. a lighthouse or street light.
- *Non-excludability* -The consumption of a good cannot be confined to those who have paid for it, so there are free-riders.

2.2. Collective goods
-It is possible to exclude free riders by levying a fee.
-Examples can be parks and toll roads.

2.3. Merit goods
-Highly desirable for general welfare, but not highly rated by the market.
-E.g. health care, education and safety.
-If people had to pay the market price for them, very little would be consumed.
-The market fails because the market produces less than the desired quantity.

2.4 Demerit goods.
-These are over-consumed goods e.g. ci******es.
-Thus more of the good is produced than is socially desirable.
-The government bans or reduces consumption of these products through sin taxes.

3. Imperfect competition
-Competition in market economies is limited by the power of certain producers such as Oligopolies and Monopoly.
-There is barriers to entry in this markets because of a lack of capital
and the controlling of resources.
-The imperfect market doesn’t allow for price negotiations.
-Advertising is used to promote producer sovereignty (dominance),
which encourages consumers to buy existing products and allows
producers to delay new products from entering the market until it
is in their own interest.
-Most businesses have had the technology to
produce long-life light bulbs for many years but have chosen not to launch them in the market.

4. Lack of information
-Sometimes the different stakeholders in the economy lacks information to make rational decisions.
-This results in resources not being allocated efficiently.

Consumers
-To maximise their benefits, consumers need detailed
information about goods and services.
-Although technology offers
this to the consumer, they obviously do have perfect information.

Workers
-Are often unaware of job opportunities and they stay were they are not productive.

Entrepreneurs
-Lack of information on costs, availability and and the best production techniques to produce more goods and services.

5. Immobility of factors of production
-Labour takes time to move from one area to another as they need to serve a notice.
-The supply of skilled labour cannot be increased easily because of the time
it takes to be trained or educated.
-Physical capital, like factory buildings or infrastructure such as telephone lines cannot be reallocated easily.
-Structural changes like a change from producing plastic packets to paper packets requires a change in labourers’ skills which takes time to change.

6. Imperfect distribution of income and wealth.

*Income distribution*
-The market system is neutral on issues of
income distribution.

*Discrimination*
-Distorts earnings for women and minority groups,
disabled persons and people subject to illness and incapacity.
-The market produces goods and services only for those who can afford it.
-This leads to some people having too many goods while others have
too few goods.
-The difference in income occurs because there is a difference in market power and unequal educational opportunities.
-The market can be efficient but not necessarily fair or
equitable.

ADDITIONAL PART
-Out of 10 always and only known to the examiners.

CONCLUSION
-The government always intervene in the market to correct market failure through institutions such as competition Commission which have the mandate to ensure that prices are low and hence enforce competition.