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Values unadjusted for inflation are called nominal values. Adujusted ones are real values or at constant prices. Positive Econonmics is the scientific or objective study of the subject. IT is c oncerned with finding out how economies and markets actaully work Positive statements are statmenets about econonmics which can be proven to be tr ue or false.They can be supported or refuted by evidence. Normiative Econonmics is concerned with value judgements.IT deals with the study of and presentation of policy prescriptions about econonmics. Normative statements are statements which cannot be supported or refuted.They ar e opinions about how economies and markets should work Thoeris which gain universal acceptance are often called LAWS In econonmics,equilibrium can be described as a point when expectations are bein g realised and where no plans are being frustrated.For instance,int the model of demand and supply, equilibrium price is achieved when the planned quantity that buyers wish to purchase is qual to the planned quantity that sellers wish to se ll Dynamic models contains time as one of its variables while a static model does n ot General models contain far more variables than a partial model All static models are equilibrium models because they deal with equilibrium posi tions In a market economy, the government has a duty to maintain stable prices and government spending should be confined to the provision of public goods

The condition of which everything else is held to be the same is called the cete ris paribus condition The demand cursve shows the qunatity that is demanded at any give price The demand curve shows effective demand, it shows how much would be bought(how m uch consumers can afford to buy and would buy) at any give price and not how muc h buyers would like to buy if they had unlimited resources The difference between the calue to buyers and what they actually pay is called CONSUMER SURPLUS Supply in econonmics is defined as the quantity of goods that sellersl are preap red to sell at any given price over a period of time A supply curve shows the quntity that wil be supplied over a period of time at a ny given price Fall in qunatity supplied is a contraction of supply When ceteris paribus condition is not fulfilled when a supply curve is drawn, se veral conditions may affect the supply curve including costs of production, tech nology, the prices of other good, goals of sellers, government legislation, expe ctations of future evets , the weather and producer cartels The producer surplus is the difference between the market price which the firm r eceives and the price at which it is prepared to supply The price of which the supply and demand curves meet is known as the equilibrium price,also, quite funnily,know as the market-clearing price because all goods o n the market is being supplied and demanded,therefore there are no excess demand or excess supply It is wrong to assum that the equilibrium price is either the current market pri ce or the price towards which the market moves These pressures which force the markets towards an equilibrium point are often c alled free market forces Equilibrium is unlikely to the be the most desirable price in the market,the mos t desirable price maybe the one that leads to the greatest economic eifficiency or the one which leads to greatest equity Soem goodsm known as complemets are in joint demand. This means that, in demandi ng one good, a consumer will also be likely to demand another good A substitute is a good which can be replaced by another good.If two goods are su bstitutes for each other, they are said to be in competitive demand Mnay goods are demanded only because they are needed for the productions of othe r goods. The demand for these goods is said to be a derived demand A good is said to be in compostie demand when it is demanded for two or more dis tince uses.FOr instance, milk may be used for yoghurt,for cheese making, for but ter or for drinking Economis theory predicts that an increase in demand for one composite good will lead to a fall in supply for another A good is in joint supply with another good when one good is supplied for two di

fferent purposes.For instance,cows are supplied for both beef and leather. An oi l well may give both oil and gas Economic theory suggests that an increase in demand for one good in joint supply will lead to an increase in its price.This lead to an increase in the quantity supplied.The supply of the other good therefore increases, leading to a fall in its price. Elastiticity is a measure of just how much the qunatity demanded will be affecte d by a change in price or income Price elasticity of demand-the responsiveness of changes in quantitty demanded t o changes in price-is calculated by using the formula: percentage change in quantity demanded ___________________________________________ percentage change in price Price elasiticity of demand is also called own price elasticity of demand to dis tinguish from cross price elasticity of demand which measures the responsiveness of quantity demanded to changes in the price of another good percentage change= (absolute change)/(orginal value) * 100% so assuming that the absolute change is demanded Q is denoted by dQ, and the abs olute change of price P is dP, then price elasticity of demand can be calculated by

P ___ Q

dQ * ___ dP

Demand is price elastic if the value of elasticity is greater than one Demand is price inelastic if the value of elasticity is less than one,and demand is said to be infinitely inelastic if the value of elasticity is zero(i.e. a c hange in price would have no effect on quantity demanded) Demand is of unitary elasticity if the value of elasticity is exactly 1 The availaility of substitues and time are two factors in particular that determ ines the price elasticity of demand The better the substitutes for a product, the higher the price elasticity of dem and will tend to be The longer the peroid of time, the more price elastic is the demand for a produc t The demand for a good will change if there is a change in consumers's income, in

come elasticity of demand is a measure of that change whcih is calculated by percentage change in quantity demanded ________________________________________ percentage change in income and Y dQ ___ * ___ Q or dQ Y ___ * ___ Q dY dY

Cross price elsticity of demand measures the proportionate response of the quant ity demanded of one good to the proportionate change in the price of another,the formula of which is percentage chang in qunatity demanded of good X _____________________________________________________ percentage change in price of another good Y Two goods which are substitutes will have a positive cross elasticity.An increas e in the price of one good,such as gas, leads to an incrase in the quntity deman ded of a substitute as electricity. Two goods which are complemets will have a negatice cross elasticity. The cross elasticity of two goods which have little relationship to each other w ould be zero Py dQx ____ * ____ Qx dPy

The responsiveness of qunatity supplied to changes in price can also be measured ,this is called price elasticity of supply percentage change in qunatity supplied ____________________________________________ percentage change in price

Q is qunatity, P is price P dQ ___ * ___ Q dP

Th two factors which determin the elasticity of supply is the availlability of s ubstitutes and time

Total expenditure = quantity purchased * price If the percentage change in price is larger than the percentage change in quanti ty demanded(i.e elasticity is less than 1, or inelastic),the expenditure will rise when prices rise, and the opposite hold true It would be reasonable to assume that consumers will incrase their demand for mo st goods when their income increases,goods for shich this is the case are called NORMAL GOODS An increase in income will result in a fall in demand for other goods. These goo ds are called INFERIOR GOODS.There would be a fall because the customer would pu rchase better, more expensive product which are previously unavailble to them A good could be both of above depending on the level of income A normal good will always have a postive income elasticity because quantity dema nded and income either both increase or both decrease A inferior good , ohwever, will always have a negative elasticity because the si gns on the top and bottom of the formuala will always be opposite Substitution effect.If the price a good rises, consumers will buy less of that g ood and more of others because it is now realtively more expensive than other go ods.If hte price ofa good falls, consumers will buy more of that good and less of others.These changes in quantity demanded solely due to the relative change i n prices are known as the substitution effect of a price change Income effect. If the price of a good rises, the real income of consumers will f all.They will not be able to buy the same basket of goods and services as before . Consumers can react ot this fall in real income in one of two ways.If the good is an inferior good, they will buy more of that good. These changes in qunantit y demanded caused by a change in real income are known as the income effect of h te price change For a normaal good the substitution effect and the income effect both work For a inferior good, the subsitution effect outweighs the income effect. A Giffen good is a special type of inferior good which the income effect takes p recedence Demand curve are usually downward sloping, but there are exceptions, such as Giffen Goods Goods with snob appeal(Velben goods)

Specualtive goods

Quality goods

An indirect tax is a tax on expenditure.Teh two major indirect taxes in the UK a re VAT and excise duties VAT is a nexample of an AD VALOREM tax. the tax leved incraes in proportion to t he value of the tax base. Excise duties on the other hand are an example of a SPECIFIC or UNIT tax. The am ount of tax levied does not change with the calue of the ogoods but with the amo unt or volume of the goods purchased A SUBSIDY is a grant given by government to encourage the production or consumpt ion of a particular good or service The incidence of tax is unlikely to fall totally on consumers The impostition of an ad valorem tax will lead to an upwars shift in the supply curve.However, the higher the price, the greater will be the amount of the tax.H ence the shift will not be parralled, but instead, the gap would increase along the line The extent to which the tax incidence falls on consumers rather than producers d epends upon the elasticities of demand and supply In situations where either the supply curve is perfectly elastic or the demand c urve is perfectly inelastic,the vertical shift in the supply curve is identical to the final price rise, therefore, all of the tax will be paid by consumers,if the conditions are reversed, then the tax would be bore by the producers alone If demand were perfectly elastic, the imposition of an indirect tax would lead o t quantity demnaded falling to zero and tax revenue being zero.At the oppositve extreme, if demand were perfectly inelastic,consumers would buy the same quantit y after imposition of the tax as before.Hence revenue will b e equal to the tax per unit times the quantity demanded before impostiion. If the price elasticity of demand lies between these two extrems, the imposition of a tax will lead to a fall in quantity demanded,. The higher the elasticity, the larger will be the f all in qunaitty demanded and hence the lower will be the tax revenue received by goveenment. Hence, it is no coincidence that in the UK excise duties are placed on alcohol, tobacco and petrol, all of which are realatively price inelastic The same analysis can be applied to subsidies,In general,subsidies tend to be gi ve where the policy objective is to reduce the price of the good.The largest fal l in price will occur when either demand is highly inelastic or supply is highly elastic. If demand is very elastic or supply very inelastic, there will be very little , if any change, in price following the granting of a subisidy, this is because producers will not pass on the subsidy to consumers. They will absorb th e subsidy , which will allow them to increase their profits The labour market is a factor market, it is market for one of the factors of pro

duction: land , labour and captial.Labour is a derived demand One factor which influences the demand for labour is the price of labour.The hig her the wage rate, the less will be demanded Other factors include, the price of other factors of production, the price of o ther workers, new technology,increased efficiency,demand for the product There are also factors which affect the SUPPLY OF LABOUR, which includes, the na tural population changes,migration,income tax and National Insurance contributio ns,welfare benefits,government labour regulations,trade unions and minimum wage

Price has three important functions in a market Rationing Signalling Incentive

Productive efficiency exists when production is achieved at lowest cost Productive efficiency will only exist if there is technical efficiency.Technical efficicency exists if a given quantity of outpur is produced with the minimum n umber of inputs Allocative or economic efficiency is concerned with whether resources are used t o produce the goods and services that consumers wish to buy There is productive efficiency in an economy only if it is operative on the PPF Factors that could cause market failure: Lack of competition in a market extrenalities on failure factor immobility inequality

missing markets informati

Externalities arise when private costs and benefits are different from social co sts and benefits A private cost is the cost of an acticity to an individual econonmic unit,such a s a consumer or a firm A social cost is the cost of an activity not just to the individual economic uni ty which creates the cost ,but to the rest of society as well If social cost is greater than pricate cost, then a negative externality or exte rnal cost is said to exist if social benefit is greater than pricate benefit, a positive externality or ext ernal benefit is said to exist Production externalities occur when the social cost of production is greater tha n the pricate cost of production

A pricate good is one where consumption by one person results in the good not be ing available for consumption by another A few goods are PUBLIC GOODS or PURE PUBLIC GOODS, theese goods possess two char acteristics:non-rivalry(non-diminshability or non-exhaustibility), non-excludabi lity A merit good is one which is underprocided by the market mechanism. One reason f or underprocision is that indiciduals lack perfect information and find it diffi cult to make rational decisions when costs occur today but benefits received onl y come in,say, thirty years time.Another reason is because there are significant positive externalities present A DEMERIT GOOD is one which is overprocided by the market mechanism:drugs are on e example In an efficient market, there is SYMMETRIC INFORMATION.One reason why markets fa il is because there is ASYMMETRIC INFORMATION in the market Principal-agent problem: occurs when the goals of principals, those standing to gain or lose from a decision,are eifferent from agents, those making decisions o n behalf of the principal Buffer stock scheme:a scheme whereby an organisation buys and sells in the open market so as to maintain a minimum price in the market for a product Markets can fail.They may underprovide public and merit goods.They may lead to e xternalities in production and consumption.There may be wild fluctuations in pri ce which harm both producers and consumers.One response is for governments to in tervene to correct these market failures.However,if markets can fail,so too can government. Government failure's cause can include:Inadequate information,conflicting object ives,administrative costs, market distortions Demand and supply infulences combine to bring about large fluctuations in the pr ice of commodities.Governments and other bodies have often reacted to this situa tion by intervening in teh market place.One way to do this is to set up a BUFFER STOCK SCHEME which combines elements of both minimum and maxiumum pricing Micromeconomics is teh study of individual markets within an economy,in contrast ,macroeconomics is concerned with the study of the economy as a whole

Recession - a period when growth in output falls or becomes negative.The technic al definition now used by goverments is that a recession occurs when growth in o utput is negative for two successive quarters

National ouput(O) This is the value of the flow of goods and services from firms to households National expenditure(E) This is the value of spending by households on goods and services,

National income (Y0 This is the value of income paid by firms to houholds in ret urn for land,labour and capital An injection into the circular flow is spending which does not come from househo lds A WITHDRAWAL or LEAKAGE from the circular flow is psending whic hdoes not flow b ack from households to firms Output= f ( land, labour,capital,technical progress, efficiency) Businiess or economic or trade cycle - regular fluctuations in the level of econ omic activity around the productive potential of the economy.IN business cycles, the economy veers from recession,when it is operating well below its productive potential,to booms when it is likely to be at or even above its productive poten tial Output gap - the difference between the actual level of DGP and the productive p otential of the economy.There is a positive output gap whe nactual GDP is above the productive potential of the economy and it is in boom.There is a negative ou tput gap when actual GDP is below the productive potential of the economy. The economics of happiness - investigates exactly what contributes to wlfare and sttempts to put values on some of these factors Acitivity or particpation rates - the percentage or proportion of any given popu ltaion in the labour force Cyclical,demand-dericient or Keynesian unemployment - when there is insufficient demand in the economy for all workers who wish to work at current wage rates to obtain a job Frictinal unemployment - when workers are unemployed for short lengths of time b etween jobs Net migration - immigration minus emigration Seasonal unemployment - when workers are unemployed at certain times of the year , such as building workers or agricultural workers in winter The balance of payments account is a record of all financial dealings over a per iod of time between economic agents of one country and all other countries, it can be split into two components: the current account where payments for the purchase and sale of goods and servic es are recorded; the capital and financial accounts where flows of money associated with saving,i nvestment ,speculation and currency stabulisation are recorded Free Rider Problem Definition of The Free Rider Problem. This occurs when people can enjoy a good s ervice without paying anything (or making a small contribution less than their b enefit.) If enough people can enjoy a good without paying for the cost then ther e is a danger that, in a free market, the good will be under-provided or not pro vided at all.

More on Definition of Free Rider Problem Public Good and a Free Rider Problem A public good has a classic free rider problem because the good has two characte ristics: Non-excludability C cant stop anyone from consuming good Non-rivalry C benefiting from good or service does not reduce the amount availabl e to others. Therefore, public goods like national defence, street lighting, beautiful garden s may not be provided in a free market. A free rider problem is also said to occur when there is overconsumption of shar ed resources. C Also known as The Tragedy of the Commons. For example, a fisherm an may take a high catch and free ride on other fishermen who are more concerned to preserve sustainable fish stocks. Solutions to Free Rider Problem 1. Tax. One solution is to treat the many beneficiaries as one consumer and then divide the cost equally. For example, UK national defence costs 31bn. This results in hig her taxes for UK taxpayers. Therefore the cost of national defence is paid indir ectly by UK taxpayers. This ensures everyone who benefits from the service pays towards the cost. Some may dislike this approach e.g. some anti-war protesters h ave tried to withhold a certain % of their tax arguing they dont want to make cont ributions to illegal wars. But, most people accept paying taxes. 2. Appealing To Peoples Altruism. For some goods like visiting a garden, the garden may be able to raise funds by asking for donations if you enjoy your visit. There will be probably be many free riders who dont make donation. But, enough people may be willing to make a donation to fund the cost of the garden / museum. This solution is only effective for ser vices which have relatively low cost. People dont mind paying 4 if others free ride. B ut, if there was a voluntary donation of 1,000 for national defence, would anyone pay it? 3. Make A Public Good private. A beautiful garden could be seen as a public good. However, if you erect a high barrier and limit entrance to those willing to pay, it loses its feature as a pu blic good and becomes a private good. 4. Legislation To deal with the free rider problem associated with overconsumption of common re sources. The government have tried various options such as: Quotes C difficult to implement and difficult to monitor Legislation C on size of net size, number of fishing vessels Compensation to move away from fishing.

5. Provision of public good also helps to solve this problem

External costs Definition of External costs An external costs occurs when producing or consuming a good or service imposes a cost upon a third party. If there are external costs in consuming a good (negative externalities), the so cial cost will be greater than the private cost. The existence of external costs can lead to market failure. This is because the free market generally ignores the existence of external costs. Example of External Cost Driving a car imposes a private cost on the driver (cost of petrol, tax and buyi ng car). However, driving a car creates costs to other people in society. These can include: Greater congestion and slower journey times for other drivers. Cause of death for pedestrians, cyclists and other road users. Pollution, health related problems. Noise pollution. Example of Production External Cost Producing chemicals can cause pollution to air and water.

This diagram shows how the existence of external costs will cause the social mar ginal cost to be greater than the private marginal cost. Therefore, in a free ma rket there will be overconsumption of the good (Q1) . Social efficiency will occ ur at Q2 where SMC = SMB

Average propensity to consumer-the proportion of total income spent Average propensity to save0the proportion of a total income which is saved Consumption- total expenditure by households on goods and services over a period of time Consumption function - the relationship between the consumption of households an d the factors which determine it Disposable income - -household income over a period of time including state bene fits, less direct taxes Durable goods- goods which are consumed over a long period of time,such as a tel evision set or a car Marginal propensity to consume-the proportion of a change in income which is spe nt Agrregate demand is the total of all demands or expenditures in the economy at a

ny given price AD=(Consumption)+(Investment)+(Government spending)+(Exports minus imports)

The macroeconomic supply curve is called the AGGREGATE SUPPLY CURVE Long run aggregate supply curve-the aggregtae supply curve which auumes that wag e rates tare variable,both upward and downards.Classical or supply side economis ts assume that wage rates are flexible.Keynesian economists assume that wage rat es maybe"sticky downwards"and thence the economy may operate at less than full e mployment even in the long run