Harry Sedgwick Teacher:

Allan Perry
Subject: economics

Introduction to economics:
- Socialscience, laws, variables (humans)
- Studyof prices - man earning a living
- Modern economics - scarcity and choice (the economic problem
- Scarce- resources relative to demand
- Wants - limited
- Income - wages-money (a constant flow) wealth - what you own (static
income)
- can't get rich by printing money! E.g. Germany failed economy
Scarcity and choice is the main economic problem

Factors of production:
1. Land - (all natural resources) gifts of nature. Prices rise by demand and
supply. BRIC (Brazil, Russia, India, china)

2. Capital - money to an everyday person

- Tools of production for businesses. 'Wealth set aside to produce
further wealth' (factory robots, tills + Lorries etc)
- Capital goods are not required for its own sake; it’s there to provide
for other goods (consumer)
- Consumer goods are produced/distributed by capital goods ^
- A durable consumer good is one that you receive satisfaction from
over a long period of time. A ' white durable good' is any white good e.g.
washing machines, fridges, microwaves etc
- Social capital - schools, hospitals, public services
- Infra structure - roads, railways, communication etc. often owned
by the government/state.
- Countries with good, rich governments have good standards of
living and have high capital - they have quality and quantity.
- Investments - if you are poor it’s very hard to put resources aside
and become richer - hard to invest in third-world-countries.

3. Opportunity cost - the alternative forgone (do without). E.g. if a

customer wanted X and Y products but he had to choose between them both he
would miss out on one product (scarcity and choice). This links to our limited
resources, in this case money. Time is also an opportunity cost.
- Labour - 'all human effort whether by hand or brain (physical or
mental) employed in the productive process?'
- Labourproductivity - output per head (what and how much product
is being produced and how quickly.
- Specialization of labour - people do one particular job (you can
specialize as a heart surgeon)
- Person power planning (man power) - enough people with the right
skills. Making sure the organization does this is 'person power planning' (team
working)
 4. Enterprise - (organization of the entrepreneur e.g. virgin)
- General - capital intensive industry = workers/machine/capital
- Labour intensive = workers are of cost - 90% - e.g.
nursing home
- Example - a cave person makes a bowl out of mud and he goes to
the forest and gathers berries and nuts for the bowl
- Bowlof mud=capital - berries=labour - forest=land

Positive and normative economics-

- Positive economics - much more scientific (positive statements)
- Empiricalevidence - evidence from observation
E.G. raising the price of alcohol will lead to a fall of purchases.
- Normative economics - personal opinions - not from empirical
evidence E.G the government should raise the price of alcohol to deter
consumption.

Industrial structure of industry -

- Primarysector - extraction of raw materials E.G farming, Fishing,
forestry - extractive industries
- Secondary sector - manufacturing - finished products - E.G steel box
- Semi finished products - steel
plate
- Tertiary sector - all service industries e.g. retailing, teaching
distribution
- Example of sectors - A. a farmer produces straw
(Primarysector) costs: 50p
B. a person weaves the straw to manufacture
baskets (secondary sector) costs: £2.50
C. a retailer prices the baskets, displays and
sells them (tertiary sector) costs: £4.00
- Conglomerate - a company with lots of interest with lots of sections
e.g. virgin, Microsoft
- Changes in the industrial sectors -
-primary (30 years ago) 4% (Present) 2%
- Secondary (30 years ago) 25% (Present) 15%
- Tertiary (30 years ago) 71% (Present) 82%

- Why? - Because of the expansion of BRIC, they are manufacturing

quality goods and WTO gives free-trade so it’s better to buy overbroad.
- Technology has got better over the years so less people are
employed (less primary)
- imports making less of our own (less primary)
- Much more leisure and entertainment (more tertiary)
- Many personal services hard to transport (more tertiary)

Different economics systems -

- The FOUR basic economic questions:-
1. WHAT shall be produced? - Resources are scarce and our wants unlimited.
Firms need to allocate resources efficiently as possible. Assumes that producers
are in competition and want to make profit.
- Example:
- Good X: - more popular with customers
- prepared to pay higher prices
- PRICE RISE
- INCREASE PRODUCTION

- Good Y: - less popular with customers

- prepared to pay less
- PRICE FALL
- DECREASE PRODUCTION

- Resources absorbed in good X (consumer sovereignty)

Important! - The Market Economy (price mechanism) - assumes

privatized firms are in competition and producing as efficient as possible. This
involves consumer sovereignty (when consumers send signals to firms and
businesses).
Important! - The Command Economy (command mechanism) -
The state or government controls the produce of all factories (not necessarily
what people need or peoples wants (leisure)) and makes all the decisions.
- CANT GET 100% COMMAND ECON OR 100% MARKET EVER!!!
2. HOW shall it be produced? - Technical problem E.G capital
substitution for labour.
- COSTS are important (you will fail if you produce
bad products in the market economy - you will need to produce EFFICIENT
products) ( in a command economy you can’t be inefficient!!)
3. Whereshall it be produced? - Location- producers must decide
where to produce E.G India cheap UK expensive.
-COSTS - are important too (in command economy
it doesn't matter)
4. For WHOM it shall be produced for? - In a free enterprise
economy the richer you are, the wider range of products isavailable to you. The
government decides if in a command economy.

- HOW, WHAT, WHERE, FOR WHOM is the fundamental economic

problem!!

Points about the market system (free enterprise) economy -

1. ADVANTAGES - freedom of choice!! (Laisser faire) - Privatization

- 'Customer sovereignty' - customers send signals
- Autonomous - it does not cost anything to run (how customers buy
their goods)
- leading to more efficient allocation of resources, and also more
efficient use of resources
- produces goods that people want and need and producing them
efficiently.
- INCENTIVES RISKS - dynamic (to gamble more)
- Entrepreneurs - workers competition - to be the best business
 - Disadvantages- freedom of speech - freedom of worship
1. - DISADVANTAGES - growth of product power - threat to consumer
sovereignty
- Though competition is essential - if you get lazy you will be driven
out (your company fails)
- Though competition is essential again - strong producers could
overpower consumers and dictate products etc.
- Monopolies can form from strong producers and become a sole
supplier to people. They can dictate consumers and how much people buy their
products for because they are such a large firm. Many monopolies can join
causing a 'cartel'.
2. - THE UNDER PROVISION OF PUBLIC AND MERIT GOODS - if left to
consumers it would be not necessarily bought which is harmful for the
community, E.G many people are hedonists (people that don’t save their
money) and would not spend money on products like health insurance.
- Publicgoods and services that individuals might be reluctant to buy
E.G emergency services
3. - NEGITIVE EXTERNALITIES - costs that do not appear on the firms
balance sheet.
- Temptation to cut costs makes firms ignore the POLLUTION etc.
4. - COMMERCIAL AND ECONOMIC VIABILITY - E.G a mine is losing 2M
pounds a year this is commercially not viable. However to close the mine it
costs 4M in lost incomes etc.
5.-CAPITAL TRADE CYCLE -

- Last recession in UK finished in 1992, we are in a boom now.

- From 1929-1940s we were in recession because of WW2 etc.

Monopolies -
- Points about monopolies - sole supplier - sole buyer E.G British
oxygen sold all 98% commercial gas (this has been the closest a company has
become to being a monopoly
- Office of fair trading - competition commission helps prevent
monopolies from arising
- TESCO - is a good example of a monopoly - it has supermarket
sales and is now going multinational, this may be because it has 32% of sales
to their advantage in the UK already!
- Any firm with 25% ownership will be investigated by the
competition commission
- Professor Roger Opie claimed - ' whether monopolies are in the
public interest or not, largely it depends on how they choose to behave'
- Disadvantages of monopolies -
- Sir John Harvey Jones is management director of 'imperial
chemicals' has said that this is not in the public interest and that monopolist’s
power is a threat to the food chain (farmers are being driven to poverty -
(exaggeration))
- Monopolies have the power to raise prices and give indifferent
service -
PRICE LEADERSHIP
- Monopolies can join together to form a cartel e.g. banks and give
a bad price e.g. higher the interest price.
- Advantages of monopolies -
- Most of the advantages claimed for monopolies arise because
they tend to be large organizations.
-1. Economies of scale - 'very large firms producing on a mass scale
many well lower than the unit cost of production‘. Because if large firms
produce at lower cost it may cost lower to customers e.g. -

-2. Innovation and research and development - because a

monopolist can often earn average (super normal profits) it can afford
expensive research and development (R+D) and can take risks)
-3. Vision - firms facing intensive competition spend all their time
fire fighting i.e. just surviving on a day to day basis. A monopolist who feels
more secure can have 'vision' i.e. it can devote management time in the long
time interests of the business. Successful UK businesses = UK public interest

Social costs -
- The sum total of all costs internal (balance sheet) and external
(negative externalities). Negative externalities are suffered by society.
POLLUTION, CONGESTION.
- Positive externalities (benefits) - Train Company set up a train
service from Crowhurst to Bexhill

Internal economies if scale -

1. Technical economies - increased dimensions (double Decker bus)
E.g. British steel cut costs by 15% building larger kilns.

- Increased specialization - labour

- Linked processes E.g. Birdseye don’t just
grow their own peas they freeze, package etc. (robot factory)
-superior techniques
2. Marketing economies - E.g. a bicycle for sale for £50 - Friday add cost
£5
6 bicycles for sale for £50 each - still costs £5
(Selling more items at the same time reduces
cost)
3. Buying in bulk - discounts for bulk buyers e.g. 100,000 at a time is
cheaper than buying 1,000 at a time.
4. Financial economies - even the most successful firms have to borrow
money and when borrowing a large amount they get a reduced interest rate
than other small firms.
5. Managerial economies - (early stages of growth) as firms grow you
don’t need more management e.g. more staff stays with 1 manager.
6. Research and development economics - only large firms can afford
expensive research and development.
7. Welfare economics - the large firms can attract the best staff with
superior prospects and conditions of work (wages etc)
8. By-product economics - what is waste for the small firm may be profit
for the larger firm e.g. you’re a small sawmill the amount of sawdust made is a
waste. If you’re a big sawmill then the amount of sawdust made is a profit
-selling 100s of bags to pet shops
9. Diversification - the large firm can produce multi-products
(conglomerates)

Diseconomies of scale -
1. Problems of management - finding people with the skills and talent to
manage a large firm/company.
2. Problems of communications - red tape - excessive rules and
regulations
- passing the buck (passing on
responsibility)
- Problemsof deregulation (giving authority
and
Resources)
- EMPIRE BUILDING - If you are involved in a
small section and you forget about the main company objective. Getting
everyone to work in the right direction
- ^ THIS IS ALL ADDING TO COST!!! ^

3. Industrial relations - strikes bureaucracy (form filling etc)

 Graph to show relation between output +

cost <
- This shows that when you reach the optimum
output OP you can’t produce more products otherwise you will lose money.

Specialization and Exchange -

Specialization of labour - concentrating on a particular job, one aspect
of a particular job.
- Advantages - very skilled
- Many modern products not available without
specialization
- Many sophisticated products produced withthe minimum
of training
- More output per head - workers Become more productive
- Disadvantages- (boring and tedious)
- Vulnerable to change
Specialization of firms -
- Specialization by region (e.g. Sheffield steel)
- Specialization by country (Cuba - cane sugar)
- Modern economy can’t function properly without specialization

Importance of exchange -
- Money needs to be trusted make a good economy
- If too much money and no one trusts money there is barter (goods
exchanged for goods) (if you specialize as a fisherman for instance you
exchange fish for goods - there is a major downside to this)
- Money > oil of commerce

Productivity -
Labour productivity - output per head
What determines productivity? -
High labour productivity where -
1. Degree of specialization (high specialization)
2. Head of education and teaching (good teaching)
3. Social mobility (equal opportunities)
4. Amount and quality of capital (quality equipment)
5. Political stability (good government)
The United Kingdom Mixed Economy -
- All economies are mixed
- We’ve come to the end of a mixed economy and how its substantial
strata sector
- The United Kingdom mixed economy is an attempt to gain the
advantages of the market system but at the same time reduces or minimizes
the disadvantages.

-Ways in which government intervene in the market system -

1. State allocation of resources - (free to user services)
A. NHS - billions of pounds - merit goods
- If the government did not intervene -
- Some people would choose not to make provision
(hedonists)
- Somepeople not wealthy enough
B. education - a country like the UK has got to be competitive
which has a good workforce
C. emergency services - fire, ambulance, police - public goods
D. welfare benefits (cash) - transferring wealth ->incapacity
benefit
- Unemployment
benefits
- Pensions etc
- There is a huge shadow economy (unofficial economy) where
people work cash in hand (without adding tax etc)
E. others - e.g. whole range of help to farmers / deprived areas
etc.

2. Intervention in the market sector - not only does the government

intervene as in the one above but it intervenes to regulate the private sector in
a wide variety of ways
A. employment - minimum wage (EU)
- Contract of employment
- Anti-discriminatory - disabilities, race, age, gender
etc
B. relations between firms - companies acts
- Annual returns
- To protect businesses
- interests charges on late payers
C. protecting consumers - trade descriptions - right descriptions
- Weight and measures - right weight etc
- Quality of goods - good quality
- Credit etc - people told all above ^ and
more
D. monopolies - competition legalizations- to encourage
competition and to counteract monopolies etc
- Regulatorybodies - OFWAT, OFCOM etc to regulate
firms and to put laws in place
Demand, Supply and price -
- Definition of a market - buyers and sellers are in contact and where price
is agreed (haggling) - price mutually good to buyer and seller (houses).
- We are silently haggling with large companies e.g. marks and Spencer
by not buying the item or buying lots of that item.
- In markets there are final goods e.g. normal consumer goods
- A commodity market is the market for industrial goods e.g. coffee
metals etc
- Spot price - is the price presently - future price - is the price in the
future
- Effective demand - not just wanting a good but being willing and able to
pay.

Demand - as price rises demand contracts. As price fall demand rises.

Or more is demanded at a lower price…
Reason= empirical evidence (observation) ‘CETERIS PARIBUS’ (other things
equal)
- The terms expand and subtract to be used when price only is being
considered
- An example
When cod in Hastings equals £1 for a lb then someone will buy
4000lbs
When cod in Hastings equals £2 for a lb then someone will buy
2000lbs
- In diagram 1 we have plotted the demand for cod in Hastings at
different prices - this is planned demand e.g. what people would be willing to
buy at different prices

cod in hastings

4
£ / lb s

1
0 1000 2000 3000 4000

lbs

Series 1

Changing conditions of demand -

- Price is not the only factors that affect demand. We now remove the
‘CETERIS PARIBUS’ conditions - so for example in our market for place in
Hastings we find is affected since the price of cod has doubled. As a result
some cod eaters in Hastings will want to switch to place. As a result we now
find that more place’s are demanded at each of the old prices.
(Place)
 place in hastings (more demanded)

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0 1000 2000 3000 4000 5000

Series 1

Imagine the price of cod had not changed but the local veggie society
launched a campaign against eating meat and fish -
(Place)

place in hastings (less demanded)

4.0

3.5

3.0
2.5

2.0
1.5
1.0
0 500 1000 1500 2000 2500 3000

Series 1

Summary - An increase in demand means more is demanded at each and

every price. A decrease in demand means less is demanded at each and every
price (demand curves shifts to the left)

- Factors causing changes in the conditions of demand -

Changes in the prices of other goods e.g. growth in demand for nuclear
power =rise in the price of fossil fuels. Goods are in joint demand they are
 close substitutes e.g. if the price of ink doubled the demand for fountain
pens would lower.
Changes in the availability of other goods e.g. when petrol was not available
to many people a few years ago then the demand for bicycles rose.
Changes in taste and fashion of other goods e.g. when XBOX360 comes on
the market taste for XBOX declines. The switch to organic foods made the
conventional food declined. Many other examples - food, games, clothes,
cars (hybrid)...
ADVERTISING - to swing people taste in favor of a particular brand and
product
Also to swing people away from a good e.g. cigarettes
Changes in the size of the population e.g. the demand for housing because
the population is rising e.g. 71M. Because the population grows there will be
demand for other goods (above) ^
Changes in the age distribution of the population e.g. AGEING population
so there will be demand for walking sticks than hockey sticks. Grey market -
market that caters for the ageing population.
Changes in real income e.g. UK experienced economic growth for the last 15
years, as living standards improved goods become Inferior - increase in
demand for health, education. E.g. Lowest 10% income groups in UK have
not shared in the increased wealth over last 10 years. E.g. Growth in % of
income enjoyed by many older people and over recent years, Women.
Change in Government policies e.g. campaigns to discourage smoking and
drinking, eating badly (demerit goods) etc.

Supply - as with demand it is only sensible to look at supply at a particular

price in a specified market over a given period of time. By supply we do not
mean what is being currently produced but by what is offered for sale
Tax = demand falls subsidies = demand

rises
- As price rises, supply expands - As price falls, supply contracts
- In the short run a low price means lower profits so many suppliers will put
some of their production on the current market and some in to stock, hoping
for a higher price at a later date. If price is high the opposite happens (not
only will current production will be offered for sale but sellers will draw from
stocks)
- Another possibility that is of price falls on a particular market then some
supply might be diverted to other markets e.g. if price is low at one market
in Hastings then less supply will go to Hastings and more to somewhere else
- In the long run a low price will mean a contraction of supply as the less
efficient firms leave the industry. In the long run a high price will mean
greater supply as less efficient firms can now supply profitably.

In our market for place in Hastings suppliers are willing to supply the product as
follows -
Supply per week - market Hastings
£1 /lb 1000lbs
£2 /lb 2000lbs
£3 /lb 3000lbs
£4 /lb 4000lbs (below)

0
0 1000 2000 3000 4000

Changes in the conditions of supply -

= - bad weather with high winds means that only the larger boats from the
Hastings fleet are able to put to sea and as a result there is a decrease in
supply in Hastings market (see line 2 - below)

graph 2 - decrease in supply

0
0 500 1000 2000 3000

A decrease in supply means less is supplied at each and every price

(graphically the supply curve moves to the left)
If the following week a new fishing net was developed then we may have found
that more fish is supplied at each and every price, e.g. supply curve would
move to the right
 Factors causing changes in conditions of supply -
Weather and other phenomena bad - bird flu good - good conditions
Changes in input costs - fall - more supplied rise - less supplied
Changes in techniques - better/worse management - planting other plants to
Improve produce
Where producers consume more/less of their own produce
New discoveries and exhaustions
Government taxes and subsidies

Demand supply curve -

So far we have only talked about planned demand and supply, e.g. what
buyers are willing to buy, at different prices, and what sellers would be willing
to put on the market at different prices.
When we put the intentions of buyers and sellers together then we can
determine what price will be charged and how much will be sold in this market
per time period e.g. week.
We predict price will settle at the equilibrium price (demand and supply curve
intercepts (d=s)) corresponding quantity will be sold (equilibrium quantity) -

At a price higher or above equilibrium there will be an excess of supply over

demand. Unsold stocks will pile up and sellers will be forced to lower price. As
price falls, demand expands - supply contracts until balance is achieved at the
equilibrium.
At a price below equilibrium price demand will exceed supply. Shortages and
dissatisfied customers will be the order of the day. Sellers will quickly realize
there is an opportunity to raise price as price rise supply will expand demand
will contract until balance is achieved at the equilibrium price (d=s).

Changes in conditions of demand -

It must be emphasized again that conditions effecting demand are totally
separate from those effecting supply e.g. just because there is a lot of apples, it
does not make them taste any different but this means a falling price and it is
this that will affect demand.
An increase in demand (d curve shifts to right) will mean a rise in price and a
rise in sales. Price rises from 0p to 0p1, sales rises from 0Q to 0Q1.

A decrease in demand (d curve shifts to the left) will lead to a fall in price and a
fall in sales. Price falls from p to p2, sales fall from Q to Q2.

Changes of conditions of supply-

When there is an increase of supply there is a fall in price and rise in sales
S curve moves right if there is a rise in

supply
S curve moves left if there is a fall in
supply
Essay in class and finish for H/W- Harry
Sedgwick

An area has just been hit by a severe hurricane. With the aid of diagrams.
Explain what would happen to the price of-A) firewood B) new building
timber C) rented accommodation (this is without government intervention or
any other help from surrounding areas)

A) The price of firewood could rise or fall depending on the situation. The price
of Firewood could rise because of the destruction of transportation routes to the
area and the destruction of houses and storage areas of firewood. Firewood
could be sold at a higher price because of a rise in demand because of lack of
heating and shelters therefore needed for burning etc. On the other hand
firewood could lower in price because of the rise in supply around the area
because of the destruction of houses and any other wood-built structures
knocked down in the hurricane. (See figure 1 - below)
Equilibrium changes from p1 to

p2 so therefore it shows price has risen because of high demand.

B) new building timber would rise in demand because of the lack of shelters
and the buildings knocked down. Building timber would be in low supply
because of the storage areas being destroyed, machinery needed to cut the
wood would be in low supply and other causes like blocked transport routes
would lower supply to the area. This would therefore mean a high price for
building timber because of the low supply (see figure 2 - below)
 Equilibrium changes from p1 to

p2 so therefore price rises because of high demand and low supply.

C) Rented accommodation would be very scarce in a area that has just been
hit with a hurricane so therefore the demand will rise very high - because of the
very low supply. Also with the low supply of building timber there will be no
rented accommodation for a good length of time, so people would be paying a
very high price for this. (see figure 2 - above)

Demand and supply things -

<- Demand for chocolate and sweets

1. Failure of sugar beet crop - supply will rise - supply curve moves to left
2. Big publicity campaign against obesity - demand will fall - demand curve
moves to left
3. Cadbury Schweppes collapses and ceases production - supply rises - supply
curve left. 4. Living standard continue to rise in 2007 - increase in demand -
demand curves right
5. Big increase in tax on confectionary - supply will fall - supply curves moves
left

Influencing prices-
Maximum (ceiling) prices -
In order to try a protect vulnerable consumers from high prices the government
may set maximum prices for certain goods and services. It only makes sense to
set the maximum price BELOW!

This will mean shortages will occur because demand exceeds supply. Where the
government simply sets a max price, shortages are inevitable and in some form
of rationing are put into place. A modern example - social housing: demand
exceeds supply because government use the point system where people are
given points for how much benefit they need I.e. 2 points for 2 children.
During and after ww2 a great number of goods were rationed using coupons.
When this happens a black market arises where people can buy goods illegally
It is not just governments that set ceiling prices e.g. cup final tickets may be
made available to loyal supporters at well below market prices.

Minimum (floor) prices-

Are usually set to protect producers. It only makes sense of course to set
ABOVE the market price

This means that supply will exceed demand so there will be large surpluses
e.g. CAP. Today one thinks of many agricultural products. In addition to other
forms of support the CAP (common agricultural policy) authorities operate
intervention prices. If the price for designated products falls below the agreed
minimum then the CAP enters the market to purchase creating shortages to
drive price back up to the minimum. If however continues intervention is
necessary surplus stocks build up: the butter mountains and wine lakes
 This type of government intervention can also help consumers. For goods in
highly inelastic demand (see diagram A) even small variations in output can
lead to large price fluctuations. As can be seen if planned supply is oQ and
actual supply 0Q2 price to consumers’ jumps from op to op2

No Government Intervention -
As can be seen in first diagram, when actual output equals planned output
price is op.
In actual output falls slightly short of planned output price is driven up to op2,
and where actual output is slightly more than planned output price plunges to
op1.
It can be seen that when there is even a small surplus the low price op1 is
welcomed by consumers but can be ruin to producers.
When there is even a small shortage price shots up to op2 which is good
news for producers but bad news for consumers.

Government Intervention -
In times of excess supply the government buys up some of the goods driving
price up to op3 (see second diagram). Farmers are not so well off as when
supply is normal but they are not ruined.
In times of shortage the government releases stock on to the market driving
price down to op4. Thus government intervention substantially and helped
stabilize the market.

Problems -
- Corruption
- Deterioration of stocks
The assumption that gluts will occur conveniently to ensure BUFFER stocks to
be maintained - In the real world there could be a shortage of supply and the
government have no surplus to sell into the market so consumers have a
higher price.
- Cost of operating the scheme
Whatever happens the tax payer is bound to contribute to such schemes.
Although the CAP authorities do not just engage in intervention pricing the
CAP swallows up a very large percentage of the EU budget.

Real income – after allowance for inflation

Interventions and special cases - demand and supply -

Analysis assumes Ceteris paribus.

1. Exceptional (perverse) demand - where for a time anyway more might be

demanded as price rises or less as price falls.
A) Goods of conspicuous consumption - showing off a particular brand/good
(e.g. Givenchy and like refused to Superdrug because it will give them the
wrong image).
B) Expectations of price changes - predicting prices to lower/rise (stock
market).
C) Consumer suspicions - people thinking that if the price if too cheap then
there was something wrong with it, but if it is expensive people think that it is
something great.
D) Giffen goods - these are goods that become regarded as inferior goods
in countries where living standards are rising. Giffen was a government official
in late 19th century Britain who noted that bread prices were falling but less
bread was being demanded.

2. Exceptional supply - for a time anyway (I.e. over part of the price range) less
may be supplied at a higher price or more at a lower price. The example usually
quoted is labour supply e.g. labour diagram. As can be seen above wage 0w
less labour is being supplied as the wage rises.
- The more wages earned the less hours spent (normally high paid jobs)
working and more time is spent on leisure.
- This is the same case for the opposite situation, if people need more wages
they work longer.

3. Goods in joint complementally demand - two goods in joint demand -

Good A - more popular so a rise in price
Good B - automatic rise in price because of good A
E.g. strawberries and cream. (Theseprices don’t have to be in proportion to
each other) The Price changes in same direction.
4. Goods in composite demand - where there are two or more distinct uses
for a good
E.g. palm oil can be used for foodstuffs, oil etc. This will mean an increase in
demand for palm oil as fuel will push up the price to foodstuffs manufactures.
5. Derived demand - a classic example is a demand for labour and industrial
machines etc. e.g. labourcapital goods. Nobody wants road builders for their
intrinsic beauty built because they repair or provide roads which we can drive.
6. Joint supply - where goods are automatically supplied together e.g. beef
and leather. Prices will go in opposite directions. For example is there is
a increased demand for beef price will rise. However more cows being
slaughtered will automatically increase the supply of leather and price for
leather will fall.

- Elasticity of demand and supply -

Price (own) elasticity of demand -

• X in elastic because quantity changes a lot when price is changed by a

small amount
• ^greater than 1 = elastic
 • Y is inelastic because price changes a lot when quantity changes by a
small amount
• ^less than 1 = inelastic – don’t count the minus sign

Price elasticity of demand measures the degree of response of the good in

question to
Given price change.
Price elasticity of demand will always be negative -
- Price elasticity of demand (PED) = proportionate change in demand
Proportionate change in price
- = actual change in demand
Original demand
Actual change in price
Original price
E.g. eggs in Hastings per day – 10p each 1000 demanded
9p each 1500 demanded
1/2
-1/10 = ½ x -10/1 = -5
E.g. oranges in Hastings per day – 10p each 2000 demanded
8p each 1900 demanded
100/2000
-2/10 = -¼
- If the answer to our calculation is greater the 1, demand will be elastic
- If the answer to our calculation is less than 1, demand will be inelastic
- If the answer to our calculation is the same as 1, demand will be UNIT
ELASTICITY

- If demand is price elastic (less than 1) a rise in price will lead to fall in sales
revenue
- If demand is price elastic (less than 1) a fall in price will lead to a rise in sales
revenue
- If demand is price inelastic (greater than 1) a rise in price will lead to a rise in
sales revenue.
- If demand is price inelastic (greater than 1) a fall in price will lead to a fall in
sales revenue.

When widgets are £5 each demand is 800 per day

When widgets are £6 each demand falls to 300 per day
Actual change in demand = -500
Original demand = 800 = -3.125
Actual change in price = £1
Original price = £5 this means it’s elastic

When blogets are £5 each demand is 800 per day

When blogets are £6 each demand falls to 780 per day
Actual change in demand = -20
 Original demand = 800 = -0.125
Actual change in price = £1
Original price = £5 this means it’s inelastic

When splogets are 10p each demand is 1000 per day

When splogets are 11p each demand falls to 500 per day
Actual change in demand = -500
Original demand = 1000 =-5
Actual change in price = 1p
Original price = 10p this means it’s elastic

What determines PED? –

1. Availability and number of substitutes - the more substitutes the more
elastic demand is e.g. cabbage, because there are many substitutes.
2. The specific and wider market food inelastic. individual foods – elastic
3. % of family income spent on the goods – e.g. if the paper went up from
45p to 50p to most people it would not matter.
4. The amount of time – if you can quickly find substitutes.

Income elasticity of demand – YED – measures how demand for a particular

product responds to a change in income. E.g. if income changes from £100 to
£103 and inflation rises 5% then that person is becoming poorer because they
are losing.
Income elasticity of demand = actual change in demand
Original demand
Actual change in price
Original price
In Hastings average income rose from £210 to £218 per week
In the same period demand for new family cars rose from £5000 to £6000
Calculate income elasticity of demand for new cars in Hastings
1000/5000 / 8/210 = 5.3 so highly elastic
- Unlike PED (price elasticity of demand) negatives and positives are most
important
E.g. in Hastings income rose from £210 to £218 per week
-100/1000 / 8/210 = -2.6 so elastic
- In Hastings income rose from £210 to £218 per week
Demand for widgets rose from £5000 to £5010
10/5000 / 8/210 = 0.053 so inelastic
If the demand for the product in % terms rises more than income = income
elastic
If the demand for the product in % terms rises less than income = income
inelastic
If the demand for the product falls when income rises = negative income
elastic
- Factors Influencing Elasticity of Supply –

TIME - is the most important factor when it comes to elasticity of supply.

1. The LEVEL of STOCKS HELD -

Levels of corn stock are at itslowest for 50 years. This is because of the
increase of living standards in India and china. The more stocks the supply will
be elastic, on the other hand, it will be inelastic at this time because there is
very little.

2. The skill requirements of the workforce producing the good -

If you need years to train workers it will be less elastic than if the good can be
produced by a workforce with very little or no training. TIME is coming into the
equation.

3. The availability of raw materials/component parts etc.

If the materials are readily available then the good is elastic. However if it is
not so available then the supply will be inelastic.

4. Capacity
Idle capacity - is when you have more than you need. If you have 10 machines
in a factory and only 8 of them are being used, you have two idle machines. If
there is an increase in the demand, these machines can be put into action to
increase the supply. This means that IDLE CAPACITY is ELASTIC.

5. How Specific are the machines/workforce etc.

If you’ve got a workforce who are multi-skilled then you have a much more
elastic workforce than someone with one skill. This is because the workforce
can change what is being produced in an instance.
Less skilled = More Elastic
More skilled =Less Elastic

6. The proportion of variable factors to fixed factors

- Fixed factors are things like buildings and machines
- Variable factors are things such as labour
Capital intensive industry products will be less elastic. The more labour
intensive the more elastic it will be

7. Natural and political factors

Natural - carrots are much more supply elastic than kiwi fruit. Carrots are a lot
more elastic because they will grow in a few months whereas kiwi trees can
take 10 years to produce fruits. TIME.

Political - the supply of oil would be much more elastic if there was much more
oil in Spain then in Russia. This is because of international relations.

Time Spans -
1. Momentary - (immediate) to get the good in a few days depends on the
stocks.
2. Short-Term- months. If you work variable factors harder. E.g. workforce doing
overtime.
3. Medium Run - how long to train workers etc.
4. Long run- Increasing fixed factor elements. Draining land to grow things,
putting more oil rigs in the sea etc.
The product or service itself -
- How complex is the product
- How skilled the workforce needs to be
- How long it takes to grow
- How long it takes to import substitutes.
- Etc.

- The Importance of PED -

a. Pricing Policies of business

If a firm is thinking of changing the price, not because they want extra profits
but because costs have risen.

b. Value of the Pound

• If the pound should depreciate (go down in value), UK Exports become
cheaper and Imports become dearer.
• If the pound should increase in value, UK Exports become dearer and
Imports become cheaper.
This will affect different industries, but very much it is a question of the price
elasticity demand for the good or service in question.
E.g. most manufactured products tend to be price elastic, so a rise in the
value of the pound makes life difficult for firms exporting such goods BUT since
a rise in the pound makes imports cheaper life is more difficult on the home
market.

c. Taxes on goods
E.g. many years ago, luxury rate of VAT was placed on British boats the
industry nearly collapsed, demand was very elastic

- Importance of YED -

Businesses
If an object is income elastic, when in a good time you need to build up
reserves so that you can ride out a future recession. This means you have
enough to keep on your workforce and not have to sack them.
In the 1992 recession the sales of furniture went flying down and most
furniture stores were put out of business.
The other option to building up reserves is to diversify.

Cross elasticity of demand

How demand for one good responds to the change in price of another good.
High cross elastic relationship between demand for one good and the change in
the price of the substitute.
Plus, it is true for goods in complementary demand.
Firms monitor carefully the prices for rival brands.