I&S Final Revision

Define/Explain the four factors of production

There are four main categories of resources, also known as the factors of
production:
Land – all the planet’s natural resources
Labour – the work we as individuals can do
Capital – all resources produced by humans
Entrepreneurship – the skills that some people possess, such as being
creative and risk-taking, that enable them to start a business
Compare between Command and Market economies
A command economy is one in which decisions about what to produce, and
how production is organized are made by individuals or groups of individuals
who retain all the control over the production system. In the ancient world,
and in civilizations such as Rome and Egypt, slavery was used to build large
projects such as roads and the pyramids, and also to complete menial tasks
in the home such as cleaning.
A market economy is the dominant system in the world today. Across much
of Europe, from the Renaissance period onwards, a middle class of
merchants, traders and skilled manufacturers began to grow. No longer tied
to the land as peasants or serfs, they moved to the urban centers to work in
manufacturing.
Talk about Law of Supply and Demand (Anything mentioning these two)
We can represent the relationships between price and quantity graphically.
For consumers, who demand goods and services, there is a negative or
inverse relationship between the price of goods and the quantity that they
want to buy. This is known as the law of demand: when the price increases,
the quantity demanded falls, and vice versa. There are different ways of
explaining why this is. There are two reasons for the downward sloping
demand curve, which require us to consider how prices determine the
amount we buy. The first reason is that we will buy more of something
because it is cheaper. The second reason is that lower prices make us
relatively richer and goods that are similar, that could substitute the good in
question, are relatively more expensive.
Supply is a more straightforward part of the model, and there is only one
explanation for the upward sloping curve. There is a strong incentive to
produce more goods when the potential to earn more revenue increases.
Prices will have to rise to allow producers to cover their increased
production costs.
Causes for changes in supply and demand
The behavior of the participants in a market will change all the time. By
adapting our market diagram, we can see how changing behavior alters the
outcomes of the market.
Consumers respond to changing circumstances, as will producers. For
consumers, reasons for changing demand include changes in: Income, taste,
prices of substitute and complementary goods, the number of buyers,
consumers’ expectations.
Producers also have their reasons for changing the amount they can supply
at each price. The determinants of supply include: natural conditions, such
as weather, costs of inputs to the production process, technology, taxes and
subsidies from the government.
Explain what an externality is?
In an ideal situation, the outcomes of the market serve only those
participating in the market – only the producers and consumers. However,
there are instances in which people outside the transaction between
consumers and producers are affected. When this occurs, the market is said
to have failed. However, the situation can yield either positive or negative
consequences.
An externality occurs when there is a positive or negative impact on
someone outside of a transaction between buyers and sellers. This happens
because other people might not value the production or consumption of
goods in the same way as the buyer or seller.
Talk about positive and negative externalities of consumption (with
examples)
Negative externalities of consumption occur when the private benefit
derived from the consumption of a product does not equal the social
benefits of that private decision.
Every second, 20,000 bottles of water are produced for private
consumption. While bottled water in many parts of the world is necessary,
as so many parts of the world are still without safe water to drink, the
developed world does have a suitable water system and bottled water is a
luxury there. This is a tricky issue because regular consumption of clean
water is necessary for maintaining your health.
The plastic that is discarded when we throw away plastic bottles has created
a number of problems:
Some chemicals such as BPA (bisphenol A) a used in plastic leak into the
water system.
Plastic washes up on to beaches and ruins the natural environment.
Plastic can break down into smaller particles (but does not biodegrade) and
can be ingested by animals.
Positive externalities of consumption occur when the social benefits of
someone consuming a product or service exceed the private benefits. Going
to school means that, not only do you gain qualifications that will likely lead
to a good job and income, but you will also contribute positively to society.
More children becoming educated can lead to the following consequences:
Greater tax revenue for the government, a more productive labor force, and
lower rates of crime.
Define Subsidies and explain their purpose
Subsidies are used to increase the production of a product, when the effects
of the product are positive for society. Subsidies are per unit payments that
lower the production costs for producers, and so the market quantity is able
to increase. The price that producers receive also increases from P, to P2,
but the price that consumers pay falls to the socially optimum level P*.
Governments have to use their tax revenues (from income taxes and sales
taxes) to fund subsidies. They have to make careful decisions about how
they spend taxpayers' money, and different groups in society will have
different priorities.
Compare between Direct and Indirect Taxes
Taxes can be implemented in a number of ways. The most frequently
complained about type of tax is direct tax (also known as income tax).
Workers earning over a certain amount have to pay a share of their income
to the government to pay for things such as health care and the welfare
system. There are usually different tax rates depending on the level of
income.
An indirect tax works by taxing suppliers of goods or services, who then pass
the tax on to consumers in the form of a price increase. The indirect tax is
one of the non-price determinants of supply, and so shifts the supply curve
inwards from Supply to Stax. This causes the equilibrium quantity of the
product or service to fall to Q*, in line with what society would consider
allocatively efficient. In addition, prices will be forced upwards to P*, but
prices that producers receive fall to P2 because P*-P2, has to be paid to the
government.