Topic 1 of 6 · Form 5
Basic economic ideas and the price system
Scarcity, choice and opportunity cost; the economic problem; positive and normative statements; factors of production; resource allocation in market, planned and mixed economies; production possibility curves; money (functions and characteristics); classification of goods (free, private, public, merit, demerit).
Notes for this topic 1 file, in order
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Basic ideas
Scarcity, choice and opportunity cost; the economic problem; positive and normative statements; factors of production; resource allocation in market, planned and mixed economies; production possibility curves; money (functions and characteristics); classification of goods (free, private, public, merit, demerit).
Demand and supply
Determinants and shifts; equilibrium; consumer and producer surplus; interrelationships between markets (joint demand, joint supply, derived demand, competitive demand).
Elasticities
PED, YED, XED and PES – calculation, determinants and uses for firms and governments.
Worked example: Income rises by 8% and quantity demanded of a good falls by 2%. Calculate YED and classify the good.
YED = −2 ÷ 8 = −0.25 → inferior good
Price mechanism
Signalling, incentive and rationing functions.
Check yourself
- State one difference between a public good and a merit good.
- What is derived demand?
- XED between two goods is +1.4. What are they?
Show answers
- Public goods are non-excludable and non-rival; merit goods are under-consumed due to information failure but are excludable.
- Demand for a factor or good that arises from demand for another product (e.g. labour from demand for output).
- Substitutes.
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