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Economics Achievement Standard 1.1 – Demand Limited means and wants: Means are our personal resources used to satisfy our wants – time, skills, income, and family/whanau. Time is limited because we only have a certain amount of it – there are only 24 hours in a day. Skills are limited because they require training and motivation and we cannot have every skill in the world. Family is limited because there is only so much help that they can give you because they have their own lives. Income is limited because you can only earn a certain amount. Wants are goods and services that a person would like but is able to live without. Wants are unlimited because it is human nature to always want more/something else. Scarcity is that resources are insufficient to satisfy all wants and needs. Opportunity Cost The next best alternative forgone. All decisions have an opportunity cost because you have to choose one thing over another. Demand: The quantity of a good or service a consumer is willing and able to purchase at each price. The Law of Demand: as the price of a good or service increases the quantity demanded decreases, ceteris paribus (or vice versa). A demand schedule is a table showing the quantity of a good or service that would be purchased at each price. Bob’s weekly demand schedule for pies: Price ($) Quantity Demanded (kg) 1 10 2 8 3 6 4 4 5 2 Demand curve: Title showing the person the curve is for, what the good or service is and the time period. Movement along the demand curve: A decrease in quantity demanded – this is a movement up the demand curve and is caused by an increase in price. An increase in quantity demanded – this is a movement down the demand curve and is caused by a decrease in price. Shift of the demand curve: A shift of the demand curve is caused by factors other than price. It occurs when ceteris paribus is removed. An increase in demand is a shift of the demand curve to the right. It is caused by the following: - increase in income - increase in the price of a substitute good - decrease in price of a complement good - increase in popularity A decrease in demand is a shift of the demand curve to the left. It is caused by the following: - decrease in income - decrease in the price of a substitute good - increase in price of a complement good - decrease in popularity Types of goods: Goods: these are tangible objects; things with a physical presence e.g. an apple Services: these are intangible things that someone does for you e.g. haircut Needs: goods and services that are considered to be the necessities of life Wants: goods and services that a person would like but is able to live without Basic Wants: goods and services that are the first thing a person buys after satisfying their needs e.g. power Inferior goods: low quality goods and services that we demand less of as our income increases. Luxuries: goods and services that make life more comfortable and enjoyable but households can manage without them. Savings: the part of the income not spent Aggregate household spending: The total spending of all households in the economy. Necessities: as income increases the total amount spend on necessities increases a small amount. This is because there is only so much that you can spend on necessities. Even at no income money is spent on necessities. This money comes from credit cards, overdraft, loans, selling assets, donations, savings and/or benefits. Basic wants: as income increases people purchase more basic wants. The amount eventually levels off because people satisfy all basic wants. Inferior goods: as income increases the amount spent on inferior goods decreases as households are able to buy better quality goods. They stop buying budget brands. Luxuries: at low levels of income no money is spent on luxuries but as income increases, so does spending on luxuries because households can afford to buy better things. Savings: we only begin to save after we have satisfied our needs, basic wants and some of our luxuries. Achievement Standard 1.2 - Producers, Production and Resources Sectors of the economy: Public Sector – activities in the economy that are owned and controlled by the government. Private sector – section of the economy not owned by the government Primary sector – industries where producers are involved in the extraction or harvest of natural resources Secondary sector – industries involved in processing raw materials into finished or semi-finished goods. Tertiary sector – industries involved in the provision of services to consumers and producers Industry – group of firms that manufacture a particular good or service e.g. publishing industry is made up all firms that print newspapers Firm – a business that provides a good or service for consumers or other firms. Changes in employment in the industries: Employment in the primary sector has decreased because it has become more capital intensive. Employment in the secondary sector has increased because people want more goods and are no longer as self-sufficient (making things for themselves). Employment in the tertiary sector has increased because people now rely more heavily on others for services they no longer want to do themselves e.g. fixing the car. Goals of a business: Goals are also reasons for starting a firm The most common goal is profit maximisation Some new firms may have the goal of sales maximisation rather than profit maximisation to begin with because they want to gain market power and share and establish clientele and brand. Satisficing is a goal where firms set up a sales or profit target that can be achieved with ease rather than trying to maximise sales or profit. Other goals include: self employment, providing a quality service, enjoying the work and gaining prestige. Some firms now have social goals such as being socially responsible and contributing to the community by being a good employer or by providing employment. Some firms also have environmental goals such as sustainable resource use and producing environmentally friendly products. Business Structure: There are four types of business units – sole traders, partnerships, companies and co-operatives. Sole traders have only one owner. The advantages are: they are cheap and easy to set up, the owner keeps all the profits, makes all the decisions and gets to choose the hours worked. The disadvantages are: limited ability to raise finds and unlimited liability. Partnerships have 2-25 owners and are often professional groups e.g. lawyers. The advantages are: share set up costs, partners can specialise. The disadvantages are unlimited liability, decisions of one partner binding on others and disagreements may hinder progress. They are governed by a deed. A company is a business that is registered with the Registrar of Companies. It is a separate legal entity from the owner/s who are called shareholders. They have Ltd. after their names. The advantages are: business has continuity because shares can be transferred, limited liability and the firm is able to raise large amounts of money. The disadvantages are: cost and time involved in the set up and shareholders have limited input into how they company is operated. Unlisted companies are not listed on the stock exchange. Unlisted companies are common in New Zealand because they offer the owners limited liability but let them keep control and all the profits. Listed companies are listed on the stock exchange. They can have an unlimited number or shareholders and their annual accounts must be audited. A board of directors runs the business. Dividends are paid out to shareholders. A consumer co-operative is a marketing organisation in which the consumers own and share the profits in proportion to their purchases from the cooperative. A producer co-operative is a business owned by the firm’s raw material suppliers. Profits are distributed on the basis of the quantity of raw materials supplied to the firm e.g. Fonterra. Unlimited liability: the owner/s of the firm are personally responsible for all business debts. If the business fails, they have to sell their personal assets to pay off the business debts. Limited liability: the business is responsible for its own debts and the owners (shareholders) are able to keep their personal assets if the business fails. Interdependence: A two way (mutual reliance) between producers. Firms rely on other firms for goods or services they do not or cannot provide themselves. In turn these firms rely on other producers for their income or revenue. Firms rely on transport firms, the accounting industry, the communication industry, the financial industry and the marketing industry. Specialisation: A worker or firm focuses on producing one main good or service. Specialisation allows workers to become better at their jobs, improve their skills through training, become more efficient, have better technology to use and output per worker will increase. Division of labour: A job is divided into smaller tasks carried out by different people or groups. This makes the workers quicker at doing their assigned task and more efficient. Workers’ training time reduces, dangerous jobs can be automated and reduces costs. The disadvantages are: workers get little satisfaction and can get RSI. Management Structure: Centralised management – a flatter management structure that gives the general manager more control over decision making. Everyone reports to the general manager. Individuals report to those above them. Pressure on top management can be relieved and the work load is spread. Specialised managers can be employed. Decentralised management – decision making is delegated to other managers as the general manager is more concerned with the overall performance and goals of the business. Allows better delegation of responsibilities. Not everyone reports to the general manager. Allows firms to take advantage of specialisation. Investment: Increasing the stock of capital goods e.g. buying new machinery. Investing in new technology causes productivity to improve and total output to increase Investing in capital goods leads to costs of production falling. Scale of a firm’s operations: Economies of scale – as a firm increases in size, the average costs decrease. Diseconomies of scale – as a firm increases in size, the average costs increase. Diseconomies of scale can be the result of organizational problems or hold-ups in the production process. Production: Production – the total output or quantity of goods or services. It involves resources being transformed. Production = productivity x output Labour intensive – the amount of human resources used is large compared to capital resources e.g. fruit picking Capital intensive – the amount of capital resources used is large compared to human resources e.g. car production. Productivity – the efficiency of the production process. It is the rate of output. Productivity = output / input Productivity of labour = output / workers Productivity of capital = output / machines Productivity can be improved by specialisation, division of labour, or increased use of technology. Types of Resources: Natural resources – resources provided by nature e.g. plants Capital resources – man made resources that help in the production of other goods e.g. hammer Human resources – work and effort of people e.g. cleaners Entrepreneur – a person who organises the factors of production and takes business risks to make a profit. Renewable resources – natural resources that regenerate through their lifecycles or will be replaced through other natural processes e.g. fish Non-renewable resources – natural resources that cannot be replaced within a reasonable time. They deplete with use e.g. gas Durable goods – goods that are long lasting or able to be used again. Business Expansion: Diversification – a firm purchases another firm which produces different goods or services to those they currently provide. Horizontal Integration – firms in the same industry at the same stage of production merge to form a larger business. Vertical integration – a firm purchases a firm in the same industry but at a different stage of the production process. Takeover – when a dominant firm forces a weaker firm to sell them a share of their business. Merger – a new business is formed by combining with another business by mutual agreement. Achievement Standard 1.3 – Supply Supply: Individual supply – the amount of a good or service one firm is willing and able to provide at each price. Market supply – the total supply of all individual suppliers in the market at each price. Law of Supply: An increase in the price of a good or service will result in an increase in quantity supplied, ceteris paribus (or vice versa). A firm will supply less of a good or service at lower prices because they cannot cover the costs of production. A firm will supply more of a good or service at higher prices because they are able to make more profit. Supply schedule: A table showing the quantity of a good or service an individual producer is willing and able to supply at each price. It is like a demand curve. It has a title that includes the name of the supplier, what is supplied and in what time period. Supply curve: Shows the information from a supply curve graphically. It has a title that includes the words supply curve the name of the supplier and the time period. It slopes up to the right because as the price of a good or service increases the quantity supplied will increase. Movement along a supply curve: Caused by a change in the price of the product only. An increase in quantity supplied is the effect of an increase in the price of the good itself. A decrease in quantity supplied is the result of a decrease in the price of the good itself. Shift of the supply curve: Occurs when ceteris paribus is relaxed. The supply curve shifts to an entirely new position. Is called a change in supply. An increase in supply causes a shift of the supply curve to the right. Reasons for an increase in supply are: - costs of production decrease e.g. lower wages for workers - new technology - workers’ productivity increases - indirect tax decreases e.g. GST, sales tax - subsidy given by government - tax on imports (tariff) lifted by the government - price of a related good decreases A decrease in supply causes a shift of the supply curve to the left. Reasons for a decrease in supply are: - costs of production increase e.g. higher workers wages - workers’ productivity decreases - indirect tax increases e.g. GST, sales tax - subsidy removed by the government - price of related good increases - tax on imports (tariff) imposed by government Environmental Factors: The extent to which a firm is concerned about environmental issues will affect its output. If they have a goal to be environmentally friendly, production costs will increase. If a firm does not care about environmental issues then their costs of production will decrease Legal Factors: Firms have to operate within the laws determined by the government Compliance with these rules and regulations increase their costs of production Cultural Factors: Cultural factors (such as getting iwi approval to carry out a development) increase a firm’s costs of production. Political Factors: Government attempts to discourage the use of things like cigarettes and alcohol by placing taxes on them. This increases the costs of production. By subsiding firms to help lower costs of production the government can encourage the output of certain goods and services. Trade Factors: Tariffs increase costs of production. A rise in world price may encourage local firms to increase quantity supplied and export overseas. Implications of a shift of the supply curve: Implications of an increase in supply are: - may need to hire and train new staff - may require existing workers to work overtime - may need to buy and install new machinery - may need to look at shifting to a larger premises Implications of a decrease in supply are: - may need to lay off staff - may have to reduce output of one product while increasing the output of another - may have to look at ways of reducing costs - may have to close down Achievement Standard 1.4 – The Market Market: A place or situation where buyers and sellers exchange goods or services. E.g. auction, roadside stall, retail shop or garage sale. Price in a market can be decided in different ways including set by the seller, set by the government, through bids, through tender, auction or by negotiation. Buyers and sellers can communicate in different ways. These ways include face to face, email, internet, fax, phone or letter. Money: Money is anything that is accepted as a medium of change Barter – when goods/services are traded for one another. The problem of barter is that there must be a double coincidence of wants People are independent which is why they must exchange goods and services The qualities or characteristics of money are: portable, durable, divisible, acceptable, scarce (limited in supply so therefore has value) The functions of money are: a medium of exchange, a standard of value (or unit of account), a means of deferred payment and a store of value. Non-Market Activities Ways consumers can satisfy wants without using money Non market activities include DIY, swapping services, utu (system of exchange based on payback or koha (gifting on marae). Price Competition: Competition that involves price reductions Strategies include discounts, sales, trade-ins, interest free terms and buy one get one free. The advantage for consumers is that they get products at lower prices. The advantage to producers is that market share may increase. The disadvantage to producers is that a price war may develop and their profits may be reduced. Non-Price Competition: Strategies that do not involve price reductions Strategies include sponsorship, competition, location, service, branding and packaging. Product differentiation is the creation of real or imagined differences in a similar product so that consumers will think it is better. The advantages for consumers are increased quality and greater variety The disadvantage for consumers is a higher price as ‘extras’ cost more The advantages for producers are that price wars are avoided, their revenue does not decrease and they can increase market share The disadvantages for producers are that costs are increased and there could be loss of profits Rights and Responsibilities: The rights of the sellers are to paid in full and on time and to set the price and conditions of sale The rights of the buyers are to enjoy the ownership of the goods debt free and if not satisfied with the goods to return them or have them repaired The responsibilities of the seller are that the goods must be debt free, they must have the legal right to sell the good, they cannot use misleading advertising and they must obey consumer laws. The responsibilities of the buyer are to pay for the goods in full and on time. Door to Door Sales Act 1967 Allows 7 days to cancel goods purchased on credits from an uninvited salesperson Doesn’t apply if you pay cash or invite the person to call Layby Sales If the buyer no longer wants the goods they can get a refund less any loss in value If a firm fails then you can pay the outstanding amount and receive the goods or become a secured creditor Hire Purchase Act You have possession of the goods while paying for them and you own the goods after the final payment. The seller can repossess the goods if you don’t make payments for them Contract A legally binding agreement between two or more people that courts will enforce. There are 6 essential requirements for a contract: 1. Legal objectives – the contract cannot break the law 2. 3. 4. 5. 6. Intention to create legal relations – must be about something important Genuine consent – cannot be forced (duress) into agreeing Consideration – something of value must be exchanged Offer and acceptance Capacity – you must be old enough/sane/sober Fair Trading Act 1986 Prevents misleading and deceptive conduct e.g. seller gives false impression of what the consumer is buying Prevents false representation – when the information given to consumers is untrue. Prevents unfair practices – selling methods that mislead consumers The act is enforced by the Commerce Commission or the Ministry of Consumer Affairs Consumer Guarantees Act 1993 Goods must be of acceptable quality Goods must be fit for their intended purpose Goods should be sold debt free Services must be provided with care and skill A service must be completed in a reasonable length of time Consumer only have to pay a reasonable price for a service If a consumer is not satisfied with a good they can get it repaired, replaced or get a refund. Market Demand The horizontal sum of all individual demand curves or schedules at each price Market Supply The horizontal sum of all individual supply curves or schedules at each price Market Equilibrium The price at which quantity demanded equals quantity supplied. Price at which there is neither a shortage or a surplus Surplus This is excess supply. It will occur at any price above the equilibrium where the quantity supplied is greater than quantity demanded. The market will react by the price falling, quantity supplied decreasing and quantity demanded increasing until a new equilibrium is reached Shortage This is excess demand It will occur at any price below the equilibrium where the quantity supplied is less than the quantity demanded. The market will react by the price rising, quantity supplied increasing and quantity demanded increasing until a new equilibrium is reached A New Equilibrium When the conditions ceteris paribus are broken and the conditions of demand or supply are broken, there will be a new equilibrium as one or both curves shift. There are four possible outcomes: