Chapter 3 • Circular flow of income

• Factors which affect the

The macro-economic economy
environment • Multiplier effect
• Aggregate demand/supply
• Business cycle
• Inflation
• Unemployment
• Economic growth
• State influences over
organisations
• Fiscal policy
• Functions of taxation
• Types of tax
• Monetary policy
BPP LEARNING MEDIA • Balance of payments
 Syllabus learning outcomes

The structure and objectives of the economy

Factors which affect the economy
The determination of national income
The business cycle
Inflation and its consequences
Unemployment
The objective of economic growth
Government policies for managing the economy
Fiscal policy
Monetary policy
The balance of payments
BPP LEARNING MEDIA
 Definitions

• Macroeconomics is the study of the aggregated effects of

the decisions of individual economic units (such as
households or businesses). It looks at a complete national
economy, or the international economic system as a
whole.
• Macroeconomic policy describes the policies and actions
a government takes to control economic issues including
economic growth, inflation, employment and trade
performance.

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 Circular flow of income – no withdrawals
Factor incomes paid by firms

Productive resources

FIRMS HOUSEHOLDS

Goods and services

Expenditure on goods and services

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 Withdrawals & injections into the circular flow of income

• Withdrawals – savings, taxation, import expenditure

• Injections – investment, government spending, export income

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 Factors which affect the economy
The economy is rarely stable because of the various changing
factors which influence it.
These include:
• Investment levels
• The multiplier effect
• Inflation
• Savings
• Market confidence
• Interest rates
• Exchange rates
Economists use the business cycle to describe the fluctuating
level of activity in the economy.

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 Multiplier effect

• An initial increase in expenditure has a snowball effect –

leading to further and further expenditures in the economy.
• For example government spends money building a new
bridge. The contractors (paid by the government) pay their
sub-contractors and suppliers, and all of these firms also
pay their suppliers and staff. The wages are spent in the
local economy fuelling further demand for goods and
services.
• The new bridge may also stimulate new economic
activity, for example opening up a less accessible area.

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 Aggregate demand

• Aggregate demand represents the sum of all of the

demand curves for individuals and businesses in a
country.
• Demand rises as prices fall because people can afford
more.

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 Aggregate supply

• Aggregate supply refers to the ability of the economy to

produce goods or services.
• Aggregate supply is positively related to the price level
because a price rise will make more profitable sales and
encourage organisations to increase their output.
• Where aggregate demand curve intersects with aggregate
supply curve, the total demand for goods and services in
the economy is equal to the total supply of goods and
services in the economy = equilibrium of national
income.

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 Equilibrium national income

Occurs where aggregate demand equals aggregate supply.

There are two possible equilibria:
1. The level of demand exceeds the productive capabilities
of the economy at full employment, and there is
insufficient output capacity in the economy to meet
demand at current prices. This is known as an
inflationary gap.
2. The other is at a level of employment which is below the
full employment level of national income. The difference
between actual national income and full employment
national income is called a deflationary gap. In order to
create full employment expenditure must increase by
the amount of the deflationary gap.
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 Business cycle

A – economy is entering recession phases

B – depression phase
C – recovery phase is beginning
D – boom phase
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 Recession/depression

In the recession phase:

• Consumer demand/confidence falls
• Investment projects begin to look unprofitable
• Orders are cut, inventory levels are reduced
• Some companies unable to sell their inventories become
insolvent
If during the recession phase there is a lack of stimulus to
aggregate demand a period of depression will set in.

Recession tends to occur quickly, while recovery is typically

a slower process.

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 Recovery/boom

Recovery
• Usually slow to begin due to a general lack of confidence
in the economy
• Governments will look to boost demand (using
fiscal/monetary policy)
• Together with confidence, output, income and employment
rise
• Investment flows into the economy
Once the actual output has risen above the trend line, the
boom phase of the cycle is entered.
Governments seek to stabilise the economic system to avoid
the distortions of a widely fluctuating trade cycle.
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 Inflation

• Inflation is the name given to an increase in price levels

generally. It can also manifest in a decline in the
purchasing power of money.
• Note that some inflation is a sign of a healthy/growing
economy. It is only high levels of inflation that represent a
problem.

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 Why is inflation a problem?

• Redistribution of income and wealth – those with

economic power tend to gain at the expense of the weak
or those on fixed incomes
• Balance of payments effects – exports become
expensive and imports cheap (eventually exchange rate
will alter)
• Uncertainty of the value of money and prices
• Resource costs of changing prices
• Can lead to hyperinflation where money becomes
worthless
• Economic growth and investment is reduced

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 Causes of inflation

• Demand pull factors

• Cost push factors
• Import cost factors
• Expectations
• Excessive growth in the money supply

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 Unemployment

• The rate of employment in an economy is calculated as:

Number of unemployed
× 100%
Total workforce
• Unemployment is measured via government statistics.
• If the flow of workers through unemployment is constant
then the size of the unemployed labour force will also be
constant.

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 Changes in employment

Flows into unemployment are:

• Members of the workforce becoming unemployed
(redundancies, people quitting, lay-offs)
• People previously out of the workforce (school leavers
without a job, carers and others) rejoining the workforce
without a job
Flows out of unemployment are:
• Unemployed people finding jobs
• Laid-off workers being reemployed
• Unemployed people stopping the search for work

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 Consequences of unemployment

• Loss of output
• Loss of human capital
• Increasing inequalities in the distribution of income
• Social costs
• Increased burden of welfare payments

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 Long term causes of unemployment

Category Comment/cause
Real wage Supply of labour exceeds demand, but real wages do not
unemployment fall for the labour market to clear. This can be caused by
strong trade unions and minimum wage agreements.
Structural Long term changes to the conditions of the industry
affecting the employment levels. This can be
concentrated in one location if a major employer ceases
business.
Technological When new technology is introduced automation can lead
to falls in employment even when output is rising.
Cyclical or demand During recovery and boom years, there will be high
deficient demand for output and unemployment will be low. The
reverse is true during decline and recession years.

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 Short term causes of unemployment

Category Comment/cause
Frictional Difficulty in matching workers with jobs. It is temporary
and only lasts for the period of transition from one job to
the next
Seasonal Pattern of demand throughout the year can cause
fluctuations in the demand for staff, eg tourism and
farming

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 Government employment policies

A government has several options to create jobs or reduce

unemployment:
• Spending more money on government staff
• Encouraging growth
• Encouraging training in job skills
• Offering grants to employers
• Encouraging labour mobility

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 Economic growth

Economic growth may be measured by increases in real

gross national product (GNP) per head of the population.
Factors which contribute to growth include:
• New investment – eg in infrastructure
• Natural resources – eg minerals
• Labour sources – eg levels of education
• Capital availability – eg from overseas
• Technological processes – eg internet

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 Four main objectives of economic policy

1. To achieve economic growth

2. To control price inflation
3. To achieve full employment
4. To achieve a balance between exports and imports

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 Policies

• The problem with trying to satisfy one objective is that

this can lead to a problem with another.
• Governments manage these objectives with:
Fiscal policy
Monetary policy

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 State influences over organisations

Market demand
Overall economic
G Cost of finance O
policy

O Taxation R
Protection vs Free Trade G
V
Grants, incentives, sponsorship A
Industry policy
E Regulation (eg investor N
Protection, company law)
R I
Entry barriers, capacity
Environment and
N infrastructure Distribution S
policy
Workplace regulation, A
M
Employment law
Social policy T
E Labour supply,
Skills, education I
N Trade promotion, export credits
O
Foreign policy EU and GATT obligations
T N
Export promotion to allies
Aid recipients

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 Government influences over commercial decisions

Decision Comment
Output capacity Grants or tax incentives to invest
Competition Forbid or allow takeovers/mergers
Outlaw anti-competitive practices
Opening markets to new entrants
Monopolies Break them up; regulate them
Sales demand Government policy affects demand

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 Government influences over operational decisions

Decision Comment
Health and safety Legislation, regulations
Employment Equal opportunities legislation
Consumer Product safety standards
Tax Sales tax, income tax, accounting control

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 Fiscal policy 1

What – a method of managing aggregate demand in the

economy
How – annually and set out in the budget
The government can increase demand by:
• Increasing its spending
• Decreasing tax

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 Fiscal policy 2

Types of fiscal policy:

• Taxation
• Public borrowing
• Public spending

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 Functions of taxation

1. Raise revenues for the government

2. To cause certain products to be priced to take into
account their social costs (eg cigarettes)
3. To redistribute income and wealth
4. To protect industries from foreign competition

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 Types of tax

Types of tax

Direct tax
Indirect tax
Paid directly by person
Collected via an
to revenue authority
intermediary (a
Eg income tax
supplier) who passes it
Usually proportional &
on to consumer
unavoidable taxes

Specific =
Ad valorem =
fixed sum per
fixed %
unit

BPP LEARNING MEDIA

 Monetary policy

A method of influencing aggregate demand in the

economy
Types of policy:
• Money supply
• Monetary systems
• Interest rates
• Exchange rates
• Availability of credit

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 Balance of payments 1

Consists of three types of accounts:

Current account:
Trade in goods
Trade in services
Income from residents employed and capital
investment in other countries
Transfers from interest payments and non
government payments to/from bodies in other
countries

Financial account
Capital account
Flows of capital to/from non
Public sector flows of capital
government sector

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 Balance of payments 2

• The sum of the balance of payments accounts must

always be zero. This is achieved via the financial account.
• The balance of trade is the surplus or deficit on the current
account only.

Deficit Surplus

Imports > exports Exports > imports

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 Rectifying a deficit

A deficit on a current account may be rectified by one or

more of the following measures:
• Depreciation of the currency (devaluation)
• Direct measures to restrict imports, such as tariffs or
quotas
• Domestic deflation to reduce aggregate demand in the
domestic economy

BPP LEARNING MEDIA

 Specimen exam 1

Martin is an experienced and fully trained shipbuilder, based

in a western European city. Due to significant economic
change in supply and demand conditions for shipbuilding in
Martin's own country, the shipyard he worked for has closed
and he was made redundant. There is no other local
demand for his skills within his own region and he would
have to move to another country to obtain similar
employment. He can only find similar work locally through
undertaking at least a year's retraining in a related
engineering field.

BPP LEARNING MEDIA

 Specimen exam 1 (cont'd)

Which of the following describes the type of unemployment

that Martin has been affected by?

A. Structural unemployment
B. Cyclical unemployment
C. Frictional unemployment
D. Marginal unemployment
(2 marks)

BPP LEARNING MEDIA

 Specimen exam 1 Solution

Answer: A

When someone is made redundant from an industry in

decline where skills cannot be easily transferred, where re-
training might take a long time or where work is not available
in the short term within a reasonable geographic proximity,
this is classed as structural unemployment.

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 Specimen exam 2

The following government policies can be used to expand or

slow down the level of economic activity.
1. Taxation
2. Public expenditure

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 Specimen exam 2 (cont'd)

Which of the following combinations would maximise

expansion of the economy?

A. Increase 1 and increase 2

B. Increase 1 and reduce 2
C. Reduce 1 and increase 2
D. Reduce 1 and reduce 2
(2 marks)

BPP LEARNING MEDIA

 Specimen exam 2 Solution

Answer: C

Increasing taxation leaves individuals with less disposable

income for expenditure within the economy thereby slowing
economic activity. The same effect is caused by a reduction
in government expenditure. Therefore economic activity can
be stimulated by reducing taxation and increasing
government expenditure.

BPP LEARNING MEDIA

 Specimen exam 3

In an economic environment of high price inflation, those

who owe money will gain and those who are owed money
will lose.
Is this statement true or false?
A.True
B.False

(1 mark)

BPP LEARNING MEDIA

 Specimen exam 3 Solution

Answer: A

Where price inflation is high the value of money reduces

consistently over time. Those who owe money (debtors)
therefore pay back less capital in real terms, and interest
rates seldom adjust adequately to compensate for this.

BPP LEARNING MEDIA

 Specimen exam 4

The aggregate level of demand in the economy is made up

of government expenditure, _____________, _______
and net gains from international trade.

Which of the following correctly completes the sentence

above?
1. Savings
2. Taxation
3. Investment
4. Consumption

BPP LEARNING MEDIA

 Specimen exam 4 (cont'd)

A. 1 and 3
B. 2 and 3
C. 3 and 4
D. 1 and 4

(2 marks)

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 Specimen exam 4 Solution

Answer: C

The components of effective demand in the economy are

consumer spending, investment by enterprises, central and
local government expenditure and the net gains from
international trade.

BPP LEARNING MEDIA

 Chapter 3 – Summary 1

Macro-economic
Deficit Surplus environment

Current • Trade in goods

account • Trade in services Terminology
Balance of • Income
+ • Transfers • Equilibrium D=S
payments
• Inflationary gap
Capital
• Deflationary gap
account
• Stagflation
= zero
Government policy

BPP LEARNING MEDIA

 Chapter 3 – Summary 2

Business cycle
Economic Fiscal Monetary
policy policy policy
Phases
• Growth • Revenue • Interest rates
• Inflation • Expenditure • Credit control • Recession
control • Exchange • Depression
• Employment rates • Recovery
• Balance • Boom
imports/
exports

BPP LEARNING MEDIA

 Chapter 3 – Summary 3

Taxation Unemployment Inflation

• Real wage • RPI
• Frictional • CPI
Functions • Direct • Seasonal • RPIX
• Indirect • Structural • RPIY
• Revenue • Technological
• Redistribute Causes
• Discourage
• Demand pull
• Cost push
• Import cost
• Expectations
• Excessive
growth in money
supply

BPP LEARNING MEDIA

Chapter 4 • Micro environment
• Micro v Macro

Micro economic • Organisation as a system

factors • Perfect competition

• Imperfect competition
• Price fixing
• Market mechanism
• The PED
• Income elasticity of demand
• Cross elasticity of demand
• Income distribution and
demand
• Supply
• Short-run supply curve
• Equilibrium price
BPP LEARNING MEDIA
 Syllabus learning outcomes

The micro environment

The internal and external micro and macro environments
The concepts of a market
The demand schedule
The supply schedule
The equilibrium price
Demand and supply analysis
Maximum and minimum prices
Competition and restrictive practices

BPP LEARNING MEDIA

 Micro environment – definition

The micro environment refers to the immediate operational

environment. It includes all of the factors which impact
directly on a firm and its activities in relation to a particular
market in which it operates and also any internal aspects of
the organisation which influence the development of a
marketing strategy.

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 Micro v Macro

The difference compared to the macro environment is that it

can be controlled to some extent by the organisation.
It includes:
• Suppliers
• Competitors
• Customers
• Stakeholders
• Intermediaries

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 Drucker

• Business must generate profits to succeed.

• Drucker (2001) tells us that in order to generate profits it is
necessary to 'create a customer'.
• They operate in market economies – a key feature of
which is competition with other firms for that customer.
• Competition acts as a spur in innovation and marketing
activities, which Drucker holds as the distinguishing
characteristics of a business organisation.
• This is in contrast to a centrally planned economy in which
the State controls production.

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 Elements of the micro environment

The micro environment

Customer Suppliers
Firm

Intermediaries Culture Skills Competitors

Organisation Employees

Interest groups

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 Micro environment

The micro environment comprises:

Firms the organisation actually does business
with

Firms the organisation could potentially do

business with

• Management will aim to use the marketing mix to convert

potential customers into actual customers.
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 Forces which impact on the organisation

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 Organisation as a system

The diagram shows how an organisation takes inputs and

transforms them into outputs for consumption.
Cyclical process – those consuming the end output provide
feedback which is used to adapt the inputs selected and the
transformation of future processes.

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 Elements

There are four main elements to the system:

1. Inputs
2. Transformational process which occur within the
organisation
3. Outputs
4. Final consumption of outputs

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 5 Ms

The 5Ms refer to the inputs that an organisation requires in

order to function:
1. Materials
2. Money
3. Men (human resources)
4. Machines
5. Management
Each of these must be carefully employed as it is a valuable
resource which will enable the organisation to meet its goals.

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 Mullins (2005)

Mullins noted that organisations may have radically different

goals, procedures, methods of operating, style of
management, systems, structure and behaviour of staff even
within the same industry, but despite this all organisations
need four factors to function:
1. People – behind every action, document written, decision
made there are human interactions
2. Objectives – determine the nature of outputs and how
they are achieved
3. Structure – to channel and co-ordinate efforts
4. Management – to direct and control efforts to pursue
objectives

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 Effective strategic management

Effective strategic management is at the core of the

organisation's ability to transform inputs and to be able to
offer a competitive offering of value to customers.

Customer value proposition is the sum of the total benefits

which a vendor promises that a customer will receive in
return for the customer's associated payment.

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 Value proposition

Affected by:
Relative performance
Price
Value proposition = what you get for what you pay

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 Market – definition

A market can be defined as a situation in which potential

buyers and potential suppliers of a good or service come
together for the purpose of exchange.

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 Perfect competition 1

Characteristics:
• Many small (in value) buyers and sellers, which
individually cannot influence the market price
• No barriers to entry or exit, so businesses are free to
enter or leave the market as they wish
• Perfect information such that production methods and
cost structures are identical
• Homogenous (identical) products
• No collusion between buyers or sellers

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 Perfect competition 2

Consequences of perfect competition include:

• Suppliers are 'price takers' not 'price makers' – this
means that they can sell as much as they want but only at
the market-determined price.
• All suppliers earn 'normal' profits.
• There is a single selling price.

Example:
Tulip sellers in Amsterdam

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 Imperfect competition

• Any market structure which does not meet the conditions

of perfect competition for example, monopolistic
competition

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 Characteristics

Characteristics of monopolistic competition:

• Many buyers and sellers
• Some differentiation between products
• Branding of products to achieve differentiation
• Some (but not total) customer loyalty
• Few barriers to entry
• Significant advertising in many cases

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 Monopolistic competition

Consequences of monopolistic competition:

• Increases in prices cause loss of some customers
• Only 'normal' profit is earned in the long run

Example:
Hairdresser

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 Monopoly

Market has only one product

Or
Firm has very high share of the market

Consequences:
Firm sets its own price, which can lead to 'super-normal'
profits

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 Oligopoly

• Occurs when market has a few dominant producers.

These producers will all have a high level of influence and
a high level of knowledge on their competitors' strategies.

Characteristics:
• Complex products
• Differentiation (possibly through branding)
• High barriers to entry
• Significant influence over prices

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 Oligopoly example

Example – airlines:
• Virgin
• Emirates
• British Airways
• American Airlines
• Qantas
• Singapore Airlines

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 Restrictive practices
As well as 'imperfections' in the market, the market may also
be subject to restrictive or anti-competitive activities,
including:
• Dumping – selling products at a loss
• Exclusive dealing – being bound by contract to only buy
from or sell to one business
• Price fixing – businesses agreeing to sell at same price
• Refusal to deal – refusing to use a certain vendor
• Limit pricing – effectively a monopoly as new entrant
discouraged
• Retail price maintenance – retailer cannot set own price
• Government subsidies – deemed unfair to competitors
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 Price fixing

• Manchester United and several leading sportswear firms

who were found guilty of price fixing on football shirts
• http://news.bbc.co.uk/1/hi/business/4565683.stm
• £16 million fine

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 Market mechanism

Interaction of demand and supply

Demand
The quantity of goods that
potential customers would buy
or attempt to buy, if the price
of the goods was at a certain
level
Supply
The quantity of goods that
existing suppliers or would be
suppliers would want to
produce for the market at a
given price

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 What impacts demand?

• Price
• Inter-related goods: substitutes (tea and coffee) and
complements (bread and butter)
• Income levels: normal goods and inferior goods
• Fashion and expectations
• Income distribution

The relationship between demand and price can be shown

graphically via the demand curve.

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 Demand schedule – for single customer

At a price of $6 (A), demand is 1 kg, but as the price falls at

G to $2, the quantity demanded increases to 8 kg.
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 Market demand

• A market demand curve is similar to the demand curve of

a single household, but it expresses the total expected
quantity of the good that would be demanded by all
consumers together at any given price.

• Market demand curve = sum of all the individual demand

curves

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 The PED

Price Elasticity of Demand (PED) is a measure of the extent

of change in market demand for a good in response to a
change in its price.

Percentage change in quantity demanded

It is measured via:
Percentage change in price

PED > 1 elastic

PED <1 inelastic
PED = 1 unit elasticity

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 What does the PED mean?

PED > 1 elastic – an increase in price has a proportionally

greater impact on the quantity demanded

PED <1 inelastic – an small increase in the price, has

proportionally less impact on the quantity demanded

PED = 1 unit elasticity

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 Elastic good

Occurs where PED > 1

Example
• Luxury goods, eg champagne

Implications
• Increasing the price causes total revenue to fall

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 Inelastic good

Occurs where PED < 1

Example
• Necessities, habitual purchases eg petrol

Implications
• Increasing the price causes total revenue and profits to
rise

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 Income elasticity of demand

• Income elasticity of demand measures the responsiveness

of demand to changes in household income
• When household income rises people increase demand
for some goods, but also start to demand new goods
which they could not previously afford

% change in quantity demanded

Income elasticity of demand =
% change in income

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 Rising income

Assume that your income doubled. How would this affect

your demand for the following items?

1. Inter-city bus travel

2. Rice
3. Sports car

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 Summary of income elasticity of demand

Elasticity Value Type of good Example

Negative –ve Inferior Bus travel
Inelastic 0–1 Necessity Basic food stuff
Elastic >1 Luxury Sports cars

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 Cross elasticity of demand

Cross elasticity of demand is the responsiveness of quantity

demanded for one good following a change in price of
another.

% change in quantity demanded of good A

Cross elasticity of demand =
% change in the price of good B

*(assuming no change in the price of A)

The cross elasticity of demand depends upon the degree to

which goods are substitutes or complements.

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 Summary of cross elasticity of demand

Cross-elasticity Value Example

Perfect complements –1
Complements –ve Bread and butter
Unrelated products 0 Bread and cars
Substitutes +ve White bread and
brown bread
Perfect substitutes 1

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 Demand curve for normal and inferior goods

Income
Normal
good

Inferior
good

Quantity demanded

The effect of a rise in household income on demand for an

individual good will depend upon the nature of that good.
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 Income distribution and demand
• As well as total income, the distribution of that income will also affect the demand for
items, especially luxury ones.
What do you think might be the demand for swimming pools amongst a population of
five households enjoying total annual income of $1m, if the distribution of income is
either as under assumption 1 or as under assumption 2.
Annual income
Assumption 1 Assumption 2
$ $
Household 1 950,000 200,000
Household 2 12,500 200,000
Household 3 12,500 200,000
Household 4 12,500 200,000
Household 5 12,500 200,000

ANSWER
Under assumption 1, the demand for swimming pools will be confined to household 1.
Even if this household owns three or four properties, the demand for swimming pools is
likely to be less than under assumption 2, where potentially all five households might
want one.

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 Shifts of the demand curve

• Occurs when quantity demanded changes when the price

remains constant, for example, due to changing fashions

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 Movement to equilibrium

Price Excess Supply

5 Supply

1
Excess Demand Demand

5 15 25 Quantity

Slide 224
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 Example – Increase in consumer incomes

Price
S
P1
P0
D1

D0

Q0 Q1 Quantity

Slide 225
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 Example – Goods become less fashionable

P0

P1
D0
D1

Q1 Q0

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 Supply

Supply refers to the quantity of a good that existing suppliers

or would be suppliers would want to produce for the market
at a given price.

The quantity of goods supplied to a market varies for two

reasons:
1. Existing firms may increase or reduce their output
quantities.
2. Firms may stop producing altogether and leave the
market, or new firms may enter the market.

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 Excess supply

• If the quantity that firms want to produce at a given price

exceeds the quantity that households demand, there will
be an excess of supply, with firms competing to win what
sales demand there is.

• Over supply and competition would the be expected to

result in price competition and a fall in prices.

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 Short-run supply curve

In the short-run the firm will only supply if the selling price
covers all of the variable costs.

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 Short-run supply curve based on cost-plus pricing

This is extended to say that the firm will only supply if it can
generate a profit, ie sell for more than the marginal
production cost.

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 Factors influencing the supply quantity

• Costs of making the good

• Prices of other goods
• Expectations of price changes
• Changes in technology
• Other factors eg the weather

Changes in the supply conditions will result in a shift in the

supply curve.

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 Shifts in the supply curve

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 Equilibrium price

The competitive market process results in an equilibrium

price, which is the price at which market supply and demand
quantities are in balance.

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 Specimen exam

Which of the following statements is true in relation to the

average revenue function of a business in a perfect market?

A. It is diagonal
B. It is horizontal
C. It is vertical

(1 mark)

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 Specimen exam Solution

Answer: B

The demand curve of a company in a perfect market is

horizontal, because they can sell as much as they want at a
given market price and nothing at all at a price set higher
than the prevailing market price.

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 Article

• Introduction to microeconomics

http://www.accaglobal.com/gb/en/student/acca-qual-student-
journey/qual-resource/acca-qualification/f1/technical-
articles/introduction-to-microeconomics.html

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 Chapter 4 – Summary 1

Micro-economic factors

Markets Supply Demand

• Perfect • Price • Price

• Monopolistic • Factor conditions • Factor conditions
• Price of other goods • Price of other goods
• Price of related goods • Price of related goods
• Change in technology • Change in technology

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 Chapter 4 – Summary 2

Influences
Equilibrium

Price Elasticity of

Q  Q  P P  Demand
PED =

 2 1   2 1 Cross Elasticity of
 Q   P1  Demand
 1   
Income Elasticity
of Demand

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