Factors of Production

Factors of production are the resources used to produce goods and services.

Types of Factors:

• Land

  • Natural resources used in production

  • Examples: raw materials, fish, physical land

. Classification by Economic Sector

Firms can be grouped based on the type of activity they perform:

🔹 Primary Sector

• Extracts raw materials from nature

• Examples: fishing, mining, farming

🔹 Secondary Sector

1. Factors Affecting Choice of Occupation

A. Wage Factors (Financial Rewards)

These are monetary benefits received for work.

• Wages

  • Paid hourly/daily/weekly

  • Example: Shop worker paid per hour

1. Household Savings

Meaning of Saving

Saving occurs when a person sets aside part of their current income for future use.

Reasons for Saving

• Future Spending

  • People sacrifice current spending to use money later

Influences on Household Spending: Income

1. Introduction

Household spending mainly depends on the level of income a person or family earns.

👉 The higher the income, the more a household can usually spend.

2. Sources of Household Income

Households earn income from different sources:

What is Market Failure?

• Market failure occurs when the free market fails to allocate resources efficiently

• This leads to a mismatch between what is produced and what society actually needs

Causes of Market Failure

1. Public Goods

Definition

What is Market Failure?

• Market failure happens when the free market does NOT use resources efficiently.

• This means demand and supply alone cannot give the best outcome for society.

⚠️ Examples of Market Failure

• Under-provision (too little produced):

  • Education

Advantages

1. Efficiency

• Competition forces firms to:

  • Produce what customers actually want

  • Improve quality and reduce costs

• Encourages innovation and new ideas

What is an economic system?

An economic system is how a country:

• Organises production

• Distributes goods and services

• Allocates scarce resources

 Market Economy

Price Elasticity of Supply (PES) depends on several factors that affect how easily producers can respond to price changes.

🔑 1. Spare Productive Capacity

• If firms have unused resources (labour, machines, space), they can increase output easily.

• This makes supply more price elastic.

Example:

• Coca-Cola can quickly increase production because of its large-scale bottling capacity.

• Price Elasticity of Supply (PES) measures how much the quantity supplied of a product changes when its price changes.

• It shows how responsive producers are to price changes.

Elastic Supply

• Supply is price elastic when producers can increase production easily and quickly when the price rises.

• This usually happens when:

  • Firms have spare capacity

1. Total Revenue (Sales Revenue)

• Sales revenue is the money a business receives from selling goods or services.

• Formula:Sales Revenue = Price × Quantity Demanded

⚠️ Note:

• Sales revenue is not the same as profit.

• Profit = Sales Revenue − Total Costs of Production

Price Elasticity of Demand (PED) measures how responsive the quantity demanded of a product is when its price changes. Several factors determine whether demand is elastic (very responsive) or inelastic (less responsive).

1. Substitutes

• This is the most important determinant of PED.

• If a product has many close substitutes, demand will be price elastic because consumers can easily switch when the price rises.

Examples

• Bananas, chocolate bars → Elastic demand

1. Meaning

• Price Elasticity of Demand (PED) measures how much the quantity demanded of a product changes when its price changes.

• It shows how responsive customers are to price changes.

Law of Demand:

• When price increases → quantity demanded decreases.

• When price decreases → quantity demanded increases.

Changes in non-price factors affecting demand or supply will shift curves and change the equilibrium price and equilibrium quantity in a market.

🔄 1. Changes in Supply

📉 A Decrease in Supply (Leftward Shift)

When supply decreases, the supply curve shifts left.

🔹 Causes:

• Government taxes (e.g., tax on tobacco)

🔹 1. Market Equilibrium

Market equilibrium is the situation where:

• Quantity demanded = Quantity supplied

• There is no shortage

• There is no surplus

At this point:

Demand and Supply

🔹 Meaning of Demand

• Demand is the quantity of a good or service that consumers are willing and able to buy at a given price.

• Demand depends on price and other factors.

Factors Affecting Demand

• Price of the good

Meaning of Mixed Economy

A mixed economy has both:

• Private sector – businesses owned by individuals or groups.

• Public sector – organisations owned and controlled by the government.

Almost every country today uses a mixed economic system.

• Income and wealth inequality — rich people enjoy more choices and better services, while the poor may struggle to meet basic needs.

  
  

• Basic needs of the poor may be ignored — firms focus on profitable goods, not what society really needs.

  
  

• Environmental damage — overuse of natural resources, pollution, and climate change happen because firms aim for maximum profit.

  
  

• Lack of public goods — important things like street lighting, public roads, and national defence may not be provided properly.

  
  

• Social hardship — poor and vulnerable groups depend mainly on charities, not the government.

  
  

• Wasteful competition — too much money is spent on advertising, packaging, and branding to win customers.

  
  

Market Economic System

An economic system is just the way a country uses its resources and runs its economy. The big question is: Should the government control everything, or should people and businesses decide things on their own?

There are three main types of economic systems:

1. Market Economy

• Here, buyers and sellers decide everything through demand and supply.

• Government doesn’t interfere much.

Significance of Price Elasticity of Supply (PES)

PES shows how quickly and easily producers can increase supply when the price of a product rises. A high PES (elastic supply) is usually better for firms because it helps them respond fast to market changes.

Why firms prefer high PES

• It helps them stay competitive in the market.

• They can earn more revenue and profit when prices rise.

• Firms can increase PES by:

They are the factors that decide how quickly and easily producers can increase their supply when the price of a product rises.

In other words, these factors explain how responsive supply is to a change in price.

If supply can increase quickly → elastic supply. If supply cannot increase easily → inelastic supply.

1. Spare Capacity

If a firm has unused machines and workers, it can increase supply easily → elastic.

2. Stocks (Inventories)

Price Elasticity of Supply (PES)

Price elasticity of supply shows how quickly and easily producers can increase or decrease the amount they supply when the price changes.

Two main types:

1. Price Elastic Supply

• Producers can increase supply quickly and easily when price rises.

• No big delays.

Importance of Price Elasticity of Demand (PED) for Decision Makers

Knowing about PED helps businesses, consumers, and the government make better decisions about prices and demand.

For Producers (Businesses)

• If demand is price inelastic (people keep buying even if price rises), the firm can increase prices to earn more revenue. Example: Medicine or petrol.

• If demand is price elastic (people stop buying when price rises), the firm should avoid raising prices because sales will fall a lot. Example: Soft drinks or snacks.

1. Predicting the Effect of Exchange Rates

Determinants of Price Elasticity of Demand (PED)

These are the factors that decide how strongly people react when the price changes.

1. Substitutes (Other Choices)

• If people can easily find another product, they will switch when the price goes up → Elastic Example: Pepsi and Coca-Cola.

• If there are no other options, people still buy it → Inelastic Example: Medicine or toothpaste.

2. Income (Money Spent)

Law of Demand & Price Elasticity of Demand (PED)

• The Law of Demand says that when the price increases, people usually buy less of that product.

• But how much less they buy depends on how sensitive or responsive they are to price changes.

Price Elasticity of Demand (PED)

PED shows how much demand changes when the price changes.

• Price Inelastic Demand → Demand changes a little when price changes.Example: Rice, petrol, toothpaste – people still need them even if prices rise.

Price Elasticity of Supply (PES)

• Definition: PES measures how much the quantity supplied of a good changes when its price changes.

• Formula:

  

• Elastic Supply (PES > 1): Supply changes more than price.

• Inelastic Supply (PES < 1): Supply changes less than price.

Price Elasticity of Demand (PED)

Meaning: Price elasticity of demand shows how much the demand for a product changes when its price changes. It helps us understand how sensitive customers are to price changes.

For example:

• If the price of ice cream goes up and people stop buying it quickly, the demand is elastic.

• But if the price of salt goes up and people still buy it, the demand is inelastic.

Formula:

• When non-price factors (like taxes or weather) change, they can shift demand or supply.

• For example, if the government adds a tax on cigarettes, the supply decreases (moves left).

• This makes the price go up (from P1 to P2) and the number of cigarettes sold go down (from Q1 to Q2).

If supply moves left, prices go up because there’s less to sell — like when bad weather reduces crops.

If supply moves right, prices go down because there’s more to sell — like when farmers get subsidies or the weather is good.

market equilibrium

• market equilibrium means the point where demand and supply are equal. At this point, the price is just right — no shortage and no extra goods. This price is called the equilibrium price, and the amount bought and sold is the equilibrium quantity.

Market disequilibrium

market disequilibrium happens when demand and supply aren’t equal. This causes shortages or surpluses.

If the price is too low, more people want to buy than what’s available — this creates a shortage. When that happens, prices usually rise until they reach the equilibrium price again.

•  the law of supply means when the price goes up, producers supply more, and when the price goes down, they supply less. That’s why the supply curve slopes upward from left to right — showing a positive link between price and quantity supplied.

movement along a supply curve happens only when price changes.

• If price rises, producers supply more — this is called an extension in supply.

• If price falls, producers supply less — this is a contraction in supply.

Individual supply and market supply

What is Supply

• Supply is the willingness and ability of producers to sell a good or service at a given price in a given period of time.

• It shows how much producers are ready to sell at different prices.

Law of Supply

• As the price of a good increases, the quantity supplied also increases.

• As the price decreases, the quantity supplied decreases.

What is Demand?

• Demand = when customers are willing and able to pay for a product.(If you only want it but can’t afford it, that’s not real demand — that’s just desire.)

• Quantity demanded = how much people will buy at each price level.

Law of Demand

• When price increases → demand decreases

• When price decreases → demand increases

Meaning and Measurement

Inflation

• Inflation means a rise in the general price level of goods and services in an economy.

• It means money loses value — you can buy less with the same amount.

• Example: If prices rise by 5%, what cost ₹100 before will cost ₹105 now.

Deflation

Definition:Market structure = how a market is organized based on number of firms, type of products, and control over price.

• Determines price, quantity, and competition.

Types of Market Structure

1. Perfect Competition

• Many sellers, identical products

• Firms cannot control price

Understanding Firms

1. What is a Firm?

• A firm is an organisation that uses resources (land, labor, capital, and enterprise) to produce goods and services for consumers.

• Its main goal is usually to make a profit.

• Examples: Apple (electronics), Tata (cars), and local shops.

2. Why Firms Exist

What are Factors of Production?

• Factors of production are the resources used to produce goods and services. They are the basic inputs needed for all kinds of production.

  Economists divide the factors of production into four main groups:

• Land

• Labor

• Capital

Introduction & Main Differences

• Economic development means improving a country’s income, jobs, industries, and living standards.

• Countries have different levels of development because of differences in resources, education, technology, and government systems.

• The world can be divided into:

  • Developed countries – rich and advanced (like USA, Japan, Germany)

  • Developing countries – still growing (like India, Brazil, South Africa)

what is labor force ?

• The labor force refers to all the people in a country who are willing and able to work .

It includes :

• People who have jobs ( the employed ) ,and

• People who are looking for jobs ( the unemployed but able to work .)

Importance of labor force

What is unemployment ?.

• Unemployment is when people who are able and willing to work cannot find a job.

Types of Unemployment ?.

Frictional unemployment - Short - term , when people are between jobs .