A2 Micro notes (copy)

Scarcity

Is the basic economic problem and it is caused by unlimited wants and limited resources.

Needs

Are goods and services without which we cannot survive – ‘necessities’; e.g. food and drink, shelter, warmth, clothing, medical care. Needs are assumed to be limited.

Wants

Are goods and services that we desire but which are net necessary for survival – ‘luxuries’; e.g. motor cars, mobile phones, foreign holidays. Wants are assumed to be unlimited.

Economic Goods

Are scarce: i.e. they are limited in supply. Resources have to be used to produce them; e.g. motor cars, health care. Have an opportunity cost

Free Goods

Are not scarce: i.e. they are unlimited in supply. Resources do not have to be used to produce them; e.g. fresh air, sunshine, the ‘countryside’. Have no opportunity cost

Sustainability

Is ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’ (Brundtland Commission, 1987)

Opportunity Cost

Is the value of any economic choice in terms of the next best alternative foregone as a result of making that choice. Factors of Production- are the economic resources used to produce goods and services: land (natural resources), labour (human resources), capital (man-made resources) and enterprise (risk bearing). Note – free goods do not use any resources and have zero opportunity cost.

Primary Production

‘Extracts’ raw materials from nature; e.g. agriculture, forestry and fishing; mining and quarrying.

Secondary Production

Processes or manufactures raw materials into semi-finished and finished products; e.g. manufacturing; energy and water supply; construction.

Tertiary Production

Is services that provide support to all stages of the production process, as well as being directly consumed; e.g. distribution and hospitality; transport and communications; financial and business services; estate management; public and other services

Consumer Goods

Are bought by households and they satisfy wants directly; e.g. goods such as food and clothing.

Capital Goods-

Are bought by firms and they satisfy wants indirectly by producing other goods and services; e.g. machine tools, factories, office space.

The Division of Labour

Is where the production of goods and services is broken down into a series of specialised tasks. Each worker only carries out a small part of the overall production process; e.g. motor cars on a production line.

Specialisation

Is where individuals, businesses and whole economies are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others.

Money

Is anything that is generally accepted in exchange for goods and services or in settlement of a debt.

The Production Possibility Curve (PPC)

Shows the combination of goods and services that an economy could produce if all of its resources – capital and labour – were fully employed and assuming a constant state of technology.

Pareto-efficiency

Occurs where it is impossible to make one person better off without making another person worse off: i.e. the economy is on the PPC.

Diminishing Returns

Occurs where an increase in the amount of labour coupled with a fixed amount of capital and land leads to an increase in the output of goods, initially at an increasing rate and then at a decreasing rate. This is the Law of Diminishing Returns.

Economic Growth

Is an increase in the actual and the potential output of goods and services produced by an economy. It can be shown by a rightward shift in the production possibility curve.

Production

Any economic activity that leads to a flow of goods and services for which people are willing and able to pay.