1.1 Nature of Economics PMT

Positive Economic Statements

- objective factual statements that can be tested and verified

Normative Economic statements

subjective statements that involve value judgements and opinions and express how things should be rather than what they are

why is the difference important

to understand and analyse economic phenomena objectively

Role of Value judgements

- economic decision making

- conflicts in values

- neutrality

- ethical considerations

- economic policy

Implications of Scarcity

choices and trade offs and opportunity cost

Opportunity cost

the value of the next best alternative forgone

Scarcity/economic problem

limited resources, unlimited wants

why opportunity cost is important to consumers

- to make choices about money and time

- help make informed decisions

why oc is important to producers

- to allocate resources for profit maximisation

- production decisions

why oc is important to governments

- to allocate budgets to programmes and policies

what is a pff

graphical repreentation of an economy maximum production potential that shows the trade off between producing different combinations of two goods/services

movements along the ppf

reallocation of those resources

shifts in the pff

changes in the country's production potential

technological progress, increased resources or inc in labour productivity

capital goods

goods used to produce other goods and services

consumer goods

items purchased for personal use and consumption

Specialisation

concentration of individuals, firms, nations on producing a limited range of goods and services

division of labour

form of specialisation where tasks are divided among workers

Adam smith argued that

specialisation leads to increased productivity and economic growth

Advantages of specialisation

- increased productivity as workers become more skilled

- economies of scale

- lower costs with reduced training times

disadvantages of specialisation

- monotony leading to job dissatisfaction

- dependency

advantages of specialising for trade

- can focus on producing g+s where they have a comparative advantage leading to higher efficiency

- increased standard of living as trade allows access to a wider variety of g+s

Disadvantages of trade specialisation

vulnerability to external shocks

income inequality as some industries/regions may benefit more

Functions of money

Medium of exchange

measure of value

store of value

method of deferred payment

Free Market Economy

- economic decisions are made by privately made by private individuals and firms

invisible hand

term economists use to describe the self-regulating nature of the marketplace

command economy

government/central authority makes all economic decisions

karl marx

classless society with centralised planning

hayek

believed in free markets

mixed economy

- private sector and government play roles in economic decision-making

- combining elements of free and command market economies

Advantages of the free market

- competition incentivises firms to innovate and prod effeciently

- consumer choice- have wider range of choices

- rapid economic growth

disadvantages of free markets

- wealth disparity

- lack of public goods

- boom-bust cycles

Advantages of command economy

- equality

- stable as central control can handle crisis

- resources targeted to public goods

disadvantages of command economy

- lack of incentives to innovate and prod efficiently

- bureaucracy

roles of state in a mixed economy

- regulation for consumer protection, environment and markets

- public goods and services

- welfare and redistribution

- stabilisation and economic planning