1.1 Nature of Economics

Follows the edexcel a level economics a specification

the 4 factors of production

land, labour, capital, enterprise

the 3 economic agents

consumers, producers, government

ceteris paribus

all other things being equal

positive statement

objective statements that can be tested and evaluated based on empirical evidence

normative statement

subjective statements that carry one or more value judgements about what ought to be

the economic problem (scarcity)

matching limited resources to unlimited wants and needs

renewable resources

commodities which are inexhaustible or replaceable over time

non-renewable resources

commodities which cannot be renewed or replenished

opportunity cost

the value of the next best alternative forgone

capital goods

goods used to make consumer goods and services

example: machines and equipment

consumer goods

goods used to satisfy our needs and wants directly

(these goods are used for final consumption)

example: food, clothing, electronics

production possibility frontier (PPF)

shows the maximum combinations of output that an economy can produce when its resources are fully and efficiently employed

points on, inside and outside a PPF curve

opportunity cost on a PPF

Opportunity Cost of Moving from Point A to Point B:

To produce more of Good Y we have to forgo (90-40=50) of Good X, gaining us (95-60=35) of Good Y.

Opportunity Cost is forgoing 50 units of Good X to gain 35 of Good Y.

explaining an outward shift of a PPF (economic growth)

Increase in natural resources

Technological advancements

Human capital development

Investment in capital

explaining an outward shift of a PPF for one good

If the technology only improves for good Y then there will only be a shift outwards along good Y’s axis

specialisation

the process where individuals, firms or regions concentrate on producing a narrow range of goods in which they have a comparative advantage

advantages of specialisation

more productivity leads to higher profits

surplus output to be traded

lower prices cause higher real incomes for consumers

disadvantages of specialisation

higher trading costs lead to lower profits

over-reliance on specialists

depletion of resources

division of labour

a form of specialisation where the production process is broken down into separate, distinct tasks, with each worker assigned to a specific task (Adam Smith)

therefore workers achieve ‘learning by doing’

advantages of division of labour

raises output per person as people become more proficient or specialised

increases productivity as time is not wasted switching between tasks

lowers unit costs

disadvantages of division of labour

repetitive strain injury

reduced job satisfaction and boredom

lower quality products

high worker turnover

the barter system

a system of trade where goods and services are directly exchanged for other goods and services without the use of money

problems with the barter system

lack of a double coincidence of wants

lack of a common measure of value

difficulty in making deferred payments

lack of division of goods

difficulty in storing value

money

anything that is generally acceptable as a method of payment when trading goods and services

money is legal tender, so only the central bank of a country has authority to print notes and coins,

types of money: notes, coins, credit/debit cards, cheques

the 4 functions of money

A medium of exchange

A measure of value

A store of value

A standard for deferred payment

free market economies

the majority of resources are owned and controlled by private individuals and firms rather than the state (Adam Smith)

Examples: United States, Singapore

advantages and disadvantages of free market economies

Lower prices as consumers have the priority

Increased competition, innovation and quality

Efficient use of scarce resources

Reduction in quality to increase profits

Monopoly power

Worker and consumer exploitation

command economies

the majority of resources are owned or allocated by the state and the market mechanism only plays a small part (Karl Marx)

Example: North Korea

advantages and disadvantages of command economies

Greater equality

Less unemployment

Resources can be directed quickly towards urgent priorities

Inefficient use of scarce resources

Less innovation

Lower living standards

Black markets

mixed economies

both private individuals and firms as well as the state control the economy (Friedrich Hayek)

Most commonly 40% of resources are owned by the state and 60% by the free market

Example: United Kingdom

advantages and disadvantages of mixed economies

Shares the advantages and disadvantages of both

Increased competition

Resources can be allocated quickly

Increased innovation and quality

Inefficient use of scarce resources

Clashing priorities

Worker and consumer exploitation