Theme 1 economics

Ceteris paribus

All other things remain the same

Positive statement

Objective statements that can be proven true or false

Normative statement

Subjective statements based on value judgements and can't be proved or disproved.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

3 economic questions

What to produce? How to produce? For whom to produce?

Factors of production

Land, labour, capital and enterprise

Land

All natural resources, raw materials, the fertility of the soil and resources found in the sea

Labour

The quantity and quality of workers

Capital

Man made aid to production that is used to make other goods and services

Enterprise

Bringing together all the other factors of production to produce goods and services

Renewable resources

Can be replaced naturally after use e.g. Solar energy, wind and wood.

Non-renewable

Where continued consumption will lead to its exhaustion

Opportunity cost

The next best alternative foregone

Economic goods

Are created from resources that are limited in supply and so are scarce. So they command a price

Free goods

Unlimited in supply, no opportunity cost

Capital goods

Goods required to produce other goods

Consumer goods

Goods that give satisfaction or utility to consumers

Marginal analysis

Analysis that is concerned with the impact of additions to or subtractions from the current situation.

Economic growth

An increase in the productive capacity of the economy indicating an increase in real output

Economic decline

A decrease in the productive capacity of the economy indicating a decrease in real output.

Factors causing an outward shift in PPF

-Discovery of new natural resources

-Advances in technology

-Improvements in education and training

-Immigration

-Increase to retirement age

Factors causing an inward shift in PPF

-Natural disasters

-Depletion of natural resources

-Emigration

-Deep recession

Division of labour

When workers specialise on very specific tasks.

Advantages of division of labour

-Each worker specialises in tasks for which that worker is best suited

-The worker only has to be trained in one task

-Less time is wasted as the worker doesn't need to move from one task to another

-Production line methods can be employed increasing productivity

Disadvantages of division of labour

-Monotony and boredom for workers

-Loss of skills as they only know one thing

-A strike by one group can stop all production

-Lack of variety as all goods produced are identical

Money

Anything that is used as a medium of exchange for goods and services.

Functions of money

-Medium of exchange

-Store of value

-Measure of value

-Means of deferred payments

Medium of exchange

Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.

Store of value

Enables people to save in order to buy goods in the future

Measure of value

Enables people to assess the value of different goods and services by comparing prices

Means of deferred payments

Enabling people to buy goods and pay for them on credit

Free market characteristics

-Private ownership of resources

-Market forces

-Producers aim to maximise profit

-Consumers aim to maximise utility

-Resources are allocated by price mechanism

Command economy characteristics

-Public ownership of resources

-State determines price

-Producers aim to meet production targets set by state

-State allocates resources

-Greater equality of income and wealth

Advantages of free market

-Consumer sovereignty

-Flexibility

-No bureaucracy

-Efficiency

-Increased choice

-Economic and political freedom

DIsadvantages of free market

-Inequality

-Trade cycles

-Imperfect information

-Monopolies

-Externalities

Advantages of command economies

-Greater equality

-Macroeconomic stability

-External benefits and costs

-No exploitation

-Full employment

-Resources will be allocated to maximise social welfare

Disadvantages of command economies

-Inefficiency

-Lack of incentives to take risks

-Restrictions on freedom of choice

-Shortages and surpluses

-Bureaucracy

-No consumer sovereignty

-Inflexibility

Utility

The level of satisfaction a consumer receives from the consumption of a product or service

Demand

The amount of goods and services people are willing and able to buy

Substitution effect

When there is a rise in price, the consumer tends to buy more of a relatively lower priced good.

Income effect

The fall incomes will lead to a fall in quantity demanded

Factors that cause a shift in demand curve

-Real incomes

-Size or age distribution of the population

-Tastes, fashions or preferences

-Price of substitutes or complements

-Amount of advertising or promotion

-Interest rates

Total utility

The total satisfaction gained from the total amount of a product consumed

Marginal utility

The change in utility from consuming an additional unit of the product

Law of diminishing marginal utility

As a person consumes more and more of a product, the marginal utility falls. So people are prepared to pay less as their consumption increases.

Price elasticity of demand(PED)

A measure of the responsiveness of quantity demanded of a product to a change in its price

PED formula

PED=%change in quantity demanded/%change in price

Factors affecting PED

-Availability of substitutes

-Proportion of income spent on a product

-Nature of a product

-Durability of the product

-Length of time under consideration

-Breadth of definition of a product

Total revenue

The value of goods sold by a firm and is calculated by multiplying price by quantity sold.

Cross elasticity of demand (XED)

A measure of responsiveness of quantity demanded of one product to a change in price of another

XED formula

% change in quantity demanded of good X / % change in price of good Y

Income elasticity of demand(YED)

A measure of the responsiveness of quantity demanded of a product to a change in real income

YED formula

% change in quantity demanded / % change in income

Supply

The amount supplied at a given price.

Factors causing a shift in the supply curve

-Costs of production

-Productivity of the workforce

-Indirect taxes

-Subsidies

-Technology

-Discoveries of new reserves of a new material

Price elasticity of supply (PES)

A measure of responsiveness of quantity supplied for a product to a change in its price