how competitive markets work (chap 1-2)

The economic problem, opportunity cost, allocation of resources, specialisation, trade

ceteris paribus

things being equal

positive statement

an objective statement that can be tested and is based on facts, they are not based on value judgements

example of a positive statement

rishi sunak has been in office for two years

normative statement

a subjective statement that is soeley based on an individuals judgement and opinion, cannot be tested

example of a normative statement

we should raise the national minimum wage

value judgement

an assessment if a decision is worthwhile in terms of standards and priorities

what is the basic economic issue

the issue of scarcity and resource distribution

scarcity

where supply does not meet demand

Free good

A good that is not regarded as scarce such as the earths atmosphere

Economic good

A good that is in demand by a consumer

What are the three economic agents

Households, government, firms

What is the aim of a rational consumer

Maximise utility

opportunity cost

the next best thing you give up when making a decision

example of opportunity cost

paying your workers more CAUSING less money to be available for things

explain the opportunity cost diagram

as you increase x output, you give up some of y output and vice versa

what are the four factors of production

capital, labour, land, enterprise

capital and its rewards

Non Human Resources used in the production process, reward is interest

labour and its rewards

manual work and efforts in order to produce goods and services in an economy, reward is wage

land and its rewards

the space and nature providing the materials and space, reward is rent

enterprise and its rewards

ability to bring all factors of production together and take risks to start business, reward is profit

renewable resource

a resource that can replenished e.g wind energy

non-renewable resource

a resource that cannot be replenished e.g coal

how does opportunity cost link to scarcity

if a firm was to use cheaper materials to combat good quality resources being scarce, they may loose customers as the products quality has dropped

what does ppf stand for

production possibility frontier or curve

what does a ppf show

the maximum combinations of goods and services that can be produced in a given period with available resources

Trade off

What you give up when making a decision between two objectives, shown on a ppf depending on what amount of what product is being produced

where on a ppf shows maximum possible output

anywhere on the curve

if a point on a ppf is outside the curve, what does this indicate

the goal is unattainable as there is not enough resources e.g raw materials or machinery

if a point on a ppf is inside the curve, what does this indicate

the economic agent is not producing at maximum output e.g having idle machinery

how can efficiency change on a ppf

changes to the factors of production e.g having more labour causing more output

describe opportunity cost in relation to a ppf

as you move from one point on the curve to another, you give up producing more of one product than another so your opportunity cost is one of the good’s output

how can the ppf curve expand outwards

if the overall production increases in volume due to an increase in productive potential, usually in long run economic growth

what causes the curve to be presented as such

investment in the production of one product over the other increasing output for only one

Capital good

Good used as part of the production process e.g machinery buildings

Consumer good

Good produced for consumer use

Productive efficiency

Where firms produced at the lowest possible cost

Allocative efficiency

Where firms produce the correct amount of goods in relation to what consumers wish to buy

Incentive

What motivates an economic agent to make a decision e.g a household buying more as prices are lower

What is the main aim of households

Maximise utility

What is the main aim of governments

Improve welfare/ quality of life

What is the main aim of firms

Profit maximisation

rationality

making decisions using assumptions of the consumers feelings and behaviours as the facts may not always be available

explain the rational decision making model

a flow diagram that describes how businesses make rational decisions

first identify the issue, find criteria they are to stick to, weigh out the criteria, generate alternatives, evaluate the alternatives, carry out the best decision

what is a drawback of the rational decision making model

it is a long process that takes time which may not match up with a firms time constraints

Resource allocation

How resources are distributed across society

free market

a type of economy where the decision making about prices is left up to firms and consumers with minimal government intervention

what can a free market also be called

market economy, capitalist economy

pros of a free market *5

high efficiency as firms want to meet customer demands as quick as possible to generate profits, follows the consumers demand, likely to lower production costs as goods are usually being produce in masses, no or little shortages, freedom of consumer choice in production and consumption

cons of a free market *4

monopolies that own almost all the trades territory may raise prices and cause all consumers to loose out, underproduction of merit goods such as welfare and education, overproduction of demerit goods such as alcohol and tobacco leading to societal outbreak, ignores the reality that inequalities as made due to people not being able to afford all goods

realistically, how do government generally intervene in free market economies

they enforce laws and provide public services aswell as goods such as roads

explain Adam Smith’s invisible hand theory

prices in a free economy are determined by consumers spending votes, the wealthy employ the poor to produce their wants, interdependency between the wealthy and poor

laissez faire

what adam smith advocated, where governments can enter and leave economies as they wish to regulate themselves

what did hayek argue

control of the economy by the government leads to the individual loosing out and having no freedom, argues free markets have more liberty and allow for more individual choice

what are some criticisms of hayeks view

free markets still create disadvantaged people as people cannot afford what is needed e.g in event of monopolies raising prices, law is controlled by the rich and power regardless of what economy you are in so you don’t necessarily have choice

what did marx argue

the proletariat are exploited by the bourgeoise and in a free market the drive for lower waged and harder work would increase exploitation and frustration against the bourgeoise causing rebellion, wanted a planned command economy of order and equal distribution

planned economy

economy where government locates all of its scarce resources to its citizens

what is a planned economy also called

command economy

pros of a planned economy *5

better order in times of crisis, ensures all have the basic needs, reduced inequalities and more welfare, prevents abuse of monopolies power, compensation when the market fails as governments can just re-allocate resources

cons of a planned economy *5

governments can fail as they are not informed well of consumer wants, may not meet all of consumer wants, limits democracy and personal freedom, usually poor quality goods and services, slow or no response to consumer demand trends so generally cannot capitalise on profits

mixed economy

where the market is controlled by both consumers and governments, most prevelant in our economy

example of a free market economy

singapore

example of a planned economy

north korea

example of a mixed economy

uk

Specialisation

The process of concentrating on a particular task to become expert in it

Division of labour

Production procedure is broken down into stages and workers are assigned to the stages

Who Introduced the division of labour

Adam smith

Advantages of specialisation for firms

Less training for workers, higher production, minimal time wasting

Disadvantages of specialisation for firms

Workers can’t fill in for each other, mistakes, shock if there is a demand change, repetitive work means boredom and a bad brand image

Advantages of specialisation for workers

Less stressful, expertise developed, sense of achievement

Disadvantages of specialisation for workers

Boredom and specific skills only, hard to gain promotions, easy to be made redundant

Advantages of specialisation for countries

Increased efficiency, greater output, lower costs, can capitalise on high demand and grow economy

Disadvantages of specialisation for countries

Over dependency on specific commodity, overuse of non-renewable resources, more imports

Market

Set of arrangements that allows transactions to take place

Labour productivity

Output per worker / unit of labour

Capital productivity

Output per unit of capital employed

Barter system

Economy where trading goods and services is a coincidence of wants- you trade something you don’t want for something you want with someone who is in the same position

Fiat money

Money that is backed by a government rather than a commodity such as bank notes rather than gold coins