Nature of economics 1.1

why is economics a social science

• It studies societies and human interactions

• Human interactions are complex and are influenced by many variables

How to think like an economist

• identify which variables will be studied and which ones will be excluded

• consider the types of relationshis between variables

Ceteris Parabis

• All other variable remain constant

• allows economists to simplify and explain causes and effects

Inability to make scientific experiments

• social scientific method

• due to complexity of human nature and the significant number of social interactions that are taking place in an economy t any given point in time

Positive statements

• based on empirical evidence and tend to be statements of facts

• objective statements

Normative statements

• built around belief and opinion

• valued judgement

Role of value judgement

• Influence individuals choices in the economic decisions

• influence governments choice with regards to economic policies they chose to adopt and spend money on

the bsic economic problem

• factors of production

• resources are finite and humans have infinite wants and needs

renewable resources

• can be used repeatedly and naturally replenished

non renewable resources

cannot be naturally replenished

Opportunity cost

• the loss of the next best alternative

• choices have to be made about how best to allocate resources

PPF

• is an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production efficiently to produce only two goods/services

capital goods 

• assets that help a firm nation to produce output

• machinery

consumer goods

• end products and have no future use

• a watch

PPF diagram

A PPF for an economy demonstrating the use of its resources to produce capital or consumer goods

PPF diagram explanation

The use of PPF to depict the maximum productive potential of an economy

• The curve demonstrates the possible combinations of the maximum output this economy can produce using all of its resources (factors of production) efficiently

The use of PPF to depict opportunity cost using marginal analysis

• To produce one more unit of capital goods, this economy must give up production of some units of consumer goods (limited resources)

Economic growth

• occurs when there is an increase in the productive potential of an econommy

• demonstrated by outward shift

• improved quality and quantity of the available factors of production

Economic decline

• when there is any impact on an economy that reduces the quantity and quality 

Factors of production

• LAND- natural resources

• LABOUR- productive human effort

• CAPITAL- man made resources

• ENTREPRENEURSHIP- the willingness and ability to take the risks of combing the other factors of production

Specialisation

• is the production of a limited range of goods by a company which means that trade is essential as it is the only way they are able to access all they need

division of labour

• is when labour becomes specialised in a particular part of the production process

Adam Smith

• stated the concept of specialisation and the division of labour and showed how it can increase labour productivity, allowing firms to increase efficiency and lower their costs of production

Advantages of specialisation

• division of labour enables labour productivity to be increased

• lead to higher quality goods an services

• time is not wasted moving between jobs and getting out tools

Disadvantages of specialiasation

• doing one specific task can be very boring which may lead to poor quality of work 

• the workforce do not have wide industrial training and could lead to structural unemployement

Advantages of specialising in the production of goods and services to trade

• the theory of comparative advantage states that countries should specialise in producing goods where they have a lower opportunity cost

• this will help them boost their economy so there is a greater output globally

Disadvantages of production of goods and services to trade

• countries may become over dependent on one particular export and if htis falls their economy may collapse

• high interdependence and this will cause problems if trade is prevented

Functions of money

• A medium of exchange- it an be used to buy and sell goods and services and is acceptable everywhere

• A measure of value - can compare the value of two goods 

• A store of value- it is able to keep its value and be kept for a long time

• A method for deferred payment- money can allow for debts to be created

Free market economy

• individuals are allowed to make their own choices and own the factors of production without government intervention

• resources are allocated through the price mechanism

• Adam Smith believed in the free market economy, he explained how there was an invisible hand which allocated resources to everyones advantage allowing the greatest good for the greatest number of people

Adam Smith

• He believed competition in the market caused lower prices as firms wanted to be competitive and so benefits the consumer as they can get goods cheaply

Friedrich Hayek

• argued that state control of the economy leads to the loss of freedom 

• he believed that the poor in the free market countries were better off than those in command economies because at least they had personal freedom

advantages of the free market

• the system is automatic due to the invisible hand- resources are moved out of production of a good when people stop wanting it

• political freedom

• productive efficiency

disadvantages of free market

• high levels of inequality 

• moopolies

command economy

• All factors of production except labour is owned by the state

• no private property 

• working for a common good

• All workers recieve the same wage

• karl marx- believed comman economy and critisiced capitalism, believed that capitalists profit came from exploiting labour as they are underpaid 

Advantages of command economy

• state provided minimum standard of living

• less wastage of resources

disadvantages of command economy

• bribery and corruption- decision making is slow

• consumers lose their freedom

mixed economy

• free market mechanism and the government panning process allocate a significant amount of the total resources in a country

governments role in a mixed economy

• creating a framework of rules

• supplements and modifies the price system

• redistributes income