1.1 Nature of Economics

what does the term ‘ceteris paribus’ mean

all else being equal

why is economics considered a social science

as it looks at the behaviour of humans & their use of scarce resources

define positive statement

an objective statement that can be tested with evidence

define normative statement

a subjective statement which contains a value judgement - opinions

what is a value judgement

an evaluative statement which says how good or bad you think something is

what is the basic economic problem

the problem of scarcity - wants are unlimited but resources are finite so choices have to be made

define opportunity cost

the next best alternative forgone

define renewable resource

a resource of economic value that can be replenished or replaced on a level equal to consumption

define non-renewable resource

a resource of economic value that cannot be readily replaced by natural means on a level equal to consumption

why is opportunity cost important to consumers

consumers will make choices on how to use their limited income based on what gives them the greatest level of satisfaction

why is opportunity cost important to firms

producers must choose what to do with their limited resources and their decisions will be based on profit

why is opportunity cost important to the government

The government must make decisions on where they should spend their limited tax revenues based on what will maximise social welfare

what is a PPF (curve)

a Production Possibility Frontier (or curve) shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current CELL resources

what are the 4 CELL resources and their rewards

• Capital - Interest

• Enterprise - Profit

• Land - Rent

• Labour - Wages

define land

anything above and below ground level, including the sea

define enterprise

the willingness and ability to take risks

define capital

all man-made resources used to produce goods and services

define labour

those actively contributing to the economy, from the ages of 16 to 66

how can you infer opportunity cost from a PPF

by looking at how the increased/decreased production of one good affects the other and how this affects the opportunity cost

how do PPFs show economic growth/decline

a shift of the PPF curve inwards suggests economic decline as the maximum potential that could be produced has decreased, meaning CELL resources have decreased and vice versa

when is economic efficiency reached

when resources are used for their best use - all points ON the curve are economically efficient and any point inside the curve is economically inefficient.

what is the difference between a movement and a shift on the PPF curve

• a movement along the curve indicates a change in the combination of goods produced (more consumer goods but less capital goods can be produced)

• a shift of the curve indicates a change in the productive potential of the economy (more/less consumer AND capital goods can be produced)

reasons why a PPF may shift outwards

• investment in capital e.g. new technology

• inward migration of younger, skilled workers

• discovery of new natural resources

• improved education, training & healthcare to increase labour productivity

• new innovations that increase output per unit & reduce resource wastage

reasons why a PPF may shift inwards

• resource depletion

• low birth rate - less younger skilled workers active in the labour market

• outward migration of skilled workers

• natural disasters that destroy CELL resources

differences between capital and consumer goods

• consumer goods are goods that are demanded and bought by households and individuals

• capital goods are goods that are produced in order to aid the production of consumer goods in the future

define specialisation

when economic units such as individuals, firms, regions or countries concentrate on specific goods/services

division of labour

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

• Adam Smith

pros of division of labour

• efficient - higher productivity as workers become more skilled at a single task

• increase technology and innovation

• less time switching between tasks

• potential higher pay for workers (as cost of production decreases)

• more profit so owners can buy more machines - lower prices for consumers

cons of division of labour

• bottlenecks can cause disruption

• monotonous for workers - tired/bored - may lead to reduction in quality of goods or even absenteeism

• difficult to see which workers are doing well/not well

• workers may not have transferable skills if firm shuts down (occupational immobility)

• difficult to bring new ideas together

who are the 3 economic agents

• consumers - purchases goods/services & sets the demand, provides labour, seeks to maximise their utility

• firms - provides the good/service for consumers, seeks to maximise profits

• government - collects taxes from consumers (VAT), firms (corporation tax), employees (income tax), uses this for public spending

Adam Smith

• believed in ‘laissez faire’ - allowing the market to work on its own (little/no gov’t interference)

• free market - prices are set by businesses; the interactions of supply and demand dictate what is produced and its price

• invisible hand theory - the FM regulates itself with no outside intervention

how to increase the quantity of each of the CELL FOP

1. Labour

   • incentivise (increase wages, health benefits)

   • allow immigration

   • reduce school leaving age; increase retirement age

2. Land

   • artificial land

   • take up more of the ocean

   • deforestation

3. Capital

   • import technology from abroad

4. Entrepreneurs

   • more business angels

   • decrease interest rates on loans

   • subsidies

   • more courses

how to improve the quality of each of the CELL FOP

1. Labour

   • training

   • investment in education

   • make education more accessible

   • apprenticeships/university

2. Land

   • fishing quotas

   • more fertile land

   • refurbish abandoned sites

3. Capital

   • increase spending on machinery

   • import (makes it cheaper)

   • investment

4. Entrepreneurs

   • incentivise people to start their own business

   • tax exemption

   • lower tax

types of economies

• free

• mixed

• command

what is a free market economy

• production is based on market demands among consumers

• very little gov’t intervention

• prices determined by supply and demand

• e.g. Singapore

what is a mixed economy

• prices are mostly determined by the consumer but essential services are set by the government

• a combination of private and public ownership - government is in charge of public lands

• attempt to produce what people want and society believes to be essential

• e.g. UK, USA

what is a planned/command economy

• production is carried out according to plans set out by the government

• all land and capital production resources are owned by the government

• consumers have a small selection of goods/services to choose from when they purchase

pros of free market economy

• lots of choices for consumers

• economy is tailored to consumers needs

• more entrepreneurship - creates jobs

• increased efficiency due to business competition

• efficient allocation of CELL resources

• low/little taxes

cons of free market economy

• government cannot act as a safety net - lack of public services

• poor working conditions & worker exploitation (gov’t cannot set minimum wage)

• unemployment

• increased inequality between rich and poor

• monopolies can be created - abuse of power

pros of mixed economy

• gov’t acts as a safety net - social welfare

• still uses supply & demand - choice of products for consumer

• allows for private property

• encourages entrepreneurship

• smaller rich-poor divide

• potential lower prices

• environmental protections due to gov’t interventions (e.g. ULEZ)

cons of mixed economy

• high taxes - slow economic growth

• gov’t intervention

• gov’t regulations may have negative effects on businesses

• hard to balance the perfect amount of freedom and gov’t intervention

• still some inequality

• inefficient public services as they are run by gov’t (no profit incentive)

pros of planned/command economy

• increased military spending - stronger

• organisation of society (unlikely that people are unemployed)

cons of planned/command economy

• totalitarian regime

• limited tourism

• propaganda

• self-reliance

• underpaid - poverty

• money is not invested in public funds (misuse)

• lack of social welfare (benefits)

• lack of entrepreneurship

• lack of economic growth

• corruption - bribery

Friedrich Hayek

• believed that the state should not interfere in the FM

• argued against planned/controlled economies

• advocated that decision making should be left in the hands of individuals

• believed that the state had a role to play in creating a safety net

Karl Marx

• believed labour was exploited by capitalism

• suggested labour was underpaid - enabled owners to make profits

• believed that revolution amongst the poor was inevitable

pros of country specialisation

• reduce unit costs (e.g. via bulk buying)

• improve quality

• use technology to increase speed and improve accuracy

• create a USP by producing better quality

• surplus can be exported

cons of country specialisation

• may be limited by size of market - small firms cannot afford to introduce specialisation

• a breakdown in the chain can cause disruption - can become reliant on key partners

• threat of structural unemployment if an industry goes into decline

• might lead to over-extraction of a country’s natural resources

• less developed countries may be discouraged from moving into new industries

4 functions of money

1. Measure of Value - allows you to compare 2 products

2. Method of Deferred Payment

3. Store of Value - means you don’t have to spend wages straight away

4. Medium of Exchange - used to buy & sell