Theme 1 - Markets and Market Failure

Ceteris paribus

All other things being equal/remaining constant

Positive statement

Factually based

Normative statement

Opinion based

Scarcity

Resources are limited

Renewable resource

Replenished by natural processes

Non-renewable resource

Not replaced naturally

Basic economic problem

Resources finite, human wants infinite. Choices must be made

4 factors of production

Land

Labour

Entrepreneurship

Capital

Reward for each factor of production

Rent

Wages

Profit

Interest

Opportunity cost

Measures value (benefit) of next best alternative use of resources foregone

Why opportunity cost exists

Scarcity of resources

Production Possibility Frontier/Curve (PPF)

Shows ability of a country to make g&s (productive capacity), & is used to illustrate opportunity cost

Capital goods

Useful, not in themselves, but are valued because they help produce items in the future

Consumer goods

Satisfy wants and needs now

4 causes of an outward shift in the PPF

Improvements in productivity & efficiency (perhaps due to introduction of new technology)

More factors of production available (due to inward migration or increased capital available)

Better management of existing resources

Discovery of new natural resources (such as shale gas)

4 causes of an inward shift of the PPF

Military conflict

Natural disaster

Emigration

Failure to invest/resources run out

Specialisation

System of organisation where economic units (such as households or nations) aren’t self-sufficient but concentrate on producing certain g&s and trading the surplus with others

Division of labour

Specialisation by workers where production of a good is broken up into many separate tasks each performed by one person

4 advantages of specialisation/division of labour

Better quality products

More productive/efficient

Reduces unit costs

Standardised products (all reliably the same)

4 disadvantages of specialisation/division of labour

More susceptible to economic shocks (risk of redundant skills)

Salaries cost more

Not self-sufficient

Needs to have high production

5 functions of money

Medium of exchange

Unit of account

Store of value

Facilitates exchange

Standard of deferred payment

3 fundamental questions of economics

What to produce, how to produce, for whom to produce

Free market economist

Adam Smith

Free market economy

Economic system where resources are allocated by price mechanism (demand and supply)

4 advantages of free market economies

Greater choice

Consumer sovereignty

Greater productivity

Innovation

Command economist

Karl Marx

Command economy

Economic system where government, through a planning process, allocates resources in society

4 advantages of command economies

Greater equality

Full employment

Key services & basic necessities provided

Prevents consumer exploitation by producers

Mixed economy

Economic system where resources are partially allocated by the price mechanism and partly by the government