Nature of economics

ceteris paribus

all other things remaining equal

Positive Statement

A statement which is objective and made without valued judgements. They can be tested

Example of a positive statement

For example, “Raising taxes will lead to an increase in tax revenue” is a positive statement as it can be tested to see whether it is true or false

normative statement

one which is subjective and based on opinion, so cannot be proven or disproven.

The problem of scarcity

people have finite needs but infinite wants

opportunity cost

next best alternative foregone

what does a PPF show

The PFF shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology.

Division of labour

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

what are some disadvantages of the division of labour

• The workforce do not have wide industrial training and could therefore suffer from structural unemployment.

• If for some reason production in one process is delayed, every other task has to stop until that problem is solved.

what are the functions of money

• medium of exchange: It can be used to buy and sell goods and services and is acceptable everywhere.

• A measure of value: It can compare the value of two goods

• A store of value: It is able to keep its value and can be kept for a long time

• A method for deferred payment: Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later.

free market economy

resources are allocated via the price mechanism

What did Adam Smith believe

Believed in the free market economy and the laissez-faire approach by governments. He explained how there was an ‘invisible hand’ in the market which allocated resources to everyone’s advantage, allowing the greatest good for the greatest number of people.

Command economy

the government allocates the resources

Friedreich Hayek

Criticised command economies argued that state control of the economy leads to the loss of freedom.

One issue of operating in a free market

• There may be a lack of merit goods (goods considered as intrinsically good) and little control of demerit goods (intrinsically bad).

• There tends to be high levels of inequality, since the rich own more factors of production and so can grow richer.

Karl Marx

believed in the command economy - argued that free markets lead to capitalism

Provide one advantage and disadvantage of a mixed or command economy

• The state provides a minimum standard of living , ensuring no one is extremely poor as there is less inequality.

• As everyone receives the same wage, there is less motivation and efficiency because people know that working harder will not increase their standard of living.

Mixed economy

where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country

The governments role in a mixed economy

• They prevent the abuse of monopolies

• protects customers as they pass a large amount of consumer protection laws to protect the consumers from poor quality products or services.

• They produce public and merit goods, such as emergency services and transport, and limit the production of demerit goods like child pornography.

• Redistributes income