1.1 The Nature of Economics (Micro)

Ceteris Paribus

a Latin phrase that means "all other things held constant", logical relationships between two components remains constant unless a related variable changes

Positive statement

based on facts, can be true or false and is proven or disproven in reference to facts

Normative statement

based on opinion, a value judgement that isn't proven or disproven by facts

The economic problem

Resources are scarce but wants are infinite. making decisions about the use of scarce resources to satisfy wants and reach maximum utility

opportunity cost

value of the next best alternative option foregone

Scarcity

want for a product or factor of production exceeds the amount available

CELL

Capital

Enterprise

Land

Labour

Production possibility frontier

shows maximum possible output of combinations of two goods or services an economy is capable of producing when using all its resources the most efficient way

Economic growth

an increase in the productive potential of the economy

why PPF is curved

due to increasing opportunity cost, some resources are better suited to producing a good than others, to increase one good to almost all resources used on it, then the goods best suited to producing the other good will have to be given up and therefore opportunity cost increases

specialisation

performing specific tasks in the production process, when a factor of production produces one good or service

division of labour

type of specialisation, labour specialises in the performance of a particular part of the production process

the four functions of money

1. Medium of exchange- ability to conduct efficient transactions, eliminates a need to barter

2. Measure of value- allows an item's value to be expressed in a meaningful way

3. Store of value- enables future purchasing power

4. Method of deferred payment- payment can be spread out over time or delayed

Free market economy

an economic system in which decisions on the three key economic questions are based on voluntary exchange in markets.

most efficient when people pursue own interests

enable mutually beneficial exchange

resources allocated by interaction of demand and supply

what to produce determined by consumers

how to produce determined by producers

who gets products depends on purchasing power

Command economy

An economic system in which the government controls a country's economy.

huge business profit in free market cause inequality

allocation of scarce resources by government (central planning e.g. taxes)

beneficial for coordination of scarce resources in crisis

free markets sometime fail in efficient allocation

Mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.

argue that it is impossible for efficient government allocation

private sector- market forces

public sector- government allocation

governments raise taxes to redistribute wealth and direct to provision of services (e.g. NHS)

Capitalism

an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

capital generates profit for private owners

individual profit rather than society

laissez faire- government intervention causes inefficiency

voluntary exchange

free market and privatisation- ownership by individuals

'production for profit', price system determines allocation, profits reinvested

people make best decisions as they have to deal with consequences

Socialism

A system in which society, usually in the form of the government, owns and controls the means of production.

profit distributed in society

public goods allow self-actualisation

large scale industries are collective- returns benefits to society

'production for use'

individuals compensated based on contribution

production through planning

production driven by state decision not demand