1.1 - The Nature of Economics

difference between positive and normative statements

- A positive statement is one that is factual and objective whereas normative statements are subjective statements which cannot be empirically proven

what are value judgments?

- Value judgments influence individuals choices in the economic decision

- they influence governments choices with regards to the economic policies they choose to adopt and spend money on

what is the basic economic problem?

- resources are scarce but might have infinite want

- economics is used as a tool when choosing between competing demands placed on available resources, however, with an opportunity cost

what is the opportunity cost?

the loss of potential gain from other alternatives when one alternative is chosen.

e.g. if someone buys a phone and cannot afford jeans as a result, the opportunity cost are the jeans

definition of renewable resources

- natural resources that can be replenished or regenerated over a relatively short period of time

definition of non-renewable resources

- Non-renewable resources are natural resources that are available in limited quantities

- Cannot be replenished within a human lifespan once they are used up.

- These resources take millions of years to form.

what is a production possibility frontier?

- 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 and services

what does a ppf graph look like?

what does it mean if a point is on the curve

- full use of an economy's resources with productive efficiency

what does a point inside the curve represent?

- inefficiency

what does a point outside the curve represent?

- unattainable

how will a shift occur?

- due to economic growth e.g. the quality of an economy. More consumer and capital goods can be produced using all of the available resources

two ways in which economic growth can occur?

- specialisation or division of labour

what is a capital good?

- Capital goods are assets that help a firm or nation to produce output (manufacturing). For example, a robotic arm in a car manufacturing company is a capital good

what is a consumer good?

Consumer goods are end products and have no future productive use. For example, a watch

Why is Adam Smith relevant to this?

- published 'Wealth of Nations'

relevance of book, what were the findings?

- studying a pin factory he found that when workers completed all of the tasks involved in producing each pin independently, output was low.

- By splitting the production into a number of different tasks, and allocating each task to a different worker, more could be produced.

- IE he divided the labour - gave each worker a specialised job to do

- Workers developed greater skill in performing their particular task with the use of specialist tools designed just for that task, therefore leading to less wastage of materials and less time spent on their task.

advantages of specialisation and division in production

- Higher labour productivity lowers cost/unit for firms

- Lower cost/unit can be passed on to consumers in the form of lower prices

- Lower cost/unit can mean higher profits for the firms. This may lead to higher wages for workers

- increased productivity allows for selling international markets aswell

- creates many low skilled jobs

disadvantages of specialisation and division in production

- Task repetition often leads to boredom and a decrease in worker motivation

- A decrease in motivation may lead to less productivity and/or poorer manufacturing quality

- It may increase worker turnover rates as workers look to move on to a role that is more stimulating

- Mass produced products often lack variety and do not take different consumer preferences into account

- If workers lose their jobs, then it may be hard for them to find work as they are only trained in one skill

disadvantages of specialisation and division in trade

·       Higher labour productivity lowers cost/unit for firms, which makes their goods more competitive internationally (exports)

·       Increased exports can result in economic growth for the nation

·       Economic growth usually leads to higher income and a better standard of living

·       Income gained from exports can be used to purchase other goods from around the world (imports). This increases the variety of goods available in a country

advantages of specialisation and division in trade

- ·       International trade is beneficial for the firms that can compete globally. However, some industries will be unable to compete and will go out of business

·       Many firms in an entire industry may close, leading to structural unemployment 

·       Specialisation may create over-dependency on other countries' resources. This may cause problems if conflict arises (For example, Europe's reliance on Russian natural gas during the Ukraine crisis)

·       Specialisation using a country's own resources will lead to resource depletion over time. Specialisation will increase the rate of resource depletion

what is a free market economy?

- an economy that has no government intervention in the allocation of resources or distribution of goods and services

What is a command economy?

- all of resources are owned by the state and the government controls the distribution of goods and services

what is a mixed economy?

- as individuals, firms and the government own factors of production and distribute goods/services

who believed in the free market economy?

- Adam Smith advocated for free markets with low levels of government intervention

- He recognised that there was a role for governments to ensure efficiency in the allocation of resources and provide public and merit goods

- However, he believed economies function best when private individuals work in their own self-interest

who believed in mixed economies and why?

- Friedrich Hayek believed that that command economies were flawed

- He identified information gaps between what the economies actually required and what the central planners in command economies were saying it required

- These gaps led to shortages or surpluses of goods/services in command economies

- He felt that the threat to efficiency and economic growth is overly heavy government intervention

who believed in command economies and why?

- Karl Marx believed that free markets lead to capitalism, in which the owners of the factors of production (Capitalists) exploited the workers

- This creates inequality, which will lead to a breakdown between the classes

- The role of the State is therefore to share the means of production and ownership with all of the workers in society

- This required the abolition of private property

- This required the State to become the central planner, deciding how each of the three economic questions would be answered which are = what to produce? who to produce for? how to produce it?

advantages of a free market economy?

- Profit incentive motivates people to work or develop entrepreneurial spirit

- Greater variety of goods/services

- Competition leads to better quality of goods/services

- Competition leads to lower prices of goods/services

disadvantages of a free market economy

- Wealth is concentrated in the hands of the few as they are able to keep buying up the scarce factors of production

- This increases inequality so the gap between the rich and the poor continues to grow

- Sometimes product quality falls as firms lower quality standards in order to increase profits

- Workers get exploited

- Resource depletion and environmental degradation are often ignored

- Monopolies develop as firms increase market power through mergers and acquisitions

advantages of a command economy

- all workers receive the same wage irrespective of role or career, as opposed to profit incentive which creates social equality

- Less unemployment

- Resources of the nation can be directed towards urgent priorities quickly

disadvantages of a command economy

- Receiving the same wage creates disincentives for people to acquire difficult skills (e.g. doctor), as 8 years of study results in the same wage as no study

- A lack of competition means that there is less innovation and product development

- There is a continual lack of efficiency as central planning always results in surpluses or shortages of goods/services

- Black markets multiply as the population seeks to address shortages

- higher standards of living is limited for most of the population

what is the role of the state in a mixed economy?

- government intervention occurs mainly through taxation and spending the revenue to redistribute income and provide essential goods/services

- income is redistributed through the creation of a welfare system, which often includes unemployment benefits, healthcare, and pension provision

- Government spending is often focused on infrastructure, merit goods and public goods