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What is economics?
Its a social science
What is a social science?
study of human behaviour.
That means that it is difficult to set up experiments to test hypotheses
What is ceteris paribus?
Latin for “all things being equal”
When is ceteris paribus used?
When determining how price will effect the quantity of a good
How do economists explain how the economy works?
Through models EG theories of demand and supply
Social science - experiments
it is difficult to set up experiments to test hypothesis. As the economist has to gather data in the everyday world, other variables are always changing
The laws can not be definite because we cannot know exactly what each individual will do
What is a positive statement?
It’s a scientific or objective study of the subject. It can be proven to be true or false
What is a normative statement?
Its a value of judgement which are opinion based and cannot be supported or proven
“Should, could, would, fair”
Are most economical decisions positive or normative?
Normative. Most economical decisions are rarely right or wrong, they are mostly matters of opinions.
however, Economists tend to use positive statements to back up normative statements
The worlds sources - scarcity
The worlds resources are scarce while our wants are infinite
Resources that are scarce are called economic goods.
Resources that are not scarce are called free goods
Problems of scarcity
Peoples needs are finite while wants are infinite
resources are scarce in relation to the demand placed upon them
what is a renewable source?
A renewable resource is resource of economic value that can be replaced on a level equal to consumption
What’s a non renewable resource?
A non-renewable resource is a resource of economic value that cannot be readily replaced by natural means on a level equal to consumption
What’s Opportunity cost?
The next best alternative forgone
4 factors of production and their rewards
Capital - Intrest
Entrepreneurs - Profit
Labour - Wages
Land - Rent
Production possibility frontiers definition
The PFF shows the maximum possible combinations of 2 goods that the economy can produce with its current resources and technology.
The GRAPH of maximum potential of an economy
Any point on the curve represents the maximum productive potential of the economy, the most that the country can produce.
Opportunity cost graphs
● Moving from A to B, the opportunity cost of producing an extra 15 consumer goods is 30 capital goods.
● The opportunity cost of producing 60 capital goods is 20 consumer goods. If they produced 0 capital goods, then 80 consumer goods could be produced. By producing 60 capital goods, they can only produce 60 consumer goods. Producing these 60 capital goods means they lose 20 consumer goods.
Economic growth or decline Graph
● The purple arrows show that the economy has grown because it can produce more of both goods. Increased quality or quantity
● The orange arrows show the economy is declining as it can produce less goods than previously. Decrease in quality or quantity
Efficient, inefficient or unobtainable on a graph
A = efficient
B = inefficient
C = unobtainable
Change in production - capital goods
fall in capital goods but no change in consumer production.
fall in efficiency that only affects capital good manufacture.
Change in production - consumer goods increase graph
Movement and Shifts on PPF
● A movement along the curve indicates a change in the combination of goods produced
● A shift of the curve indicates a change in the productive potential of the economy
Capital and consumer goods
Consumer goods are goods that are demanded and bought by individuals
Capital goods are goods that are produced in order to aid the production of consumer goods
Some goods can be both consumer and capital goods, for example computers.
What is specialisation?
the process of focussing on a s specific task
What’s the division of labour?
The division of labour is when labour becomes specialised in a particular part of the production process.
What’s the difference between Specialisation and the division of labour?
Specialisation is the process of focusing on a specific task, while the division of labour is the breakdown of a larger task into smaller
Advantages of specialisation and devision of labour in organising production
labour productivity to be increased. Quicker production, better and more efficient
higher quality of goods and services
It is more cost effective to develop specialist tools, improving speed or quality. (cheaper)
Time is not wasted moving between jobs and getting out tools etc.
trained to do one specific task saving time and money
Disadvantages of specialisation and devision of labour in organising production
very boring leads to poor quality of work and staff turnover
Reduction of craftsmanship
If one process is delayed, every other task has to stop until that problem is solved.
unemployment.
mechanisation
Function of money during the introduction of specialisation
People bartered which allowed everyone to access what they need
But bartering led to many problems causing the development of money
The 4 key functions of money and definitions
A medium of exchange - money is an acceptable means of payment
A measure of value - when a seller sells something for money, it keeps its value until it can be spent later
A store of value - Money is used to put a value on goods and services
A method for deferred payment - If people lend money today, if they can think they can get it back
What is a Free Market Economy?
free to make their own choices
Own the factors of production without government interference.
Resources are allocated through the price mechanism.
Consumers make decisions based on satisfaction and producers based on profit.
What did Adam Smith (1723-1790) say about Free market economy?
Adam Smith believed in the free market economy
He believed that there was an “invisible hand” in the market which allocated resources to everyones advantage - greatest good for the greatest number of people
He believed that competition in the market caused lower prices as firms wanted to be competitive and so this benefits the consumer as they get goods cheaper
What are the advantages of Free market economy?
Freedom
motivation to work hard to earn higher wages
High profit for entrepreneurs
Cost efficient
higher quality goods
What are the disadvantages of the free market economy?
inequality
gap between rich and poor
no welfare system
Market failure
What is the command economy?
all factors of production, except labour, is owned by the state and labour is directed by the state.
There is no private property and everyone is assumed to be selfless, working for a common good.
What are the advantages of command economy?
less inequality.
There is less wastage of resources.
Standardised products means that they are produced cost effectively.
Everyone is treated equally
What are the Disadvantages of command economy?
- less motivation and efficiency because people know that working harder will not increase their standard of living.
lose their freedom
What’s a mixed economy?
both the free market mechanism and the government planning process allocate a significant amount of the resources in the country.
Who came up with the division of labour
Adam smith
What’s barter
Exchange for other goods without using money
What does barter require
A double coincidence of wants
What’s a double coincidence of wants
Both parties wanting what the other person has
What’s the problem with barter
It’s difficult for one person to find someone else willing to barter what they wants
What are important features of money
Limited supply - otherwise it wouldn’t have value
Divisibility - can be Brocken down into small units
Portability - easily transported
Durability - lasts
Homogeneity - money of the same value should be the same size
What two people support the free market economy
Adam smith
Friedrich Hayek
Functions of a free market economy
workers paid for labour
Goods and services are private
Entrepreneurs make lots of money
The more efficient production methods are more popular so more money
