Economics Unit 1 AOS 1

Define economics:

Study of the decision making of individuals, businesses and governments regarding the production, consumption, distribution of goods and services and incomes.

What are the two main branches of economics? Describe each.

Microeconomics: Study of the factors that influence the small parts such as a single firm, industry and market that make up the economy.

Macroeconomics: Study of the whole economy and its conditions. This includes: GDP, inflation, employment/unemployment and national incomes.

What are the two forms of economic analysis? Describe each.

Positive Analysis:

• Proved or disproved beyond doubt

• Based on verifiable facts + Can be tested

• Free of personal values, feelings and opinions.

• ‘Expected’

Normative Analysis:

• Proved nor approved

• Based on personal opinions, likes and dislikes

• ‘Should be’

Compare wants and needs

Wants are desires, but are not things needed in order to survive. Whereas needs are things essential for survival.

What are resources? What are the different types and give examples of each.

Resources are the factors of production.

Natural Resources: Productive inputs derived from nature.

E.g. Minerals, water, climate

Labour Resources: Intellectual skills, knowledge and manual effort people provide to produce goods and services.

E.g. doctors, accountants

Capital Resources: manufactured or producer goods that are past production but are used to aid current and future production.

E.g. tractors, factories, commercial buildings

What is relative scarcity?

Basic economic problem – wants and needs are unlimited, however the resources used to fulfil and produce these wants and needs are limited —> resulting in people having to make decisions as to which wants and needs to satisfy first.

Define opportunity cost:

Value of production or consumption given up when resources are allocated to their next best alternative use.

What are productive possibility diagrams used for?

Illustrate ideas such as scarcity, choice in production, opportunity costs, unemployment and nation’s productive capacity.

What do PPDs show?

Productive capacity or physical limits of a nation’s total production, and the output combinations of goods and/or services.

The size of a nation’s PPF depends on what?

Quantity of resources and level of technical efficiency.

What do points inside the PPF illustrate?

Below the economy’s potential capacity/maximum level of production —> resources are not fully utilised

What do points outside the PPF illustrate?

Beyond the economy’s potential capacity/maximum level of production —> results in scarcity, inflation

What are some factors that can cause the PPF to grow in size and shift outwards?

• New resources

• Better technology

• Improved worker efficiency

• Better education

• High levels of foreign investment

What are living standards affected by?

Affected by both material well-being (income, quantity of goods and services consumed) and non-material well-being (Quality - happiness, low crime rates, long life expectancy, political freedom)

Define trade-offs:

When individuals, businesses or governments make choices between different ways that scarce resources should be used --> sacrifice certain things for an alternative

What is cost-benefit analysis used for and how is it measured?

Used to make decisions that maximise efficiency, satisfaction and wellbeing.

1. Expected + indirect costs added up

2. Expected benefits added up

3. Benefit to cost ratio: total value of benefits/total value of costs

Ans >1 —> Net benefit.   Ans <1 —> Net cost

What are the three basic economic questions?

1. What and how much to produce

2. How to produce?

3. For whom to produce

Define economic system:

Collection of national organisations that coordinate production and distribution of goods, services and incomes amongst the population

Define traditional economy:

• Old-fashioned, natural

• Hunter-gatherer, traveller

• System of barter (trade)

• Low living standards → Low productive efficiency

Outline how a traditional economy answers these questions:

1. What and how much to produce?

2. How to produce?

3. For whom to produce?

What and how much to produce?	Essential goods and services required for survival (food, clothing, shelter, household items)  Climate and seasonal conditions impact quantity of goods and services produced
How to produce?	Basic  Labour-intensive   Limited tools
For whom to produce?	Shared among family or tribe(status + seniority in group)  Those unable to work, depend on others for survival

What are some of the cons of a traditional economy?

• Low productive efficiency

• Low living standards

Define market economy:

• Self-interest, competition, private ownership of resources

• Includes consumers, sellers/businesses

• System of prices

• No government interference

Outline how a market economy answers these questions:

1. What and how much to produce?

2. How to produce?

3. For whom to produce?

What and how much to produce?	Consumer sovereignty --> what consumers buy determines the outputs + their prices
How to produce?	Firms maximize their profits --> minimizing production costs  Cheap resources + production methods
For whom to produce?	Relies on price system  --> Wages + incomes – Sell scare/wanted resources + require greater skills have higher wages

What are some qualities of market economies that can lead to market failure?

• Cheap production methods → reduce society’s well being

• Resources are not allocated efficiently → prevents maximisation of consumer satisfaction + society wellbeing

Define planned economy:

• Non-democratic, central government, dictatorial

• All businesses are government-owned 

• Lack of consumer freedom + low allocative efficiency

Outline how a planned economy answers these questions:

1. What and how much to produce?

2. How to produce?

3. For whom to produce?

What and how much to produce?	Planning agency --> important product targets (education, defense transport)
How to produce?	Technical efficiency is low --> no competition + profit is not the main driver  Lack of innovation + adaptability
For whom to produce?	Reduce inequality --> control wages + provides free low-cost essential goods & services (health, education, housing)

What are some cons of a planned economy?

• Low allocative efficiency

• Lack of consumer freedom

• Lack of innovation + adaptability in production

• Removal of incentives to work hard + improve skills → providing products & essentials fairly

Define mixed/contemporary economy:

• Most features of market economies (competition, price system, consumer sovereignty, most private sector ownership)

• Some features of planned economy (government-owned businesses, provision of goods & services)

Outline how a mixed economy answers these questions:

1. What and how much to produce?

2. How to produce?

3. For whom to produce?

What and how much to produce?	Consumer sovereignty
How to produce?	Private businesses – maximize profits, cheaper resources + productive methods
For whom to produce?	Higher incomes --> selling wanted + scarce resources, greater skills -> consuming more goods & services    Reduce inequality --> government interference   --> Progressive taxes (tax rises with income)  --> Welfare payments (payments to those in need)  --> Provision of free or cheap services (health, housing and education)  --> Minimum wages

What are the three main sectors of the three-sector circular flow model:

• Consumer/household sector

• Producer/business sector

• Government/public sector

What are the flows in the three-sector circular flow model? Describe each.

Flow 1: (Nation's supply of resources) 

• Household sector sells wanted resources (labour) to business sector using resource markets 

 

Flow 2: (Demand of resources + payment of national incomes) 

• Businesses demand resources from household sector --> pay incomes to households 

 

Flow 3: (Nation's spending of incomes or demand for goods and services)/ Aggregate demand 

• Undertaken by both households and governments 

• Household pay government taxes + spend leftover income for goods & services  

• Government uses tax income --> goods & services for the community 

 

Flow 4: (Production of final goods & services/ Nation's GDP) 

• Production of businesses --> total value of finished goods & services

What are the four stages of the business cycle diagram?

Boom/peak:  

• Extremely strong spending --> rising prices --> inflation 

Slowdown: 

• Spending starts to fall 

Recession: 

• Economic activity drops 

• GDP shrinks 

• Unemployment rises + incomes fall 

Recovery: 

• Spending begins to expand again 

Compare material and non-material living standards.

Material: 

• Affected by incomes, consumption of goods & services 

Non-material: 

• Reflect quality of life (happiness, life expectancy, mental & physical health, freedom, crime rates, education)

Define the term economic agent:

Individual, company or organisation that influences the economy by producing, consuming or selling goods & services.

What are the qualities of a consumer according to the traditional viewpoint?

• Rational

• Self-interest

• Ordered preferences/priorities

• Informed and smart decisions based on knowledge

• Maximisation of utility → maximise pleasure + minimise pain

Define marginal utility.

Additional satisfaction/benefit consumers derive when consuming an additional unit of a good or service

What is the law of marginal utility?

Number of units consumed increases → utility decreases

Explain these terms:

1. Incentives

2. Disincentives

1. Inducement designed to further encourage behaviour that would otherwise not occur to the same extent

2. Used to discourage certain behaviour

Provide some examples of government incentives and disincentives.

• Cash payments/subsidies

• Tax rebates/offsets
  

• Indirect taxes

• Enforced laws and regulations

What does business behaviour look at?

Looks at factors influencing the decisions of firms involving the production and sale of goods and services.

What are the qualities of a business according to the traditional viewpoint?

• Seek profit maximisation

• Give back to the community

• Affected by government policies

How would businesses aim to maximise their profit?

--> Maximise sales revenue (advertising, developing new products, consumer sovereignty) 

--> Minimise production costs (lower wages, cheaper materials, equipment, transport and utilities)

Define monopoly-type firms:

• Sell a particular product/service 

• Dominant in their field

• No competition --> firm has complete control over the price + availability of product/service

Why is government intervention necessary?

Prevent market failure → improve material and non-material living standards

How might the government prevent market failure and improve society’s general wellbeing?

• Stabilisation of economic activity 

• Increase efficiency in resource allocation 

• Redistributing income fairly

In order for the economy to be stable, how much percent should the GDP rise each year?

3% a year

What are some actions which the government may undertake during booms and recessions?

• Booms (GDP is above 3-4%) → Increases taxes + cutting government spending

• Recessions (GDP is below 2-3%) →  Cutting taxes + raising government spending

What are some ways the government may increase efficiency in resource allocation?

• Installing laws to promote competition (Anti-monopoly laws, consumer protection laws)

• Provision of beneficial goods and services

• Installing laws that discourage harmful production

What are some ways the government may redistribute incomes fairly?

--> Progressive taxes (tax rates rise with income) 

--> Welfare benefits to the neediest 

--> Provision of services