microeconmics unit 1

What is positive economics primarily concerned with?

Positive economics is concerned with objective statements about how a market or an economy works. These are statements of fact based on empirical evidence and can be proven true or false.

Give an example of a positive economic statement.

The UK unemployment rate has fallen from 4% to 3.7% in the past three months. (This statement can be proven true or false with data).

What is the main focus of normative economics?

Normative economics focuses on value judgements, which are built around opinions and beliefs about the best economic policies or solutions. These are called normative economic statements.

Provide an example of a normative economic statement.

Every economy should aim to provide free healthcare for its citizens. (This statement expresses an opinion or belief).

How do value judgements influence individuals' economic decisions?

They guide choices in daily life, such as diet (e.g., avoiding meat due to unethical production) or health (e.g., smoking despite risks).

How do value judgements influence government economic policies?

They determine policy adoption and spending priorities, such as funding rehabilitation over imprisonment for drug users.

Differentiate between a normative and a positive statement regarding government spending on rehabilitation.

To say "The UK approach is better" is a normative statement; to say "the UK government spends more per head on rehabilitation" is a positive statement.

What is the basic economic problem in economics?

Resources are scarce (finite) in relation to infinite human wants and needs.

What are resources in economics called?

The factors of production.

According to the text, what is economics the study of?

The study of scarcity and its implications for resource allocation in society.

How does scarcity influence prices in a free market?

The scarcer a resource, the higher its price; the less scarce, the lower its price.

Define renewable resources and provide an example.

Resources that can be used repeatedly and naturally replenished (e.g., wind generated electricity).

Define non-renewable resources and provide an example.

Resources that cannot be naturally replenished at a pace that keeps up with consumption (e.g., oil and coal).

Define opportunity cost.

The loss of the next best alternative when making a decision.

Give a consumer example of opportunity cost.

When a consumer buys a new phone, they may be unable to purchase new jeans, which is the opportunity cost.

Give a producer example of opportunity cost.

When a producer allocates resources to producing electric vehicles, they may be unable to produce petrol vehicles, which is the opportunity cost.

Give a government example of opportunity cost.

When a government funds free school meals to all primary students, they may be unable to fund rural libraries which may have to close. The libraries represent the loss of the next best alternative (the opportunity cost)

What is the Production Possibility Frontiers (PPF) model?

The PPF model is an economic model that illustrates the maximum possible production (output) a country can achieve by efficiently using all its factors of production to produce only two goods/services.

What types of goods are often shown on PPF diagrams?

PPF diagrams commonly show capital goods and consumer goods on their axes.

Define capital goods and provide an example.

Capital goods are assets that help a firm or nation to produce output. For example, a robotic arm in a car manufacturing company.

Define consumer goods and provide an example.

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

What do points on the PPF curve represent?

Points on the PPF curve, like C and D, represent the full (efficient) use of an economy's resources or productive efficiency.

What does a point inside the PPF curve signify?

Any point inside the curve (e.g., point E) represents inefficiency.

What does a point outside the PPF curve signify?

Any point outside the curve (e.g., point F) represents unattainable production with the current level of resources.

How is opportunity cost depicted on a PPF?

Opportunity cost on a PPF is shown by a movement along the curve.

For example, moving from point C (120 consumer, 150 capital) to point D (225 consumer, 100 capital) means the opportunity cost of producing an additional 105 units of consumer goods is 50 capital goods.

When does an outward shift of the PPF occur?

An outward shift of the PPF indicates economic growth, meaning an economy can produce more consumer goods and more capital goods.

This is caused by an increase in the quality or quantity of the available factors of production.

Give an example of how the quality of a factor of production can cause an outward PPF shift.

Improved training and education on labor leads to a more productive workforce, increasing production possibilities.

Give an example of how the quantity of a factor of production can cause an outward PPF shift.

Changes in migration policies that allow more foreign workers to productively work in the economy increase the quantity of labor, thus increasing production possibilities.

When does an inward shift of the PPF occur?

An inward shift of the PPF indicates economic decline, occurring when there is any impact that reduces the quantity or quality of the available factors of production.

Who is often referred to as the 'father of Economics'?

Scottish economist Adam Smith.

What significant book did Adam Smith publish, and when?

He published 'The Wealth of Nations' in March 1776.

What was the main premise of Adam Smith's 'The Wealth of Nations'?

The book discussed how to increase productivity and wealth.

What two key economic ideas did Adam Smith develop based on his pin factory observations?

The ideas of specialisation and the division of labour.

Explain Adam Smith's pin factory observation that led to the concepts of specialisation and division of labour.

A single worker could not make more than 20 pins a day (involving \approx 18 processes). However, if labour was divided and workers specialised, 10 workers could produce 48,000 pins per day.

Define the division of labour.

The division of labour is when a task is broken up into several component tasks.

Define specialisation in the context of production.

Specialisation occurs when workers focus on one (or a few) components of the production process, gaining significant skill, which results in higher output per worker over a measured time period and increased productivity.

List the different levels at which specialisation can occur.

Specialisation occurs on:

1. An individual level
2. A business level (e.g., a firm specialising in manufacturing drill bits)
3. A regional level (e.g., Silicon Valley in the tech industry)
4. A global level (e.g., Bangladesh specialising in textiles for export)

What are some advantages of the division of labour and specialisation in production?

Advantages include:

• Higher labour productivity, which lowers cost/unit for firms.
• Lower cost/unit can be passed on to consumers as lower prices.
• Lower cost/unit can mean higher profits for firms, potentially leading to higher wages for workers.
• Increased productivity allows firms to sell in international markets.
• It creates many low-skilled jobs.

What are some disadvantages of the division of labour and specialisation in production?

Disadvantages include:

• 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.
• Mass produced products often lack variety.
• If workers lose their jobs, it may be hard for them to find work as they are only trained in one skill.

What are some advantages of the division of labour and specialisation in trade?

Advantages include:

• Higher labour productivity lowers cost/unit for firms, making 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), increasing the variety of goods available.

What are some disadvantages of the division of labour and specialisation in trade?

Disadvantages include:

• International trade benefits competitive firms, but some industries will be unable to compete and 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, causing problems if conflict arises (e.g., Europe's reliance on Russian natural gas).
• Specialisation using a country's own resources will lead to resource depletion over time, and specialisation will increase the rate of resource depletion.

What are the four main functions of money?

Money functions as:

1. A medium of exchange
2. A measure of value
3. A store of value
4. A method of deferred payment

Explain how money acts as a medium of exchange, and why it is superior to bartering.

Money easily facilitates the exchange of goods because it removes the need for a 'double co-incidence of wants' required in bartering (where two people must want each other's good).

Describe how money serves as a measure of value.

Money provides a means of ascribing value (price) to different goods and services, allowing both consumers and producers to make decisions in their best interests and arrange agreeable exchanges easily.

How does money function as a store of value?

Money holds its value over time (though inflation can impact this), meaning it can be saved and remains valuable in exchange over long periods.

What does it mean for money to be a method of deferred payment?

Money is an acceptable way to arrange terms of credit (loans) and to settle any future debts, allowing producers and consumers to acquire goods now and pay for them in the future.