A Level Economics - 1.1 Nature of Economics

What is an economic model

Simple representation of economic behavior of economic agents

Why are economic models used

To explain and predict their behavior, the impact of and on the, given changes in certain parameters

Ceteris Paribus

All else remains the same. Variables remain the same during period of study. Helps isolate impact of a change in a variable.

Optimization Assumption

Assumption that all economic agents aim to maximize their utility

Positive statements

Seeks to explain what is observed, can be proven/disproven. Not influenced by opinions. Can be scientifically tested

Normative statements

Focuses on what should be done, based on value judgement.

Value Judgements

Statements put forward that can’t be factually verified based on personal beliefs and prejudices

Economic problem

Unlimited wants with finite resources to supply it

Scarcity

Where demand exceeds supply

Factors of production

Land, Labor, Capital, Enterprise

Land

Natural resources

Labour

Human input in the production process

Capital

Goods used in the supply of other goods

Enterprise

Entrepreneurs organizing factors of production and taking risks

Opportunity cost

Next best alternative forgone after a choice has been made

Classical economist

Thinks economic agents aim to maximize utility

Economic agents

Consumers, Firms, Governments

How do economic agents maximize utility

Consumers maximize satisfaction
Firms maximize profits

Governments maximize the welfare of their citizens

Non-Price factors that affect demand

Population, Income, Related Goods, Advertising, Tastes and Fashion, Expectations, Season

Substitute Goods

Goods that provide a similar level of utility

Complementary Goods

Goods that are often bought together to satisfy a specific want. A change in price of one directly affects the demand of the other product.

Extension and Contraction

Caused by a price factor ONLY. Extension is when price decreases and you move down the curve, Contraction is when price increases and you move up the curve

L/R Shift in demand curve

Caused by non-price factors (PIRATES). shift to the right is increase of demand, shift to the left is decrease of demand

Effective demand

Qty of a product that customers are willing and ABLE to buy at a given price

Notional Demand

Qty of a product that customers are willing but NOT ABLE to buy at a given price

Inferior Goods

When income increases, demand decreases e.g. own-brand budget food

Normal Goods

When income increases, demand increases e.g. luxury cars and clothing