Foundations

What is a need?

Survival based necessities that are essential, eg. Food

What is a want?

Something considered desirable but not essential, eg. designer clothing

Internal factors that could impact needs and wants

• Age: older people have moved out, could require medication etc

• Income/wealth: people that make less focus on needs, not wants

• Values/beliefs: religious items (like prayer mats), pilgrimage, or discouraged greediness

• Attitudes: increased social discourage for overconsumption

External factors that could impact needs and wants

Social media, fashion trends

What is economic activity?

The production, distribution, and consumption of goods and services in an economy.

What is the central purpose of economic activity?

To produce goods and services to satisfy consumer’s needs and wants

What are goods? Properties?

Goods are tangible products

• physical

• can be stored for future use

• standardisation (they can be produced in a consistent manner)

What are services? Properties?

Services are intangible products

• not physical

• inseparable (often produced/consumed simultaneously)

• varied (the quality can differ based on who provides it, when and where)

• customisable (often personalised to meet individual customer needs)

What is the fundamental economic problem?

The issue of scarcity - we have unlimited wants but limited (scarce) resources to meet those wants

How does scarcity impact decisions?

We must decide the best way to allocate our scarce economic resources in a way that maximises economic welfare

What is economic welfare?

A measure of happiness or good standard of living based on how well needs and wants can be satisfied

What are economic resources?

4 factors of production:

• Land: natural resources used in production, including land itself, as well as minerals, water and forests

• Labour: physical and mental effort exerted by people in the production process, including skills, ability and time

• Capital: physical assets or man-made resources used in productions, such as machinery, tools and infrastructure

• Enterprise: catalysts that make production happen, risk takers that bring the other 3 together

Rewards for each factor of production

Land: Rent

Labour: Wages

Capital: Interest

Enterprise: Profit

How is each factor of production considered scarce?

Land: it is finite, will run out. It has competing uses, a piece of land can’t be used for different things simultaneously

Labour: competition for available or skilled workers

Capital: must be bought, manufactured etc so they aren’t infinite. Opportunity cost of using it in one area would mean you couldn’t use it in another

Enterprise: not many people have the skills or willingness to take risks

3 Fundamental Economic questions

• What should be produced?

• How should we produce it?

• For whom should it be produced?

Who are the main economic agents?

• Consumers

• Producers

• Government

Consumers as an economic agent

Individuals or groups who consume goods and services. They drive production as demand decides where resources go. Spending helps to stimulate economic growth

Producers as an economic agent

Individuals or entities that create goods or provide services. They respond to consumers’ demands and produce what they want, aiming to make profit. They play a role in driving innovation because they try to gain a competitive edge in the market to maximise profit

Government as an economic agent

They play a multifaceted role in the economy:

• It acts as a producer of public goods/services (roads/schools etc)

• It acts as a consumer, buying goods/services (buying cement from the private sector to build roads etc

• It acts as a regulator, setting rules that guide economic activity. Policies can impact the economy

What is interdependence?

The mutual reliance between participants in an economic system: they work together

How do consumers rely on the other 2 agents?

Producers: They ensure consumer’s needs and wants are satisfied and provide employment

Government: They provide public services and benefits (welfare payment)

How do producers rely on the other 2 agents?

Consumers: they buy goods and services and allow profit to be made, otherwise they’d go out of business

Government: they provide public services, act as consumers and provide financial support/subsidies

How does the government rely on the other 2 agents?

Consumers: They pay direct (income) and indirect (VAT) tax

Producers: They pay corporation tax (tax on profit)

What is the circular flow of income?

A very basic model of the flow of resources, goods/services and money in an economy

Leakages in the circular flow of income

• Savings

• Taxation

• Imports

Injections in the circular flow of income

• Exports

• Investment

• Government spending

What is an opportunity cost?

What you’re sacrificing when deciding how to allocate your resources: the value of the next best alternative forgone when a decision is made to allocate resoiurces

What is a normative statement?

A statement that contains a value judgement which can’t be tested or verified, depends on the beliefs of the individual

What is a positive statement

Statements that can be tested or verified with data

What is a market?

A market is any sort of arrangement (doesn’t need to be physical) where consumers and producers meet to exchange goods and services

What is monetary exchange?

An exchange of goods/services for a agreed upon price

What is price determined by?

The interaction of supply and demand. The equilibrium price is when supply = demand - this is where the quantity of goods consumers want to buy equals the quantity producers want to sell. If supply increases, the price decreases. If demand increases, the price increases

Two types of markets

• Factor markets

• Product markets

What is a factor market?

A market where factors of production are traded (exchange of resources needed to produce goods and services). Buyers are usually businesses seeking resources and sellers are entities selling resources for payment

Examples of factor markets

Land: may be traded at farmer’s markets, real estate markets

Labour: may be traded at career fairs and recruitment companies

How do factor markets contribute to the economy?

They deal with resource allocation, companies will seek resources based on demands for the products they sell. Efficient factor markets contribute to economic growth as they allocate resources to their most productive uses

What is a product market?

A market where final goods and services are sold/bought. Buyers are consumers or businesses and sellers are businesses offering products for sale

How do product markets contribute to the economy?

They facilitate the consumption of goods and services by satisfying consumer needs and wants, which improves economic welfare

How are the 2 markets interdependent?

If it wasn’t for factor markets providing workers or raw materials, product markets wouldn’t have anything to sell. If there weren’t any customers such as those in product markets, there would be no reason to produce so there would be no need for a factor market

What are the economic sectors?

• Primary

• Secondary

• Tertiary

Relative size of each economic sector in the UK

• Primary: 10%

• Secondary: 20%

• Tertiary: 70%

UK economic history

Before the 18th century, the UK economy was dominated by the primary sector, 70% of workers were in farming or mining. It was the first to industrialise in the 18th century; the secondary sector grew and the primary sector declined as mechanisation reduced the need for agricultural workers. From the 1960s onwards, the UK de-industrialised; the tertiary sector grew and the secondary sector declined as manufacturing moved overseas and factories grew

What is the primary/extraction sector?

The sector that focuses on the extraction of raw materials such as agriculture/mining

What is the secondary/manufacturing sector?

The sector that focuses on turning raw materials into finished products - comprised of processing, manufacturing and construction companies

What is the tertiary/service sector?

The sector concerned with the provision of a wide variety of services for consumers, such as retail and leisure

Why has the tertiary sector grown rapidly since the 20th century?

• Tech and automation; as manufacturing and agricultural industries become at risk of automation, people move to jobs harder to replace, which are services

• The rise of technological advancements have amplified the number of digital service jobs needed (app developers, social media managers, marketing, IT etc)

• Most developed countries have already moved past mainly farming and factory work. Most goods are now made with machines or even overseas – not as many people are needed in factories anymore, freeing up people to work in services.

• As incomes rise and people become wealthier, they demand more services due to increased purchasing power, so more people are needed to work in the sector

What is specialisation?

The process of concentrating on a specific product or task in production, achieved by countries, businesses or workers

How does specialisation work in countries?

Specialisation means that countries can focus on goods and services that they are better at producing, either by a comparative or absolute advantage, and then trade with other countries. Specialisation in countries relies on trade because economies need to buy the goods/services that they haven’t specialised in from other countries

What is comparative advantage?

When a country can produce a good or service at a lower opportunity cost than another. This means they can produce the product relatively cheaper than other countries

What is absolute advantage?

When a country is able to produce more of a good or service with the same amount of resources as another country; it can produce a product more efficiently than another country

Why do businesses specialise?

Businesses may specialise in a particular good/service to optimise profits (through efficiency) and benefit from economies of scale (cost advantages that a firm experiences as it increases production, lower average costs per unit)

How do workers specialise?

Through the division of labour

What is the division of labour?

When workers concentrate on different parts of the production process of a good/service, where specific employees undertake specific tasks they are specialised in to increase output and productivity

Benefits of Division of Labour and Specialisation

For workers:

• They can become experts in the area, meaning they have a higher bargaining power because they’re harder to replace, so they can expect higher wages

• They receive less training as there is only one area they need to be trained in, so they can expect to earn wages sooner

• They focus on one task, so they become good at it, this can lead to job satisfaction

• It can lead to a feeling of trade unionism where workers feel they’re valuable as the products can’t be made without their input

For employers:

• Higher productivity when focusing on specific tasks, workers reduce the time spent switching between different activities. This leads to a rising output per person per hour, enabling larger production volumes, developing into an economy of scale, resulting in lower average costs (due to benefits like purchasing raw materials in large quantities at discounted rates) and therefore more profit

• Training new workers is easier and cheaper as they only need to be trained in one area

• Theoretically less wastage due to fewer mistakes as if you do something every day, you’d make less mistakes

Costs of Division of Labour and Specialisation

For workers:

• They can develop boredom, lack of motivation/job satisfaction, which can lead to mistakes or less productivity

• They may feel useless or unimportant as they only helped with one small part of the process

• Their skills are adapted to one specific role, so they are not transferable. This means that if machinery takes over the role, it could lead to structural unemployment as workers would find it difficult to find another job as they don’t have skills

For employers:

• Mistake in one area of the production line affects the other areas down the assembly line

• Harder to cover or replace staff as roles are specialised, so workers are less flexible because skills aren’t transferable

• Changes to tastes and fashion may mean that specialised workers’ skills are redundant to the production of new products, new training needed

• Specialisation can be dangerous because if demand drops in a product, there could be wastage, over-production and a loss of profits