1.1 Nature of Economics

Ceteris Paribus

All other things remaining equal

Positive statement

Objective and made without any obvious value judgements or emotions, can be tested and disproven - more factual

Normative statement

Subjective and based on opinion, so cannot be proven or disproven

Renewable resource

Can be replenished and is non-finite eg/. Solar power

Non-renewable resource

Cannot be readily replaced by natural means and is finite eg/. Fossil fuels

Opportunity cost

The cost of one thing in terms of the next best alternative which has been given up

Four Factors of Production

• Land

• Labour

• Capital

• Entrepreneurship

What does a PPF show

Shows the maximum possible combinations of capital and concussed goods that the economy can produce with its current resources and technology.

Consumer goods

Goods that are demanded and bought by households and individuals

Capital goods

Goods that are produced in order to aid the production of consumer goods in the future

Specialisation

Production of a limited and specific range of goods by a company/individual/country, meaning that trade is essential as it is the only way to access all that they need

Division of Labour

When labour becomes specialised in a particular part of the production process

Advantages of specialisation and division of labour

• Higher quality of goods and services

• More cost effective

• Labour productivity is increased

• Time is not wasted changing jobs

• Workers only need to be trained in one specific task

Disadvantages of specialisation and division of labour

• If one person is doing one job on repeat, boredom can set in and the quality of work can decrease

• Reduction of craftmenship

• Domino effect on delays

• Can lead to structural unemployment if employees change jobs

Advantages of specialising in the production of a specific good or service

• Theory of comparative advantage - countries should specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing. This will boost their economy.

Disadvantages of specialising in the production of a specific good or service

• May become over-dependent on one particular export and if this fails an economy can collapse

• Countries may specialise in non-renewable resources and these can run out, leading to a massive loss of income for the country, and also the loss of the resource for the global economy

Functions of money

• A medium of exchange - Acceptable everywhere, removes double coincidence of wants

• A measure of value - Compare the value of two goods

• A store of value - Can keep its value for a long time

• A method for deferred payment - Money allows for debts

Free market economy

• Individuals are free to make their own choices and own the factors of production without government interference.

• Resources are allocated through the price mechanism

Advantages of a free market economy

• Automatic due to the invisible hand

• Consumers have freedom of choice

• High motivation

• Political freedom

• Productive efficiency

• Free market tends to allow for higher growth

Disadvantages of a free market economy

• Higher levels of inequality

• Resources could be wasted on unproductive expenses

• Monopolies arise, who could provide low quality for high prices

• Externalities

Command economy

• All factors of production, except labour, is owned by the state

• There is no private property and everyone is assumed to be selfless, working for a common good

• Resource allocation is carries out by the government

Advantages of a command economy

• State provides a minimum standard of living

• Less wastage of resources

• Allows for stable long term planning

• Production is cost effective

• Generally motivated by the wellbeing of the country

Disadvantages of a command economy

• State may make wrong decisions, leading to a waste of resources

• Can be subject to bribery and corruption

• Less motivation and efficiency

• Consumer lose their freedom

Mixed economy

• Uses both free market mechanisms and the government planning process allocate a significant amount of the total resources

Governments roles in a mixed economy

• Creating a framework of rules

• Supplements and modifies price system

• Redistributes income

• Stabilises the economy

Demand

The amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period

Supply

The quantity of a good of service that producers are willing and able to sell at a given price in a given time period