1.1 Nature of economics

Positive statement

an objective statement about the economy that can be tested, proven, or disproven using evidence.

Normative statement

a subjective statement based on opinions, values, or judgments about what the economy should be like.

Productive efficiency

When goods and services are produced at their lowest possible cost per unit, using resources efficiently as possible

Allocative efficiency

When resources are allocated towards producing the goods and services that are most in demand.

Pareto efficiency

A situation where nobody can be made better off without making someone else worse off

Dynamic efficiency

Efficiency achieved through innovation and investment overtime

What are the causes that can shift the PPF curve?

A change in the Quantity/Quality of the four factors of production

What is a capital good?

A man-made good used to produce other goods and services, rather than being consumed directly.

What is specialisation?

When individuals, firms, or countries focus on producing a narrow range of goods/services in which they are most efficient.

Division of labour

Splitting the production process into separate tasks, with workers focusing on specific stages.

Why did Adam Smith argue that the division of labour increases productivity? (3)

1. Workers become more skilled in one task

2. Less time is wasted switching tasks

3. Easier use of machinery

What are the 4 advantages of specialisation in production?

1. Higher productivity as workers become more skilled

2. Efficiency reduces average costs

3. Faster production from repetition in tasks

4. Technological efficiency as it is easier to automate specific tasks

What are the 3 disadvantages of specialisation in production?

1. Repetitive tasks decrease job satisfaction and harm motivation

2. Lack of flexibility when workers become specialised in one task

3. Risk of structural unemployment if demand falls for one skill

What is a free market economy? (Adam Smith)

An economy where resources are allocated by price signals, with minimal government intervention.

What is a command economy? (Karl Marx)

An economy where the government owns most resources and makes all key economic decisions.

What is a mixed economy?

An economy with both private sector markets and government intervention

What was Adam Smiths belief about free markets?

Believed that markets worked best through the invisible hand, where self-interest leads to efficient outcomes.

What was Frederich Hayeks belief about free markets?

Believed that price signals carry out information and central planning cannot match the efficiency of markets

What was Karl Marx belief about a command economy?

Believed that capitalism creates inequality and exploitation therefore supported state ownership of resources.

What are the 3 advantages to a free market economy?

1. Efficient resource allocation since prices reflect supply and demand

2. Incentives and freedom to innovate create a profit motive

3. There is consumer choice for a variety of goods and services

What are the 3 disadvantages of a free market economy?

1. Inequality is created as wealth is concentrated among successful firms/individuals

2. Chances of market failure

3. Under-provision of merit goods

What are the advantages of a command economy?

1. Reduced inequality as wealth distribution is controlled by the state

2. Provision of public goods so the government ensures essential services

3. Economic stability as there are no profit-driven cycles

What are the disadvantages of a command economy?

1. Inefficiency due to lack of price signals and misallocation

2. Low incentives to innovate and work harder

3. Poor consumer choice from a limited variety of goods

What are the roles of the state in a mixed economy?

1. Provision of public goods with policing