The basic economic problem, concept of the margin, opportunity cost, PPF, allocation of resources and types of economic systems:

What is the economic most concerned with?

What to produce

How to produce

For whom to produce

Economic good

A good which imposes some cost on society to produce, it is a good that is limited and will have an opportunity cost

Free good

A good which can be enjoyed without an cost to society, it is a good that is unlimited and has no opportunity cost eg air to breathe

Positive statements

Are based on facts that can be tested as true or false

Normative statements

Are based on an opinion or a value judgement, people can disagree with these statements

Needs

A good that is required for the basic functions of life, these are goods and services, such as food, shelter, clothing and important services, such as health and education

Wants

This refers to things that we our like to consume, it are not essential for the basic functions of life

Scarcity

Referring to resources that are limited, with scarce resources we need to make choices about how to use and distribute them

Non-renewable resources

These are natural resources that are finite, once used they cannot be replaced eg coal and oil

Renewable resources

Resources that can e replenished eg wood wind and solar energy

What are the economic agents?

• governments

• Firms

• Households

Factors of production

Are items used in the production process to makes goods and services

What are the factors of production

Land- raw material

Labour-worker

Capital- machines an equipments

Enterprise- human initiative to set up a business

Marginal cost

The cot of producing an extra unit

Marginal utility

The benefit/satisfaction people get from consuming a certain good

Utility

Concept if how much benefit/satisfaction people get from consuming a certain good

Opportunity cost

The next best alternative foregone

An example of opportunity cost

If the government spend all of its money on defence then they will not have enough to spend on medical

Importance of opportunity cost

Have to make decisions about the best use of time, money and resources

There is a trade off

Evaluation of opportunity cost

Difficult for consumers to know the next best alternative

People often don’t have time to try and work out opportunities cost even if they could

Consumers are not always rational but influenced by other factors such as impulse buying how good are framed and habitual consumption

PPF (Production possibility frontiers)

Shows the maximum output that an economy can produce if the economy is maximising the use of its resources and operating efficiency

Short run economic growth

Moving from point A to B, this involves making better use of existing productivity capacity

Long run economic growth

This requires a shift in the PPF curve to the right

Causes of long run economic growth

• discovering more raw materials

• Increase in the size of work force

• Increase in capital stock

• Increase in labour productivity

• Improvement in technology

Negative economic growth

• declining population

• Firms closing down and stopping production

Consumer goods

Good thats we can use and enjoy, the things we buy in shops like food, clothes etc

Capital goods

There are goods that are used in the productive process, involve investment in increasing productive capacity

Allocative efficincy

Is concerned with choosing the best combination of goods/services- capital goods/consumer goods

Specialisation

Occurs when a country or firm concentrates on producing a particular good or service

Division of labour

Workers concentrate on different tasks within a firm

Advantages of specialisation

• Gives workers time to gain skills for one particular ob

• Firs ca be ore efficient when producing on a large scale enabling economies of scale

• Countries don’t have to produce every good they need which would be impractical for small countries

Problems of specialisation

• can make jobs highly specialise and repetitive leading to boredom and possible diseconomies of scale

• On an assembly line if one person is absent this can slow down the whole production

Money

An object used as a medium of exchange between two parties, enables people t socialise in one job and use their earnings to purchase goods and services

Functions of money

• medium of exchange

• Unit of account-Mauser the relative worth of goods

• Store of value

  • Standard of deferred payment

Allocation of resources

Refers to how goods are distributed in society

Incentive effect

The higher the price makes the good more profitable therefore it acts as an incentive for producers to increase production.

In the long term, firms respond to higher rices by increasing supply

Evaluation of incentive effect

• considerable time delays

• People are not always motivated by money and profit, firms may not produce goods if hey are of questionable ethics

• Workers are to always motivated by high wages but may choose jobs for non-monetary reasons

Planned economy

An economy where the government owns the means of production and the government decided what and how to produced, sometimes known as a command economy or communist economy

Advantages of planned economies

• government can reduce inequality and make important public services available to all

• Government can take into account externalities and protect the environment

• Government can prevent the abuse of monopoly power

• Government ensures full employment by giving people jobs

Problems of planned economies

• no profit motive

• Gov agencies control all areas of economic life it i prone to bureaucracy, high administration costs and corruption

• Gov may be slow to respond to changing consumer preferences with price controls

• Gov have poor information about what to produce Leading to shortages and surpluses

• Consumers may face lack of choice about goods to buy, people may be unable to set up businesses that they want

Market economy

A totally free market occurs where there is no government intervention in the economy

Advantage of free market economies

• tend to result in an efficient allocation of resources because firms have a profit incentive to produce goods that are in demand

• Also have an incentive to cut costs and be efficient otherwise they will go out of business

• Consumer have the freedom to choose the best products which they need

• Avoids gov bureaucracy which can lead to inefficient and corruption

• Incentives of a free market encourages individuals to work hard and set up new business

Disadvantages of free market economies

• private firms can gin monopoly power leading to higher prices for consumers and greater inequality

• There will be overconsumption of goods with negative externalities, leading to pollution and damage to the environment

Mixed economy

Part of the economy will be left to private enterprise, but the government will intervene in various different areas

What are the different areas that the government will intervene in a mixed economy?

• implement taxes on income and goods

• Reduce relative poverty by redistributing income

• Provide services that are under consumed in a free market

• Regulate markets

Government failure

Danger that any government intervention could lead to an inefficient allocation of resources