Economics unit 1

Scarcity

The limited availability of economic resources relative to society’s unlimited needs and wants for goods and services.

Opportunity cost

The next best alternative foregone when an economic decision is made; what you give up to get something else.

Subsidy

Financial aid, usually from a government, given to a person, company, or industry to lower costs, keep prices affordable, or encourage a specific economic or social activity.

Factors of Production (FoPs)

The resources used to produce goods and services: land, labour, capital, and enterprise.

Land

All natural resources used in production, including land, the sea, and resources found on or under the Earth.

Labour

The physical and mental work performed by humans in the production of goods and services.

Human capital

The value of a workforce, including workers’ skills, knowledge, education, training, and experience.

Capital

Manufactured resources used to produce other goods and services, such as machinery, tools, and buildings.

Infrastructure

Large-scale public facilities and systems needed for economic activity, such as roads, railways, electricity networks, and water systems.

Enterprise

The factor of production that takes risks and organises the other factors of production in order to produce goods and services.

Economic system

The way a society organises the production, allocation, and consumption of goods and services.

Three questions every economic system must answer

What to produce? How to produce? Who to produce for?

Main types of economic systems

Central planning, free market economies, and mixed economies.

Central planning

An economic system where the government makes decisions about the allocation of resources and owns or controls the factors of production.

Free market economy

An economic system where individuals and firms make decisions about resources and production, with prices determined mainly by supply and demand.

Price mechanism

The way prices adjust through changes in supply and demand to allocate resources in a free market.

Mixed economy

An economic system combining elements of central planning and free markets, with both government and private sectors involved in economic decisions.

Example of a mixed economy

Switzerland has both government involvement, such as compulsory healthcare coverage, subsidies, and regulations, and private-sector activity where firms make decisions about production, prices, and investment.

Economic incentives

Factors that encourage people or firms to change their economic behaviour.

Examples of economic incentives

Working harder, improving efficiency, innovating, starting businesses, taking risks, and investing.

Opportunity cost and sacrifice

Opportunity cost is what you sacrifice when choosing one option instead of the next best alternative.

How is opportunity cost calculated?

It can be thought of as the benefit or value of the next best alternative that is sacrificed when making a choice.

Why does opportunity cost increase?

As more resources are allocated to producing one type of good, increasingly unsuitable resources must be used, making each additional unit more costly in terms of the alternative good sacrificed.

Production Possibility Curve (PPC)

A curve showing the maximum possible combinations of two goods or services that can be produced using a given set of resources and technology.

What causes a PPC to shift?

Changes in the quality or quantity of factors of production