economics theme 1.1

what is economics?

Economics is the study of how scarce resources are allocated to satisfy unlimited wants.

ceteris paribus

All other things being equal

What is scarcity?

Scarcity occurs because resources are finite but human wants are unlimited.

Why does scarcity exist?

Scarcity exists because there are finite resources but unlimited wants.

difference between needs and wants

Need = something necessary for basic survival/well-being.

Want = something people would like to have but don’t necessarily need.

What are the four factors of production?

Capital, labour, land, enterprise

an example of land

natural resources: farm, coal, forest…

labour

human effort used in production

Capital

Man made resources used in the production of goods and services

Enterprise

The ability to organise the other factors of production and take risks in production

What is Opportunity cost

The next best alternative foregone

What is a free good?

A good that is not scarce and therefore has no opportunity cost

What is an economic good

A good that is scarce therefore has a opportunity cost

What is a positive and normative statement

Positive is a fact that can be proven or disproven and normative is an opinion

Why can economists disagree

Different value judgements leading to different normative views.

What is specialisation?

When individuals/ firms/ countries concentrate on producing a particular good or service or performing a particular task

What is division of labour

When production is split into separate tasks and workers specialise in particular tasks

Advantage and disadvantage of division of labour

Advantage: increased productivity

Disadvantage: boredom

What is a barter economy

Goods/ services exchanged for other goods and services without using money

Why can barter be inefficient?

Double coincidence of wants, someone may not want what the other is offering

What are the four functions of money?

Medium of exchange

Unit of account

Store of value

Standard of deferred payment

What is medium of exchange

Money accepted as a mean of payment for goods and services

What is unit of account?

Money providing a common measure of value, allowing prices to be compared

What is store of value

Money can saved and used in the future while retaining its value

What is standard of deferred payment

When you buy the product and pay later

Why does money make specialisation easier?

Money makes exchange easier, allowing individuals and firms to specialise

What is resource allocation

Deciding where scarce resources go