AQA A level Economics - Micro Term 1a

Basic economic problem

Economics is the study of the most efficient way to allocate scarce resources.

• The basic economic problem is that resources are finite, but desire is infinite - as such, decisions must be made.

• There are two types of economies:

  • Market economy - linked with capitalism

  • Command economy - linked with communism

Economic agent - anyone who makes an economic decision

In a market economy, forces of demand and supply work together to determine a price. A full market economy has no intervention from the government, and as such we are in a mixed economy - the government possess and distribute money, but it does not hold all of the money.

Four factors of production, the abundance of which determine how efficiently goods can be made:

• Entrepreneurship

• Labour

• Land

• Capital

Spending more can lead to a better quality of life - not doing this is inefficient use of scarce resources.

In a full market economy, schools, hospitals, etc. would not be free. In our economy, they are allocated based on need, which makes us a mixed economy.

Economic methodology

• Economic theories can only survive through allowing many exceptions to their predictions

• Critics argue and say this turns theories purely into generalisations

In economics, it is hard to collect evidence, so an assumption called ceteris paribus is used - meaning “all other things staying the same.”

Positive statements can be proven by facts

Normative statements are purely based on opinion

Cost-benefit analysis - weighing up costs against benefits