Free goods have no scarcity and no opportunity cost.
Opportunity cost is the value of the next best alternative forgone.
Scarcity is a shortage of resources compared to human wants, requiring optimal use and distribution.
Capital goods are goods that produce other goods.
Wants are unlimited but resources are finite, leading to the need for choices.
The basic economic problem - the issue of scarcity and how best to produce and distribute these scarce resources.
Economic goods are goods that benefit society and are scarce. They have more value so people are willing to payer a higher price for them.
A normative statement is a statement that is based on opinion not facts.
A positive statement is a statement that can be tested with factual evidence and can be accepted or rejected.
A need is something that is necessary for us to live and function.
A want is something that people desire to have but is not necessary for survival.
Opportunity Cost is the cost of something, in terms of the lost benefit of the ‘nextbest’ alternative given up, when a choice has to be made. (what we are givingup)
Trade off - when one thing is lost to gain something else
A production possibilities curve is a model that shows alternative ways that an economy can use its scarce resources.
the PPC demonstrates scarcity, trade-offs, opportunitycosts, and efficiency.
4 Key Assumptions of the PPC:
Only two goods can be produced
Full employment of resources
Fixed Resources
Fixed Technology
Constant Opportunity Cost- Resources are easily adaptable for producing either good. Result is a straight line PPC (not common).
Law of Increasing Opportunity Cost- As you produce more of any good, the opportunity cost will increase because resources are NOT easily adaptable to producing both goods.
Result is a bowed out (Convex) PPC.
3 Shifters of the PPC:
Change in resource quantity or quality
Change in Technology
Change in Trade (allows more consumption)
Advantages of opportunity cost:
An awareness of the lost opportunities is gained
Enables decisions to be made which offer the best value
Disadvantages of opportunity cost:
It takes time and slows down the decision-making process
It is often difficult to quantify opportunity costs – many opportunities come in the future and/or have no monetary value
Simplified model – many complex choices exist in the real world
Land - Natural resources can be extracted and refined for human consumption from the land e.g. gold, oil
rewards - rent
labour - effort expended by an individual to bring a product or service to the market e.g. a worker, teachers, doctors
rewards - wages
capital - the machinery, tools and buildings humans use to producegoods and services e.g. factories, computers, machinery
rewards - interest from the investement
enterprise - having an idea of how to use the land, labour and capital to make a profit and also knows how to take risks e.g. farmers, Arnold Clark
Rewards - profit - an incentive to take risks
Specialisation is the concentration by a worker, group of workers, firm, region or whole economy on a narrow range of goods and services.
Division of labour is when a business has employees working on one small part of a product. The workers specialise - each worker concentrates on doing one task. In a manufacturing business this would be used with flow production.
Benefits of specialisation:
Higher output – reduces unit costs and enables more to be produced with given resources
Higher quality products
More choice for consumers as surplus products can be traded
Bigger markets – economies of scale
Competition – lower costs, innovation and lower price
Little training is needed and necessary skills are gained quickly.
Low-skilled workers become efficient at their task
Cheaper labour can be hired.
The production process can be mechanised more easily.
Disadvantages of division of labour:
Workers can feel alienated.
Motivation can be poor.
Quality may suffer if workers have less pride in their jobs.
Mass produced standardised goods lack variety.
Narrowly skilled workers may find it hard to gain work elsewhere (structural unemployment).
Barter is a type of trade in which goods or services are directlyexchanged for other goods and services, without using any money
The role of money as a medium of exchange is to facilitate transactions between buyers and sellers of goods and services
coincidence of wants - For a barter to take place, a person wanting to trade must find someone willing to part with their item in exchange for your item.
Bartering takes a long time because it takes long to find someone who wanted the item you wanted to trade away.
two disadvantages of using barter when trading:
1.The lack of transport
2.The lack of common measure of value
Specialisation can help scarcity as resources are used more efficiently.
Trade helps scarcity as it improves the allocation of resources.
The three economic questions
What goods and services should be produced
How should these goods and services be produced
Who consumers these goods and services
Economic system - is the method used by society to produce and distribute goods and services
Command (centrally planned) economy -
Governments make the decisions about how resources will be allocated
The state owns the means of production
State run businesses are given targets for what to produce
Citizens are employed and rewarded (paid) by the government
Products are sold by state enterprise and prices set by governments