1.1 Nature of economics

• The point of money is that it's a point of exchange, it allows the designation of exchange, demonstration of value of product/service , specific value for goods. It would also prevent bartering / negotiating
• Utility and How much you can afford affects your purchases / demands
• The Economic Problem is that We have infinite wants, but finite resources, also some resources are scarce
• A Renewable resources are resources that can be exploited over an over again because they have the potential to renew themselves
• Non Renewable resource are resources which once exploited cannot be replaced
• Sustainable resources is A resource that is being economically exploited in such a way that it will not diminish or run out
• What is caused by the Economic problem is With every choice there's an opportunity cost
• An Opportunity cost is the benefits of the next best alternative which has been given up due to a choice made
• The 4 factors of production are Land, Labour, Capital and Enterprise
• Factor of production: Land - [fields, offices, school site, factory space] [if you want land, you pay rent (or own the land)] [rent]
• Economic as a social science:

  • Economists develop models to explain how the economy works, such as theories of supply and demand or the circular flow of income
  • The terms "theory" and "model" can be used interchangeably
  • The purpose of theories and modelling is to explain why something is as it is
  • Assumptions must be made in economic models due to the many variables that can change
• Positive and normative economic statements:

  • Positive statements are objective and can be tested to be proven or disproven
  • Normative statements are subjective and based on opinion, cannot be proven or disproven
  • Economists tend to use positive statements to back up normative statements
• The economic problem:

  • The basic problem of economics is scarcity, where resources are limited but wants are infinite
  • Scarcity is a relative concept as resources are scarce in relation to the demands placed upon them
  • Economies solve the basic economic problem by determining what to produce, how to produce it, and for whom production should take place
• Ceteris paribus:

  • Economists use the term 'ceteris paribus' meaning 'all other things remaining equal'
  • For example, when there is a change in income, demand will shift, ceteris paribus
• Renewable and non-renewable resources:

  • Renewable resources can be replenished or replaced on a level equal to consumption
  • Non-renewable resources cannot be readily replaced by natural means on a level equal to consumption
• Opportunity costs:

  • Opportunity cost is the cost of one thing in terms of the next best option which has been given up
  • Consumers, producers, and governments make decisions based on opportunity costs
• Production possibility frontiers:

  • Shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology
  • Economies aim to produce efficiently at a point on the curve
• Specialisation and the division of labour:

  • Specialisation is the production of a limited range of goods by a company/individual/country
  • The division of labour increases labour productivity and efficiency
• Adam Smith:

  • Adam Smith introduced the concept of specialisation and the division of labour to increase labour productivity
  • Specialisation and the division of labour lead to higher quality goods and services
• Advantages of specialisation and division of labour:

  • Higher quality of goods and services, since workers are more skilled at their jobs
  • More cost-effective to develop specialist tools, improving speed or quality
  • Time is not wasted moving between jobs and getting out tools
  • Workers only need to be trained to do one specific task, saving time and money
• Disadvantages of specialisation and division of labour:

  • Work can become boring, leading to poor quality of work and people leaving the business
  • Reduction of craftsmanship and a more standardised product due to mechanisation
  • Production delays in one process can halt all other tasks
  • Workforce may suffer from structural unemployment
• Advantages of trade for countries that specialise:

  • Theory of comparative advantage states countries should specialise in producing goods where they have a lower opportunity cost
  • Greater output globally
• Disadvantages of trade for countries that specialise:

  • Over-dependence on one particular export can lead to economic collapse
  • Risk of resources running out, causing a huge loss of income
  • High interdependence can cause problems if trade is prevented, for example because of war
  • Increased competition may not necessarily lead to falling wages
• Functions of money:

  • Medium of exchange: used to buy and sell goods and services
  • Measure of value: compares the value of goods and services
  • Store of value: keeps its value and can be kept for a long time
  • Method for deferred payment: allows for debts to be created
• Free market economy:

  • Individuals make their own choices and own factors of production without government interference
  • Resources allocated through the price mechanism
  • No completely free markets exist today
  • Advantages include automatic resource allocation, consumer sovereignty, high motivation, political freedom, productive efficiency, and higher growth
  • Disadvantages include high levels of inequality, lack of merit goods, potential wastage of resources, monopolies, and externalities
• Command economy:

  • All factors of production, except labour, owned by the state
  • Resource allocation carried out by the government
  • Advantages include minimum standard of living, less wastage of resources, long-term planning, standardised products, and focus on objectives other than profit
  • Disadvantages include potential waste of resources, slow decision-making, lack of motivation and efficiency, loss of consumer freedom, and often led by dictators
• Mixed economy:

  • Combination of free market mechanism and government planning
  • Government's role includes creating a framework of rules, supplementing and modifying the price system, redistributing income, and stabilising the economy
• ceteris paribus is the assumption that other things are being held equal or constant, so nothing else changes. 
• Positive statements are objective. They can be tested with factual evidence and can consequently be rejected or accepted
• Normative statements are based on value judgments. These are subjective and based on opinion rather than factual evidence.
• The basic economic problem is scarcity. Once unlimited and resources are finite, so choices have to be made. Resources have to be used and distributed optimally. 
• Opportunity cost of a choice is the value of the next best alternative foregone. Opportunity cost is important to economic agents such as consumers, producers and governments
• Allocative efficiency occurs when goods and services are produced where marginal benefit equals marginal cost. It ensures scarce resources are allocated efficiently between competing uses
• The factors of production are : capital enterprise. Land and labour. 
• Labour is human effort. Labour rewards / incentive are wages and salaries.
• • Entrepreneurship is managerial ability. The entrepreneur is someone who takes risks, innovates and uses factors of production. Resources are drawn together into the production process. The reward / incentive for entrepreneurship is profit – an incentive to take risks.
• Capital are goods which can be used in the production process. For example. Machines and buildings. Or finished or semi-finished consumer goods. The reward/incentive for capital is interest from the investment.
• Renewable resources can be replenished. For example, oxygen, fish or solar power are renewable assuming the rate of consumption of the resource is less than the rate of replenishment.  
• Nonrenewable resources cannot be renewed. For example, fossil fuels such as coal, oil and natural gas are not renewable. The stock level decreases over time as it is consumed.  
• Production Possibility frontiers PPFs depicts the maximum productive potential of an economy using a combination of two goods or services and resources are fully and efficiently employed.