Theme 1

• Stabilises the economy: The government will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand.
• They do this through fiscal and monetary policy, which is looked at in Theme 2.
• Economics is a social science that develops models to explain how the economy works, such as theories of supply and demand or the circular flow of income.
• Economists develop models by putting forward a model, gathering evidence and then accepting, changing or disregarding the model.
• The words “theory” and “model” can be used interchangeably and there is no exact distinction between the two.
• The purpose of theories and modelling is to explain why something is as it is.
• Theories are simplified to make them more useful.
• Renewable resources can be replenished or replaced on a level equal to consumption, while non-renewable resources cannot.
• The maximum potential of an economy is represented by any point on the production possibility frontier.
• Scarcity is a relative concept as resources are scarce in relation to the demands placed upon them.
• The production possibility frontier shows the maximum possible combinations of capital and consumer goods that an economy can produce with its current resources and technology.
• Economic growth is shown by the ability to produce more of both goods, while economic decline is shown by the ability to produce less goods than previously.
• Opportunity cost is the cost of one thing in terms of the next best option that has been given up.
• Specialization can result in structural unemployment
• Specialization can result in a reduction of craftsmanship and standardized products
• Money serves as a medium of exchange, measure of value, store of value, and method for deferred payment
• In a free market economy, individuals are free to make their own choices and own the factors of production without government interference
• Specialization leads to higher quality of goods and services
• Specialization saves time by eliminating the need to switch between tasks
• Specialization in trade can result in high interdependence and problems if trade is prevented
• Disadvantages of a free market economy: high levels of inequality, lack of merit goods, little control of demerit goods, wastage of resources, potential for monopolies, externalities
• Specialization can lead to delays if one process is delayed
• Friedrich Hayek (1899-1992) argued that state control of the economy leads to the loss of freedom
• Specialization in trade can lead to resource depletion and loss of income
• There are no completely free markets in the world today, because the government has to intervene at least to an extent
• Specialization allows for more cost-effective development of specialist tools
• Specialization can lead to poor quality of work and high turnover
• The consumer determines what is produced by their willingness to spend their money on a good
• Specialization in trade can lead to over-dependence on one export and economic collapse
• Consumers make decisions based on satisfaction and producers based on profit
• Specialization in trade allows countries to obtain goods and services they need
• Karl Marx (1818-1883) believed in the command economy and criticised capitalism
• Resources are allocated through the price mechanism
• Advantages of a free market economy: automatic resource allocation, consumer sovereignty, high motivation, political freedom, productive efficiency, higher growth
• Adam Smith (1723-1790) believed in the free market economy and the laissez-faire approach by governments
• In a command economy, all factors of production, except labour, are owned by the state and resource allocation is carried out by the government
• A mixed economy is a compromise between a free market and government planning, where both mechanisms allocate resources.
• Marx's theory stated that workers would rise against property owners and seize control of the means of production, leading to a democratic society and the fall of capitalism to begin communism.
• Marx believed that competition in capitalism would lead to more firm failures, unemployment, lower wages, and higher prices, causing discontent among the working class.
• The division of labor enables increased labor productivity as workers can concentrate on one task and develop their skills.