Nature of Economics

• Ceteris Paribus

  All other things being equal
• Positive Statement

  A statement that can be tested to be proven or disproven using data (facts).
• Normative Statement

  A statement that involves a valued judgement and cannot be verified with data.
• Renewable Resources

  Resources that are not finite and can be replenished over-time.
• Non-Renewable Resources

  Resources that are finite and cannot be replenished.
• Sustainability

  Meeting needs of today without compromising the needs of future generations
• Opportunity Cost

  The next best alternative foregone
• Economic Problem

  Problem of scarcity - resources are finite and limited, but wants are unlimited.
• Factors of Production

  Capital - Investment in producing the goods

  Enterprise - Willingness and ability to take the risks of producing a good with 3 other FOPs

  Land - Natural Resources used in production

  Labour - Human input into the production process
• PPF

  Combination of 2 goods in an economy and how they interact with each other.
• Division of Labour

  Dividing workforce and allocating them to specific tasks.
• Specialisation

  Process by which a worker becomes specialised in a certain skill.
• Benefits of Specialisation

  Economies of Scale - lowers avg. cost per unit

  Reduces cost of training workers

  Workers are productively efficient
• Drawbacks of Specialisation

  boredom - fall in efficiency and production

  Not flexible - workers will struggle to adapt to new environmental changes
• Functions of money

  Store of value

  Unit of account

  Medium of Exchange

  Standard of deferred payment
• Free-market Economy

  An economy in which market forces allocate scarce resources based on price mechanism - FOPs are privately owned (capitalism)
• Command Economy

  An economy in which resource allocation is guided by the government
• Mixed Economy

  An economy in which FOPs are controlled by both the public and private sector

  
  

  Firms form private sector

  
  

  Government forms public sector
• Benefits of Free-Market Economy

  Efficient: Only high demand goods - firms are incentivised to lower costs

  Rewards entrepreneurship

  Greater choice selection
• Drawbacks of Free-Market Economy

  Inequitable: What is fair in free-market may not be fair in reality

  Missing markets: If firms see no profit signal, they have no incentive to enter the market

  Monopolies may rise - exploits consumers as they are able to charge higher prices to yield more revenue
• Benefits of Command Economy

  Corrects inequalities: Equal distribution amongst population

  Fall in Unemployment

  Breaks up Monopolies - see no exploitation of consumers
• Drawbacks of Command Economy

  Inefficient: Governments are not a profit-maximising entity

  Asymmetric information: Government may not know what is best for the economy - Gov. failure

  Choice restriction