Tutor2u booklet

• The purpose of economic activity is to produce goods and services to meet our needs and wants
• needs - something you must have in order to survive
• wants - something you desire but is not essential
• the economic problem is that we have finite resources to fulfil infinite wants and needs. Resources are scarce
• economic agents need to make choices on how to allocate resources: what, how, for whom to produce
• land - natural physical resources
• capital - human input
• capital - man made resources such as machinery
• Enterprise - the willingness to take risk
• rewards of using factors of production:

  • land = rent
  • labour = wages
  • capital = interest
  • enterprise = profit
• consumers aim to maximise utility when making rational decisions
• workers aim to maximise wages when making rational decisions
• producers aim to maximise profit when making rational decisions
• governments aim to maximise social welfare when making rational decisions
• Opportunity cost is the value of the next best alternative forgone when making a choice
• PPF diagram

  
• positive statements are objective, can be proven
• normative statements are subjective, can’t be proven true or false
• PPF shoes the maximum possible output an economy can achieve when all resources are fully and efficiently utilised
• PPF is curved because of the law of diminishing returns - one extra output of consumer goods diminishes as more capital goods are allocated to it
• a point beyond the PPF curve is unattainable with current resources
• opportunity cost increases as more consumer goods are produced
• the opportunity cost of producing more consumer goods is the capital goods forgone
• An increase in the quantity and quality of the factors of production will cause an outward shift in the PPF curve
• A decrease in the quantity and quality of the factors of production will cause an inward shift in the PPF curve
• discovering new natural resources and increases in labour productivity will increase the quantity and quality of the factors of production
• war, natural disasters and loss of worker skills will cause a decrease in the quantity and quality of factors of production
• Geographical mobility is when factors of production can be easily moved from one place to another
• Occupational mobility is when factors of production can be easily moved between different types of work
• geographical immobility of labour caused by high house prices, family + social commitments
• occupational immobility of labour can occur due to a lack of education and training, so there is a lack of transferable skills. Could be because some people can’t afford education/training
• specialisation - firms focusing on the production of limited range of goods and services
• the division of labour - type of specialisation where workers focus on a small range of tasks
• Adam smith argued that specialisation leads to increased productivity and economic growth
• advantages of specialisation/division of labour:

  + greater output using the same amount of resources, higher productivity

  + workers become more skilled by focusing on a certain task, higher efficiency

  + skilled workers can develop specialist machinery to increase automation
• disadvantages of specialisation/division of labour:

  - workers may find repetitive tasks to be monotonous and unrewarding, leading to job dissatisfaction

  - only skilled in a specific task so less employable

  - mass produced goods can reduce consumer choice, lack of variety
• Store of value - an asset that holds value over time
• free market:

  • private ownership
  • economic agents are motivated by self interest
  • consumers determine what is produced by being willing to buy goods and services (demand drives output)
  • Resources allocated by the price mechanism
• advantages of free market:

  + higher choice

  + profit motive

  + incentive to work harder for higher wages, productivity increases

  + high competition drives prices down

  + incentive to innovate and invest in new ideas