1.1

• Ceteris paribus


  all other things equal
• Models


  expressed in mathematical terms because they require greater precision.
• Theories


  often be expressed in words.
• Theories and models purpose


  to explain why something is as it is. They are simplified to make them more useful.
• Social science


  the study of societies and humans' behaviour using a variety of methods, including scientific method.
• governments role in a mixed economy

  -Creating a framework of rules® They prevent the abuse of monopolies (a company with more than 25% of market share can be considered as having monopoly power) so can take advantage of their customers due to the lack of competition and charge higher prices/provide a poorer service.® They can protect customers as they pass a large amount of consumer protection laws to protect the consumers from poor quality products or services.® They protect property rights, ensuring whatever a person owns cannot be taken away by someone else.® They ensure safety standards, protecting employers and employees.-Supplements and modifies the price system.® They produce public and merit goods, such as emergency services and transport.® limit the production of demerit goods like child pornography.® Government action ensures the consideration of externalities.-Redistributes income.® They move income from one group of people to another, from the rich to the poor, by using tax, such as income tax, to take money away from one group then give the money to the poor.® This is in the form of benefits for those who are out of work or on low incomes, and in the provision of services for all, such as education and the NHS, allowing the poor to access these services when they might not have been able to afford to.-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.
• mixed economy features

  - Compromise economy of a mix of both free market and command economy.

  - Free market mechanism and the government planning process allocate a significant amount of the total resources in the country.

  - Government control is restricted, with it differing for each country, but usually being between 40-60%.
• disadvanatages of command economy

  -risk of under supply and a waste of resources.® Impossible for the state to make so many decisions correctly.-Increase in bribery and corruption.® Due to decision making being slow as it has to go through various stages.-Less motivation and efficiency.® people know that working harder will not increase their standard of living, as everyone receive the same wage.-Loss of freedom.® Often led by dictators.
• advanatages of command economy

  -Minimum standard of living provided by the government.® ensuring no one is extremely poor as there is less inequality.-Less wastage of resources.® as there is no need for competitive services nor advertising, which is very expensive.-Long term planning® means that the industry doesn’t have to keep changing and shifting resources.® This is important as some industries may take a number of years to get established and would fail if planning was short term.-Standardised products® Produced cost effectively.-Government motivated by the wellbeing of the country.® decide resource allocation, objectives other than profit can be followed: merit goods are encouraged and increased whilst demerit goods aren’t produced.
• who believed in a command economy and what was their theory

  ® capitalist's profit came from exploiting labour as they underpaid workers for the value that they actually created.

  ® He wanted to remove the difference between the incomes of owners and workers.

  ® believed that capitalism would collapse leading to communism.

  ® Marx saw businesses growing and workers getting poorer, creating a two-class system with a few wealthy capitalists and many underpaid workers.

  ® He thought more firms would fail because of competition causing unemployment, lower wages, and higher prices and this would lead to discontent amongst the working class. His theory stated that these workers would inevitably rise against property owners and seize control of the means of production. This would lead to a democratic society where everything would be owned by everyone i.e., the fall of capitalism to begin communism.
• features of a command economy

  - all factors of production, except labour is directed by the state.

  - There is no private property.

  -> everyone is assumed to be selfless, working for a common good.

  - Resource allocation is carried out by the government, rather than the price mechanism.

  - the government's allocation may represent the wishes of the consumer and often focuses on the need to expand certain areas of the economy, such as weapon building.

  - planning is so complex that some decisions are left up to the consumer.

  - Workers receive wages and can spend this on what they want, within limits.

  - Some goods can be purchased whilst others, such as houses, are allocated.

  - Income distribution is determined by the government and all workers

  -> no matter their job, tend to receive the same wage.

  - products are standardised and prices are limited.

  -> causing excess demand and queueing
• disadvantages of a free market economy

  -Inequality® Since the rich own more factors of production and so can grow richer.-Lack of merit goods.-Little control of demerit goods.-Resources wasted on unproductive expenses.® E.g., advertising, switching the factors of production and providing competitive services.-Existence of monopolies.® Due to disappearance of competition.-Existence of externalities.
• advantages of a free market economy

  -Automatic® due to the invisible hand; resources are moved out of production of a good when people stop wanting it or costs are too high.-Consumer sovereignty (freedom of choice).-High motivation® people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish.-Political freedom-Productive efficiency® As firms are in competition, they will produce goods at the lowest cost they can.-Higher growth in general than other markets.
• who supported free market economy to an extent and what was their theory

  Believed that state control of the economy leads to the loss of freedom. He believed the poor in free markets were better off because at least they had personal freedom. Central planning by governments led to what a small minority wanted being forced on the whole of society. Although individuals don't make supply and demand decisions based on perfect information, they best know what they need in their own situation.
• what was adam smiths free market theory

  invisible hand' in the market which allocated resources to everyone's advantage, allowing the greatest good for the greatest number of people. competition in the market caused lower prices as firms wanted to be competitive and so this benefits the consumer as they can get goods cheaply. each individual's self-interest managed to produce and purchase the goods and services that society needed. However, he did argue that the state needed to provide goods/services which free markets wouldn't such as. the laws, property rights and goods such as bridges and roads.
• features of a free market economy

  - individuals are free to make their own choices and own the factors of production without government interference.

  - Resources are allocated through the price mechanism.

  - The consumer determines what is produced by their willingness to spend their money on a good.

  - Consumers make decisions based on satisfaction.

  - Producers make decisions based on profit.
• who believed in a free market economy


  Adam Smith
• value judgement


  when our opinions are based on our core values. They can influence decision making and policy.
• normative statement example


  government should provide healthcare to all citizens
• normative statement


  a statement which cannot be supported or refuted because it is a value of judgement.
• example of positive statement

  government-provided healthcare increases public expenditure
• Positive statement


  a statement which can be supported or refuted by evidence.
• factors of production

  1) Land- natural resources.

  2) Labour- people available for work.

  3) Capital- goods used to produce other goods and services.

  4) Enterprise- decision making, risk taking (innovation kinda)
• Non-renewable resources


  a resource of economic value that cannot be readily replaced by natural means on a level equal to consumption.

  E.g. fossil fuels (coal, oil, gas)
• renewable resource


  resource of economic value that can be replenished or replaced on a level equal to consumption.

  E.g. oxygen, solar power.
• How to solve/distinguish for the main economic problem:

  - WHAT is to be produced.

  - HOW is production to be organised.

  - FOR WHOM is production to take place.
• problem of scarcity


  It is a relative concept as resources are not necessarily scarce in themselves, but they are scarce in relation to the demands placed upon them.
• Fundamental economic problem


  how best to allocate scarce resources in the face of infinite wants.
• problems with barter

  - People could only trade if there was a double coincidence of wants: where both parties want the good the other party offers.

  - With barter, goods such as fruits often went out of date and so could not keep their value.
• functions of money

  -A medium of exchange-A measure of value-A store of valueor deferred payment
• disadvanatges of trade

  - Countries may become over-dependent on one export and if this fails their economy may collapse.

  ® For example, many developing countries specialise in farming and if crops fail due to weather, they will have no income.

  - Other countries specialise in non-renewable resources, and these could run out, which will result in a huge loss of income for that country. It will also mean the loss of these resources.

  - There will be high interdependence, and this will cause problems if trade is prevented, for example because of war.

  - Some say that increased specialisation means there will be more competition to cut costs and therefore wages will fall, but this is not necessarily true.
• advanatges of trade

  - The theory of comparative advantage states countries should specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing. This will help them boost their economy.

  ® Overall, there is greater output globally.
• what does the degree of specialisation depend on

  the nature of the task and the size of the firm.
• disAdvantages of specialisation and the division of labour in organising production:

  -poor quality of workand people leaving the business due to boredom.- There is a reduction of craftsmanship and a much more standardised product because of mechanisation.- If production in one process is delayed, every other task has to stop until that problem is solved.- The workforce does not have wide industrial training and could therefore suffer from structural unemployment.
• Advantages of specialisation and the division of labour in organising production:

  - Labour productivity to be increased..

  - higher quality of goods and services.

  - It is more cost effective to develop specialist tools, improving speed or quality.

  - Time is not wasted moving between jobs and getting out tools etc.

  - Time and money saved.
• who started the concept of specialisation of labour

  adam smith
• how does a country maximise the amount of goods and services

  ensure that all factors of production, including workers, undertake the tasks that they are best at.
• The division of labour

  when labour becomes specialised in a particular part of the production process.
• specialisation


  the production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way they can access all that they need.