Economics

• Why free goods have no opportunity cost:

  • Unlimited in supply
  • decision to consume does not have to come at the expense of other G/S
  • eg. rainwater, seawater, air, daylight, desert sand
• How the objectives of the private sector differ from the public sector:

  • private sectors tend to operate to gain profit eg. personal gain
  • public sectors operate to provide a service to society eg. state education and healthcare
• Economic Problem

  • Infinite wants and needs but finite resources
  • Economy has to make choices about what, how, and for whom production should take place
  • these choices incur opportunity costs to the economy
• Why choices have to be made about how resources are allocated in an economy:

  • Scarcity means that resources are limited in supply
  • Not possible to meet everyone's wants and need
  • Economic choices have to be made
• Difference between economic activity in private and public sectors:

  • private sector focuses on meeting the needs and wants of private individuals and firms
  • private sector resource allocation is based on fulfilling needs and wants of customers in return for profit for seller/supplier
  • public sector is determined by the government in order to meet the needs and wants of society as a whole eg. education, healthcare, transportation networks, infrastructure, national defence, etc.
• Factors that affect the level of labour mobility:

  Geographical Mobility - cost of living family and friends, presence of good transportation networks, immigration and emigration policies

  Occupational Mobility - qualifications, skills, experience, cost and length of training, retraining programmes, demand for specialised skills in a certain industry
• Functions of an entrepreneur:

  • bears the uninsurable risks of running a business
  • responsible for organising the other 3 FOPs
  • makes key decisions in the business
• Define FOPs:

  • 4 categories of resources needed to produce any G/S
  • land, labour, entreprise, capital
• Define the term 'resources':

  • FOPs used to produce G/S
  • Land, labour, entreprise, capital
• Capital goods:

  • man-made goods used to produce other G/S
  • eg. machinery tools, capital equipment
• Using machinery as an example, explain the mobility of capital as a FOP?

  Machinery might be used for different purposes eg. conveyor bells in a factor, drink manufacturers use machinery to produce bottled water or soft drinks
• 2 factors that firms consider when choosing which FOP to use:

  • Cost and availability of FOPs: Higher the cost, the more likely the firm will use as an alternative FOP
  • Type of product: eg. manufacturing an aircraft will require more capital where teaching will require more labour
• Scarcity:

  • resources are finite in supply
  • at any point in time, there is a limited amount of FOPs in the economy
• Why scarcity creates an opportunity cost:

  Scarcity implies that there are insufficient resources to satisfy the unlimited wants of consumers. This creates a need for consumers and firms to make a choice. Choices generate opportunity cost in terms of next best alternative forgone when making an economic decision.
• Productive capacity of an economy:

  • Shows the maximum amount of output if all FOPs are used efficiently
  • Shown by any point of the economy's PPC
• Conditions for an economy to be operating on its PPC:

  • Full employment of all resources eg. FOPs
  • Efficient use of these resources
• Possible causes of an inward shift of the PPC:

  War, trade conflict, economic recession, natural disasters, widespread disease, famine, droughts, etc.
• Reason for outward shift of the PPC:

  • improvements in the quantity and quality of FOPs
• How PPC diagrams demonstrate the concept of opportunity cost:

  • By producing more of one G/S as shown on a PPC, the economy automatically forgoes the production of the other G/S
  • This demonstrates OC as it involves a forgone opportunity when an economic decision is made
• Microeconomics:

  • the study of an individual market
  • individual households and firms and consumers as decision makers
  • analysing particular parts of the economy isolation instead of looking at the economy as a whole
• Macroeconomics:

  • the study of resource allocation and decision making of the economy as a whole
  • governments, large non-governmental organisations and large multinational companies as decision makers
  • eg. the causes and consequences of unemployment
• Effect of macroeconomic decisions:

  • Consumers - tax rates affect their disposable income and hence level of consumption
  • Firms - taxes or subsidies affect their cost of production and hence level of output and profits
• Key Features of the Market System:

  • No government interference
  • Resources allocated on the bases of price and financial incentives
  • Competition creates choices and opportunities
  • Resources allocated to individual firms and consumers who are willing and able to pay
• How prices are determined in a market system:

  • Interacting forces of demand and supply
  • eg. In equilibrium - when demand for and supply of a product are equal
• Disequilibrium:

  • when demand for is not equal to the supply of a product
  • prices are either above the market price or below market price
• Price Mechanism:

  • the economic system of relying on the market forces of demand and supply to allocate scarce resources in the economy
• Advantages of market system:

  • Promotes competition --> creates greater choices and opportunities for firms and potentially better quality and lower prices for consumers
  • Based on financial incentives --> eg. incentives for people to work hard in return for monetary rewards
• How price mechanism allocate resources:

  • By the forces of demand and supply
  • if price is too low, there is excess demand --> firms raise prices accordingly to solve shortage
  • if price is too high, there is excess supply --> firms lower prices accordingly to get rid of surplus
• State two benefits a country may gain from immigration

  Larger labour force

  Reduced dependency rate

  Higher demand

  Higher tax revenue

  More skilled workers
• Define a capital good

  Human-made good used to produce other G/S
• Define macroeconomics


  The study of the whole economy

  eg. unemployment, study of economics on a large scale
• State two objectives of firms

  Survival

  Social welfare

  Profit maximisation

  Growth
• Define external costs


  Harmful effects on third parties

  Social costs - private costs
• State 2 functions of money, other than store of value.

  Medium of exchange

  Measure of value

  Standard of deferred payments
• State 2 qualities of a good tax

  Efficient

  Flexible

  Certain

  Equitable

  Convenient
• State 2 key questions about how resources are allocated

  What to produce

  How to produce it

  For whom is it produced
• State 2 functions of local government

  Providing public goods eg. streetlights

  Cleaning eg. waste collection and management

  Infrastructure investment

  Supporting local businesses
• State 2 benefits of free trade

  Increase choices

  More competition

  Lower prices

  More specialisation
• Define profit maximisation


  When a firm produces at the level of output which makes the highest profits for the firms

  When a firm produces where the gap between TR and TC is largest
• Define market failure


  When the price mechanism does not lead to an efficient allocation of resources