economics (mr smith)

• Production Possibility Frontiers (PPF) show alternative combinations of two goods or services attainable when all economic resources are fully and efficiently employed
• The PPF is generally drawn concave to the origin because not all economic resources may be suited to the production of consumer goods or capital goods, known as Diminishing Marginal Returns
• The PPF line represents the maximum combination of two goods or services that can be produced if all resources in the economy are used efficiently
• A straight line PPF indicates perfect factor substitutability of resources and perfect mobility of factors of production between the two goods being produced
• Markets exist anywhere where a buyer and seller trade or exchange goods and services, and a market does not have to be a physical place
• Reasons the Demand Curve slopes Downwards:

  1. Income effect: a fall in price increases the real purchasing power of consumers, allowing them to buy more with a given budget
  2. Substitution effect: a fall in the price of good X makes it relatively cheaper compared to substitutes, leading some consumers to switch to good X, increasing demand
  3. Diminishing Marginal Utility: as more is consumed, the marginal utility of extra units declines, so firms must charge lower prices to sell more output, resulting in the downward sloping Demand curve
• Disequilibrium refers to an imbalance between the quantity demanded and the quantity supplied in a market at a particular price, leading to excess demand or excess supply
• Key Terms:

  • Utility: Satisfaction derived from the consumption of a good or service
  • Rationality: Economic agents behaving in a way that maximizes their own welfare
  • Market: Any place where buyers and sellers can meet to exchange goods and services
• Supply and Demand Diagram:

  • At a high price, there will be less demand
  • At low prices, the quantity of a good or service that firms are willing to produce is low
  • Equilibrium Price: the price at which demand matches supply, producing a market equilibrium acceptable to buyers and sellers
• Types of Economy:

  • Free Market Economy: Resources are allocated through the market mechanism, with minimal government involvement
  • Command Economies: Scarce resources are allocated by the government, determining what to produce, how to produce, and who gets what
  • Mixed Economies: Some sectors are left to free markets while others are controlled by the government
• Most economies today are mixed economies, with elements of both free markets and command economies
• Scarce money is a key factor for the government
• Functions of Money:

  • Medium of exchange: without money, people would be forced to barter, requiring a 'double coincidence of wants'
  • Measure of value: money allows quick and easy comparison of the relative value of goods and services
  • Store of value: money can be saved and used at a later date
  • Method of deferred payment: allows people to go into debt and repay at a later date
• Advantages of the Division of Labour:

  • Raises output per person as workers become more skilled
  • Better earning potential for workers
  • Helps firms lower the cost per unit, leading to more profit and/or lower prices
• Disadvantages of the Division of Labour:

  • Workers may become bored or dissatisfied
  • Operation can be expensive to set up
  • If one worker makes a mistake, the whole operation can fail
  • Workers may be over-specialized and not flexible, risking job loss to automation
• Ways for firms to improve productivity:

  • Invest in better capital equipment and technology
  • Locate nearer to raw materials
  • Train workers
• Specialisation of task in the production process can lead to higher output per person/per hour worked
• Specialisation and Division of Labour:

  • Specialisation: when a firm, individual, or economy concentrates on one specific task or producing a specific range of goods or services
• Key Advantages from Specialisation:

  • Higher labour productivity and increased profits for firms
  • Quality of product or service can be improved
  • Creates surplus output that can be traded internationally, leading to more revenue, profit, employment, and higher salaries
• Disadvantages of Specialisation:

  • Repetitive work can lower motivation and reduce productivity
  • Vulnerability to changing demand or new competition
  • Mass-produced standardized goods can lack variety for consumers
• Cyclical unemployment


  Occurs as a result of a decline in overall economic activity of an economy leading to a decrease in demand for labour
• Seasonal unemployment

  Occurs when workers are unemployed at certain times of the year when demand is decreased
• Types of unemployment


  • Cyclical unemployment
  • Seasonal unemployment
  • Frictional unemployment
  • Real wage inflexibility
• Real wage inflexibility


  Occurs when wages are set above the equilibrium causing the supply of labor to be greater than the demand
• frictional unemployment

  Occurs when workers are seeking new jobs or are transitioning from one job to another
• Real wage inflexibility is also known as classical unemployment
• Labour force survey (LFS)

  Nation-wide survey directed at households designed to obtain information on the labour market and related issues through a series of interviews
• Structural unemployment


  Occurs when the labour market is unable to provide all individuals that are seeking employment due to a mismatch between the skills and qualifications of the jobseekers and the available job opportunities
• Unemployed


  People able, available and actively willing to find work and actively seeking for work but not employed
• Types of unemployment

  • Structural unemployment
  • Seasonal unemployment
  • Frictional unemployment
  • Real wage inflexibility
  • Demand deficiency unemployment
• Claimant count

  The number of people claiming the jobseekers allowance and the unemployed
• GDP components

  • Expenditure method
  • Factor income method
• Expenditure method

  • Consumption
  • Government spending
  • Exports (net trades)
• Factor income method

  • Wages and salaries
  • Proprietor's income
  • Rental income
  • Net interest income
  • Profit for corporations
  • Mixed income
• Value added

  • Gross value added
  • Net value added
• Value added by economic sector

  • Primary
  • Secondary
  • Tertiary
  • Quaternary
• Unemployment


  People able, available and willing to find work, and actively seeking work but not employed
• The claimant count is the number of people allowed to claim unemployment benefits
• Market that fail to allocate resources efficiently in an economy lead to a deadweight loss of economic welfares
• Externalities occur when producing or consuming goods or services causes an impact on others not directly related to the transaction