Unit 1

• Ceteris paribus


  Assumption that other things are being held equal or constant, so nothing else changes
• Economists


  • Cannot conduct scientific experiments, like in the natural sciences, so models are devised
  • Use real-life scenarios to build these models upon, and assumptions are made with the models
• It is important to be able to distinguish between fact and fiction in current affairs
• Positive statements


  Objective, can be tested with factual evidence, and can consequently be rejected or accepted
• Positive statements


  • "Raising the tax on alcohol will lead to a fall in the demand of alcohol and a fall in the profits of pub landlords"
  • "Higher temperatures will lead to an increase in the demand for sun cream"
• Normative statements


  Based on value judgements, subjective and based on opinion rather than factual evidence
• Normative statements


  • "The free market is the best way to allocate resources"
  • "The government should increase the tax on alcohol"
• Value judgements can influence economic decision making and policy
• Different economists may make different judgements from the same statistic
• People's views concerning the best option are influenced by the positive consequences of different decisions and by moral and political judgements
• Purpose of economic activity

  To produce goods and services which satisfy consumer needs and wants
• How to produce goods and services

  1. Using resources (inputs in the form of the factors of production)

  2. Producing outputs (the goods and services)
• Decisions economists have to make

  • What is to be produced?
  • How should it be produced?
  • Who will benefit from the goods and services produced?
• What is to be produced?

  The government and private sector have to decide what and how much of each good to produce, considering opportunity cost
• How should it be produced?

  Considering how the goods and services produced will be distributed, the rewards from each factor of production, and aiming to minimise costs and maximise profits through efficient production (labour intensive vs capital intensive)
• Who will benefit from the goods and services produced?

  Consumers who have purchasing power and are willing and able to pay the price charged
• Factors of production

  • Land
  • Labour
  • Capital
  • Enterprise
• Capital


  Physical: goods which can be used in the production process

  Fixed: Machines; buildings

  Working: finished or semi-finished consumer goods
• Entrepreneurship


  Managerial ability. The entrepreneur is someone who takes risks, innovates, and uses the factors of production.
• Reward/Incentive for Capital

  Interest from the investment
• Reward/Incentive for Entrepreneurship

  Profit- an incentive to take risks
• Land


  Natural resources such as oil, coal, wheat, water. It can also be the physical space for fixed capital.
• Labour


  Human capital, which is the workforce of the economy.
• The environment is a scarce resource. There are only a limited amount of resources on the planet.
• Types of resources

  • Renewable
  • Non-renewable
• Renewable resources

  Can be replenished, so the stock level of the resources can be maintained over a period of time. For example, commodities such as oxygen, fish, or solar power.
• If renewable resources are consumed faster than they are renewed, the stock of the resource will decline over time.
• Renewable resources are sustainable. However, currently, resources are being consumed faster than the planet can replace them.
• Non-renewable resources


  Cannot be renewed. For example, things produced from fossil fuels such as coal, oil and natural gas.
• The stock level of non-renewable resources decreases over time as it is consumed.
• Methods such as recycling and finding substitutes, such as wind farms, can reduce the rate of decline of non-renewable resources.
• Wants are unlimited and resources are finite, so choices have to be made
• Resources have to be used and distributed optimally
• Opportunity cost


  The value of the next best alternative forgone
• Opportunity cost is important to economic agents such as consumers, producers and governments
• Finite resources mean choices have to be made for where resources are best spent
• Production possibility frontiers (PPFs)


  Depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed
• PPF curves

  • Can show the opportunity cost of using the scarce resources
  • Points A and B are the most efficient combinations of output on the PPF
  • Producing at B incurs an opportunity cost of producing more cheese
• Law of diminishing returns

  The opportunity cost of producing more yoghurt increases, in terms of the lost units of cheese that could have been produced
• Producing under the PPF

  • Is inefficient, and resources are not used to their full productive potential
  • There is the potential to use these resources more efficiently, which would shift production closer to the curve