Economics Theme 1

• price elasticity of supply


  a measure of how much the quantity supplied of a good responds to a change in the price of that good.
• positive statement


  Objective statements that can be tested, are value free and fact based
• normative statement


  A subjective opinion, or value judgement, that is opinion based.
• opportunity cost


  The real cost of a good/service in terms of its next beat alternative
• economic problem


  How to satisfy unlimited wants with limited resources
• Economic Resources


  Inputs used in production including natural resources (land), labour, capital and enterprise
• Economic good


  Produced using economic resources and has an opportunity cost since the resources used could have been employees elsewhere
• Free good


  one that does not use up economic resources so there is no opportunity cost
• What does the PPF show?

  The maximum combination of two goods or services that can be produced by the economy when a fixed number of resources are efficiently used
• rightward shift in PPF

  The economy can produce more of both products so there has been an increase in total stock of factors of production and an increase in the efficiency with which the factors of production are used ( economic growth)
• What to do to experience economic growth in the future

  invest in capital stock and save conumer goods.
• The gradient of the PPF


  A change in the quality or quanity of resources specific to the production of one type of product

  
• Points inside or outside the ppf

  inside means that the resources are not being used efficiently

  outside is not achievable
• Specialisation of labour


  when workers, forms or countries concentrate their efforts on particular products or tasks
• How would specialisation work

  Through trade using an acceptable medium of exchange which is usually money
• Advantages of specialisation


  - better quality

  - greater economic efficiency

  - greater output

  - higher productivity
• Disadvantages of specialisation


  - Vulnerability to supply

  - demand may fall due to trends

  - Factor inputs may become scarce and eventually run out

  - cost of production may rise
• division of labour


  the concentration of workers on a particular task
• division of labour advantages

  - highly skilled at 1 task

  - trained quickly and easily

  - requires less capital equipment
• division of labour disadvantages

  - Boredom could lead to inefficiency

  - decline in motivation leading to mistakes

  - less flexible workforce

  - increases labour turnover
• Adam Smith and the division of labor

  productivity increases

  - increased dexterity

  - time savings in passing from one function to the next

  - automation: investment in machinery

  example of the pins on an assembly line
• Free market


  A capitalist system of economy in which competition and the factors of supply and demand determine prices without government involvement.

  - private sector businesses

  consumer decided goods and quantity, entrepreneur decides method of production

  - income distribution
• Command market


  a system where the government rather than free market determines what goods that should be produced, at how much and price at which goods will offered for sale.

  - communist

  - public sector businesses
• mixed markets


  - Free market with some government intervention

  - Public and private sector
• Karl Marx


  Father of Communism

  capitalists end up exploiting workers, replacing them with machines, leading to an alienated workforce and social unrest. A revolution among the proletariat is inevitable. Competition causes many firms to go bust leading to a monopoly power.
• Adam Smith


  By pursuing their own self-interests, individuals would be led by an invisible hand. Competition in markets ensures that firms produce their goods at the lowest costs. Self-interest objectives leads to optimum resource allocation. Low barriers reduce the risk of monopoly power
• Friedrich Hayek


  Believed in Government non-involvement in resource allocation decisions as individuals have the best knowledge of their own situation. The price mechanism acts as a communication network.
• Advantages of a free market

  - consumer choice - freedom

  - efficient allocation of resources

  - loads of innovation = profit motive

  - profit motive stimulates investment which encourages economies of scale

  - competition through trade reduces risk of monopoly power
• Disadvantages of a free market

  -Inequality (economic equity)

  - possible economic crisis (unstable)

  - Goods that are bad could be over produced like alcohol
• advantages of command economy

  - equal allocation of resources

  - less unemployment

  - more equality

  - the common good rather than profit motive
• Disadvantages of a command economy

  - inefficient allocation of resources

  - open to corruption due to shortages

  - low productivity - no profit motive

  - lack of motivation (no profit motive or promotions) leading to lower productivity
• Functions of Money


  medium of exchange- transaction between buyer and seller , unit of account- money is a unit of measure used to value assets , store of value- an asset that holds its value over time
• Demand


  The willingness and ability to purchase a product at the prevailing price in a given time period
• Law of demand


  As the price of a good increases the quantity demanded falls and vice versa, ceteris paribus.

  
• Extension of demand


  when quantity demanded for a good increases because its price falls; it is shown by a movement down the demand curve
• Contraction of demand


  when quantity demanded for a good falls because its price rises; it is shown by a movement up the demand curve
• Reasons for downward sloping demand curve

  income effect, substitution effect, law of diminishing marginal utility
• Determinants of Demand


  - real disposable income

  - the price of other goods (substitutes and complements)

  - changes in taste and fashion

  - advertising and branding

  - changes in population (size and structure)

  - political, social and religious factors

  - quality
• substitute goods - price


  Goods tat are alternative to each other. An increase in the price of one good will decrease the demand for that good and increase the demand for its substitutes. Competitive demand
• complementary goods - price


  Goods that are often used together, so they are un joint demand