1.1 Nature of Economics

• economic models

  a simplified representation of a real-world economic situation that is used to analyse + understand the underlying economic principles at work

  built on assumption about how people, firms and markets behave, use mathematical + statistical techniques to make predictions + and test hypotheses about economic phenomena
• economic assumption

  a simplified statement about how people. firms or markets are expected to behave in a given situation
• ceteris paribus

  all other factors remain equal
• factors of production

  an input that allows production to take place

  • land - use of world's resources, reward is rent
  • labour - people's efforts, reward is wages
  • capital - machinery (or possible financial assets), reward is interest
  • enterprise - the ability to bring them all together, reward is profit
• a good

  anything that brings you some benefit even if it has negative elements
• a bad

  something that has no positives at all
• opportunity cost

  what you give up by making another choice - the value of the next best alternative
• basic economic problem

  unlimited wants for limited resources
• allocative efficiency

  using resources as effectively as possible to meet the most highly valued needs and wants
• economic objective

  an economic outcome that economic agents (individuals, firms, governments, not businesses or companies) want to achieve
• individual economic objective

  higher income leading to a higher consumption of goods
• firms economic objective

  maximise profits, satisficing profits
• government economic objective

  economic growth, provision of services, low unemployment, low and stable inflation
• positive statement

  a statement that you can test - doesn't necessarily have to be true
• normative statement

  opinion based, is not a statement that can be tested
• a market

  where two groups of people come together - buyers and sellers

  each has its own aims and each has its own theories that determine behaviour
• the law of diminishing marginal returns

  if you keep adding more of the same thing without changing anything else, the impact will become less

  diminishing - getting smaller

  marginal - impact of the last unit

  returns - positive thing we get from the input
• Production Possibility Frontier

  shows how much an economy can produce given the existing available resources, compares two different products to show the trade-off between production of the two products as resources are switched between them
• assumptions of PPF

  all factors of production are variable (movable)

  all workers have the same skills and abilities
• PPF shows the combinations of 2 goods (or type of good) that can be produced by an economy at a given time period

  illustrates the opportunity cost of producing each good
• straight line PPF

  gradient = opportunity cost

  
• curved PPF

  fixed factors - land and some capital

  variable factors - labour and some capital

  short run - fix some factors and keep others variable
• curved PPF

  all resources are being used anywhere on the curve and productive efficiency is achieved

  anything outside of the curve is currently impossible given the current resources

  anything inside the curve means not all resources are being used

  
• what causes a shift outwards in the PPF

  added capital and labour - increase training, demographic changes, immigration of skilled workers

  improvement in technology

  high productivity/efficiency

  better management

  discovers/extraction of new natural resources

  innovation and invention of new products
• what causes a shift inwards in the PPF

  resource depletion - resources wearing out

  large scale net outward labour migration

  damaging effects of natural disasters

  trend decline in productivity

  destruction/loss of factor of production inputs (caused by civil wars)
• division of labour

  individual people allocated to a specific task
• specialisation

  being good at a specific task which makes their task be faster and have higher quality, improves/increases output
• agglomeration

  the benefits that come when firms and people locate near one another - arts centre with museums, galleries, cafes etc
• advantages of specialisation

  increased efficiency

  increased output

  PPF shifts outwards

  economy grows

  GDP growth

  surplus output - can be traded internationally

  higher profits for firms/businesses

  lowers unit cost of supply (high productivity)
• disadvantages of specialisation

  no transferable skills

  product quality goes down when workers get bored (low productivity) - unrewarding, repetitive work

  mass produced standardised goods - lack of variety for consumers

  worker may take less pride in the work

  people may choose to move to less boring jobs, high labour turnover

  may receive little training and be unable to find alternative jobs
• capital goods

  goods that are used to make consumer goods and services

  capital inputs include fixed machinery, hardware, software, new factories and other building
• consumer goods

  goods and services which satisfy our needs and wants directly

  sub division between:

  • consumer durables
  • consumer non-durables
  • consumer services
• production

  a measure of the value of the output of goods and services
• productivity

  a measure of the efficiency of the factors of production measured by output per person employed or by output per person per hour - measures the efficiency of the production process
• functions of money

  • store of value - remains as money, not a perfect store of value due to inflation
  • means of exchange - intermediary between buyers and sellers
  • unit of account - common denominator
  • standard of deferred payment - buy today and pay later (loans)
• characteristics of money

  widely accepted

  hard to counterfeit

  durable

  holds its value over time
• economic system

  a network of organisations used to resolve the problem of what, how much, how and for whom to produce
• Command economy

  Also known as a centrally planned economy, the government has significant control over economic activities
• Command economy

  • Government ownership of most resources and industries
  • Centralised decision-making by the government or central authority
  • Limited consumer choice, as production is geared towards meeting government-set priorities
  • Focus on collective goals rather than individual preferences
  • Little room for private entrepreneurship and innovation
• Command economies have been associated with socialist and communist regimes, where the state takes a dominant role in economic planning and resource allocation