NATURE OF ECONOMICS

• Economics

  Study of the allocation of scarce resources
• Economics


  A social science that develops models to explain how the economy works
• Theory


  An explanation of why something is as it is, expressed in words
• Model


  A simplified representation of reality, expressed in mathematical terms
• Theories and models are simplified to make them more useful
• Assumptions must be made when developing economic models due to the many variables that can change
• Ceteris paribus


  All other things remaining equal
• Economics is a social science, so it is difficult to set up experiments to test hypotheses as other variables are always changing
• Economists tend to come up with very different conclusions for the same set of data
• Positive statement


  An objective statement that can be tested and proven or disproven
• Normative statement


  A subjective statement based on opinion, which cannot be proven or disproven
• Economists use positive statements to back up normative statements
• Value judgements can influence economic decision making and policy
• Scarcity


  The basic problem of economics, where people have finite needs but infinite wants, and resources are limited
• Economies try to solve the basic economic problem by determining what to produce, how to produce it, and for whom production should take place
• Renewable resource


  A resource of economic value that can be replenished or replaced on a level equal to consumption
• Non-renewable resource


  A resource of economic value that cannot be readily replaced by natural means on a level equal to consumption
• Opportunity cost


  The cost of one thing in terms of the next best option which has been given up
• There is no opportunity cost for free resources
• Production possibility frontier (PPF)


  The maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology
• The PPF is drawn as a curve because the first resources switched from capital to consumer good production are resources that are not adding much to capital goods but will be much more productive in the production of consumer goods, and vice versa
• The PPF gives no indication of which combination of goods is best, as economics is concerned with explaining why a country chose a particular production point
• Any point on the PPF represents the maximum productive potential of the economy
• Moving from one point to another on the PPF shows the opportunity cost of producing more of one good in terms of the other good
• Economic growth is shown by an outward shift of the PPF, while economic decline is shown by an inward shift
• Economic efficiency is achieved when resources are used for their best use, which occurs at all points on the PPF
• Points inside the PPF represent possible but inefficient production, while points outside the PPF are unobtainable with current resources and technology
• A movement along the PPF indicates a change in the combination of goods produced, while a shift of the curve indicates a change in the productive potential of the economy
• Consumer goods


  Goods demanded and bought by households and individuals
• Capital goods


  Goods produced in order to aid the production of consumer goods in the future
• Specialisation


  The production of a limited range of goods by a company/individual/country, requiring trade to access all that is needed
• Division of labour


  When labour becomes specialised in a particular part of the production process
• Specialisation and the division of labour can increase labour productivity, allowing firms to increase efficiency and lower their costs of production
• Advantages of specialisation and division of labour

  • Increased labour productivity
  • Higher quality of goods and services
  • More cost-effective to develop specialist tools
  • Time not wasted moving between jobs
  • Workers only need to be trained for one specific task
• Disadvantages of specialisation and division of labour

  • Work can become very boring, leading to poor quality and high turnover
  • Reduction of craftsmanship and more standardised products due to mechanisation
  • If one process is delayed, every other task has to stop
  • Workforce may suffer from structural unemployment due to lack of wide industrial training
• Specialisation


  • May lead to higher quality of goods and services as workers are more skilled at their jobs
  • It is more cost effective to develop specialist tools, improving speed or quality
  • Time is not wasted moving between jobs and getting out tools etc.
  • Workers only need to be trained to do one specific task, rather than many, saving time and money
• Disadvantages of specialisation


  • If someone is only doing one specific task, it can make work very boring which will lead to poor quality of work and people leaving the business
  • There is a reduction of craftsmanship and a much more standardised product because of mechanisation
  • If for some reason production in one process is delayed, every other task has to stop until that problem is solved
  • The workforce do not have wide industrial training and could therefore suffer from structural unemployment
• The degree to which specialisation or the division of labour is possible will depend on the nature of the task and the size of the firm
• Comparative advantage


  Countries should specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing
• If countries specialise


  It is essential that they trade in order to obtain all the goods and services that consumers demand