1.1- Nature of economics

• Ceteris paribus


  All other variables remain constant
• Positive economics


  Concerned with objective statements of how a market or an economy works
• Positive economic statements are based on empirical evidence and tend to be statements of fact
• Positive economic statements can be proven to be true or false
• Positive economic statements


  • The UK unemployment rate has fallen from 4% to 3.7% in the past three months
  • Increasing the minimum wage last year in the UK resulted in improvements to wage inequality
  • Prices in the UK have risen dramatically, partly due to the 20% increase in the price of oil
• Normative economics


  Focuses on value judgements and opinions about what the best economic policies or solutions may be
• Normative economic statements


  • Every economy should aim to provide free healthcare for its citizens
  • Corporation taxes in an economy should be higher than personal income taxes
  • The best way to deal with a rise in crime is to employ more police
• Value judgements


  Influence individuals' choices in the economic decisions they make
• Value judgements


  • Deciding not to eat meat based on the harmful impact of meat production on the environment
  • Choosing to smoke nicotine based products due to the perceived benefits outweighing the risks
• Value judgements influence governments' choices with regards to the economic policies they choose to adopt and spend money on
• Value judgements influencing government policy

  • The USA spends more money on imprisoning drug users than rehabilitating them
  • The UK government has recently increased its spending on rehabilitation
• To say the UK approach is better would be a normative statement
• To say that the UK government spends more per head on rehabilitation would be a positive statement
• Basic economic problem


  Resources are scarce in relation to the infinite wants and needs that humans have
• Factors of production


  The resources used in the production of goods and services
• Due to the problem of scarcity, choices have to be made by producers, consumers and governments about the best (most efficient) use of these resources
• Scarcity


  Has a direct influence on prices in a free market
• Renewable resources


  Can be used repeatedly and naturally replenished
• Non-renewable resources


  Cannot be naturally replenished at a pace that keeps up with consumption
• Opportunity cost


  The loss of the next best alternative when making a decision
• Opportunity cost


  • When a consumer chooses to purchase a new phone, they may be unable to purchase new jeans
  • When a producer decides to allocate all of their resources to producing electric vehicles, they may be unable to produce petrol vehicles
  • When a government decides to provide free school meals to all primary students, they may be unable to fund some rural libraries
• Production Possibility Frontiers (PPF)


  An economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services
• Capital goods


  Assets that help a firm or nation to produce output
• Consumer goods


  End products and have no future productive use
• The PPF curve demonstrates the possible combinations of the maximum output an economy can produce using all of its resources
• Points on the PPF curve represent full (efficient) use of an economy's resources
• To produce one more unit of capital goods, the economy must give up production of some units of consumer goods
• A movement in the PPF occurs when there is any change in the allocation of existing resources within an economy
• Producing at any point on the PPF curve represents productive efficiency
• Any point inside the PPF curve represents inefficiency
• Any point outside the PPF curve is unattainable with the current level of resources
• Outward shifts of the PPF show economic growth and inward shifts show economic decline
• Economic growth occurs when there is an increase in the productive potential of an economy
• Economic decline occurs when there is any impact on an economy that reduces the quantity or quality of the available factors of production
• Specialisation


  When workers focus on one (or a few) components of the production process and gain significant skill in doing it
• Division of labour


  When a task is broken up into several component tasks
• The division of labour allows workers to specialise and results in higher output per worker, increasing productivity
• Levels of specialisation


  • Individual
  • Business
  • Regional
  • Global
• Pros of division of labour and specialisation

  • Higher labour productivity lowers cost/unit for firms
  • Lower costs can be passed on to consumers in the form of lower prices
  • Lower costs can mean higher profits for firms, potentially leading to higher wages for workers
  • Increased productivity allows some firms to sell beyond their local market into international markets
• Cons of division of labour and specialisation

  • Task repetition often leads to boredom and a decrease in worker motivation
  • A decrease in motivation may lead to less productivity and/or poorer manufacturing quality
  • It may increase worker turnover rates as workers look to move on to a more stimulating role
  • Mass produced products often lack variety and do not take different consumer preferences into account
  • If workers lose their jobs, then it may be hard for them to find work as they are only trained in one skill