Aqa Alevel Economics

• 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
• Economists then 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, can 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, 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
• Using resources (inputs in the form of the factors of production) to produce outputs (the goods and services)

  1. What is to be produced?

  2. How should it be produced?

  3. Who will benefit from the goods and services produced?
• Due to the problem of opportunity cost, decisions have to be careful
• Factors of production (CELL)


  • Capital
  • Entrepreneurship
  • Land
  • Labour
• 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. Resources are drawn together into the production process.
• 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.
• Renewable resources


  Can be replenished, so the stock level of the resources can be maintained over a period of time
• Non-renewable resources


  Cannot be renewed, the stock level decreases over time as it is consumed
• The basic economic problem is scarcity. Wants are unlimited and resources are finite, so choices have to be made.
• Opportunity cost


  The value of the next best alternative forgone
• Opportunity cost examples


  • If a car was bought for £15,000 and after 5 years the value depreciates by £5,000, the opportunity cost of keeping the car is £5,000

  Producers might have to choose between hiring extra staff and investing in a new machine

  The government might have to choose between spending more on the NHS and spending more on education
• Production possibility frontier (PPF)


  Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed
• Producing at points A and B on the PPF are the most efficient combinations of output
• Law of diminishing returns


  The opportunity cost of producing more of one good increases, in terms of the lost units of the other good that could have been produced
• Producing at C or D on the PPF is inefficient, and resources are not used to their full productive potential
• Producing at E on the PPF is not yet attainable with the current resources
• Economic growth and decline


  Outward shift of the PPF curve shows economic growth, inward shift shows economic decline
• An increase in the quantity or quality of resources shifts the PPF curve outwards, so the productive potential of the economy increases, and there is economic growth
• Moving along the PPF


  Uses the same number and state of resources, and shifts production from fewer consumer goods to more capital goods, incurring an opportunity cost
• Shifting the PPF curve outwards

  Uses either more resources or resources of a greater quality, reducing the opportunity cost of producing either capital or consumer goods
• Capital goods


  Goods which can be used to produce other goods, such as machinery
• Consumer goods


  Goods which cannot be used to produce other goods, such as clothing
• Productive efficiency


  All points on the PPF boundary are productively efficient, as resources are being used to their productive potential
• Allocative efficiency


  When no one can be made better off without making someone else worse off. Another name for this is Pareto efficiency.
• If more of both goods could be produced, there would be a gain in allocative efficiency, because there is an improvement in welfare