AS micro paper 1

• Economists


  Develop models to explain how the economy works, for example theories of supply and demand or the circular flow of income
• Theory


  Can be expressed in words
• Model


  Expressed in mathematical terms, requires greater precision
• The purpose of theories and modelling is to explain why something is as it is
• Theories and models are simplified to make them more useful
• Assumptions


  Must be made when developing economic models and theories due to the many variables that can change
• Ceteris paribus


  All other things remaining equal
• Economics is a social science, unlike natural sciences it is difficult to set up experiments to test hypotheses
• Economists tend to come up with very different conclusions for a particular set of data
• Economics is not a science because it studies human behaviour which cannot be reduced to scientific law
• Groups of individuals are much more predictable than individuals themselves, and much of economics deals with groups rather than individuals
• Positive statement


  Objective statement made without value judgements or emotions, can be tested to be proven or disproven
• Positive statements


  • Raising taxes will lead to an increase in tax revenue
  • Warm weather will lead to an increase in ice cream sales
• Normative statement


  Subjective statement based on opinion, cannot be proven or disproven, often includes words like 'ought', 'should', etc.
• Normative statements


  • The free market is the best way to allocate resources
  • The government should increase taxes
• Economists tend to use positive statements to back up normative statements
• Value judgements can influence economic decision making and policy
• Scarcity


  The basic problem of economics, people have finite needs but infinite wants, and resources are finite and limited
• Renewable resource


  Resource of economic value that can be replenished or replaced on a level equal to consumption
• Renewable resources


  • Oxygen
  • Solar power
  • Fish
• Non-renewable resource


  Resource of economic value that cannot be readily replaced by natural means on a level equal to consumption
• Non-renewable resources


  • Fossil fuels (coal, oil, gas)
• Opportunity cost


  The cost of one thing in terms of the next best option which has been given up
• Opportunity cost


  • If you buy a chocolate bar instead of a bag of crisps, the opportunity cost is the bag of crisps you could not buy
• Production possibility frontier (PPF)


  Shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology
• The PPF is typically 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, economics is concerned with explaining why a country chose a particular production point
• Points on the PPF


  Represent the maximum productive potential of the economy, the most that the country can produce
• Moving from point A to point B on the PPF

  The opportunity cost is 30 capital goods for an extra 15 consumer goods
• Producing 60 capital goods

  The opportunity cost is 20 consumer goods
• Producing 1 consumer good

  The opportunity cost is 3 capital goods
• Producing 1 capital good

  The opportunity cost is 1/3 of a consumer good
• Purple arrows on the PPF


  Indicate economic growth, the economy can produce more of both goods
• Orange arrows on the PPF


  Indicate economic decline, the economy can produce less goods than previously
• Economic efficiency


  Achieved when resources are used for their best use, all points on the PPF are efficient
• Point A on the PPF

  Possible and efficient production
• Point B on the PPF


  Possible but inefficient production, not maximising output
• Point C on the PPF


  Unobtainable production, beyond the economy's current resources and technology
• Factors that could cause a fall in production


  • Natural disasters
  • Natural resources running out
  • Decrease in the quantity/quality of labour, due to war, migration or a fall in spending on education
• Economic efficiency


  Achieved when resources are used for their best use. At all points on the PPF, resources are allocated efficiently.