economics theme 1

• Economics

  A social science that focuses on the allocation of scarce resources against the competing behaviour of economic agents
• Economic agents

  • Households
  • Consumers
  • Government
• Microeconomics

  The study of individuals household and firms behaviour in the allocation of scarce resources
• Macroeconomics

  The study of the behaviour and performance of the economy as a whole
• Recession

  When there is negative gdp growth for 2 consecutive quarters
• Interest rates

  Cost of borrowing and the reward for savings
• Public good

  A good that must be supplied by government
• Public goods

  • Healthcare - NHS
  • Water – Thameswater
  • Education
  • Street lights, lighthouses
• Laffer curve

  The relationship between tax rates and tax revenue
• Brain drain

  Skilled workers leave the economy (due to reasons like high tax, lack of opportunities)
• Capital flight

  Top businesses leave to find skilled workers
• Ceterius Paribus

  "all other things remaining equal"
• Positive statement

  An objective scientific statement made without obvious value judgements or emotions. Can be proven/disproven
• Normative statement

  A subjective non scientific statement based on an opinion. Can't be proven/disproven
• Value judgement

  Judgement based on opinions or beliefs. Can influence economic decisions e.g. what they eat, where they work, health habits
• Basic economic problem

  About scarcity. Finite needs, infinite wants
• How economies try to solve the basic economic problem

  • What to produce
  • How to produce
  • Whom to produce for
• Renewable resource

  Resource of economic value that can be replenished on a level equal to consumption. If rate of consumption ≤ rate of replenishment R≥C , stocks will not decrease
• Non renewable resource

  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 best option which has been given up. Resources to produce one thing cannot be used to produce another option
• Criteria for economies

  • Advanced economy - japan, uk (HIC equivalent)
  • Emerging economy - china, india (NEE equivalent)
  • Developing economy - sub saharan africa (LIC equivalent)
• Factors of production

  • Land - all natural resources used in production - raw materials
  • Labour - productive human effort - physical +mental in return for wages
  • Capital - man made resources to produce goods or services in the future
  • Entrepreneurship - the willingness and ability to take the risks of combining the other 3 factors of production to make a product or service
• Different industries need to combine different factors of production - labour intensity, land intensity
• Production possibility frontier (PPF)

  Combinations that produce max output of capital and consumer goods that an economy can produce with its current resources and technology
• Consumer goods

  Demanded and bought by households and individuals
• Capital goods

  Produced to aid the production of consumer goods i the future
• Economic growth

  PPF moves outwards - can produce more of both capital and consumer
• Economic decline

  Less or lower quality goods produced. Caused by natural disasters, resources run out, decreased quality and quantity of labour, war, migration, worse education
• PPF shift

  Big increase in capital, small increase in consumer goods - better technology - improvement in capability or quality of capital goods
• PPF movement

  Changed combination of goods produced. Same amount of resources, different allocation
• Specialisation

  Production of a limited range of goods
• Division of labour

  Labourers specialised in a particular part of production process
• Advantages of specialisation and division of labour

  • Increased productivity
  • Increased quality of goods + services
  • Increased cost effectiveness
  • No wasted time moving between jobs
  • Workers only need to be trained for one task
• Disadvantages of specialisation and division of labour

  • Boring - lower quality of work, absenteeism, high staff turnover
  • More standardised products (mechanised systems)
  • If one process is impaired, whole production must stop
  • No wide training
  • Structural unemployment - structure of economy changes so job becomes redundant
• Results of structural unemployment

  • Diverted resources for training - opportunity cost
  • Government suffers from tax losses - unemployed - can't pay tax
  • Lower tax and VAT revenue
  • Government spending increases because of universal credit
  • PPF falls - lower output - lower consumer and capital goods
• Theory of competitive advantage


  Countries should specialising in the good with lowest opportunity cost
• Advantages of specialisation and division of labour in countries

  • Helps boost local and global economy
• Disadvantages of specialisation and division of labour in countries

  • If overdependent on one export, economic collapse risks
  • Non renewable materials can run out
  • High interdependence on trade for goods they don;t produce
  • Increase specialisation means increased competition to cut costs, meaning lower wages
• Absolute advantage

  Who can produce more
• Competitive advantage

  Who an produce with lowest opportunity cost