theme 1 markets + market failure

• Microeconomics: The study of economic actions and decisions of individuals and firms.
• Economics

  The study of how people choose to use resources
• Scarcity

  A finite amount of a resource needed to satisfy everyones wants and needs
• The basic economic problem

  "Scarce resources, unlimited wants"
• Economic agent

  An entity that engages in economic activity
• Economic agent: Consumers

  • A person that directly uses a final good or service for personal use.
  • Seeking to maximise utility.
  • Time + money at their disposal.
• Economic agent: Producers

  • A person that supplies goods or services.
  • Seeking to maximise profit.
  • Factors of production at their disposal.
• Economic agent: Government

  • A political authority that decides how a country is run and manages its operation.
  • Seeking to maximise welfare of citizens.
  • Tax revenue at their disposal.
• Needs

  Limited, necessary for survival
• Wants

  Unlimited, not essential but desired
• Factors of production

  The inputs to the production process.

  • Land -> Natural physical inputs -> wood, gold -> Factor payment = rent
  • Labour -> The exertion of workers -> bakers, teachers -> Factor payment = wages
  • Capital -> Man-made aid -> laptops, machinery -> Factor payment = interest
  • Enterprise -> Organiser of FOP and the risks created -> CEO, entrepreneur -> Factor payment = profit
• Renewable goods

  Resources that replenish over time
• Non-renewable goods

  Resources that do not replenish over time
• Consumer goods

  Goods which are consumed directly for their utility
• Capital goods

  Goods which are used to make other goods
• Ways that the government can raise money for expenditure

  1. Tax revenue
  2. Printing more money
  3. Borrowing from others - abroad, firms etc
• Opportunity cost

  The value of the next best alternative foregone, when a choice is made
• Positive statement


  An objective statement based on facts which can be proven as true or false
• Normative statement


  A subjective statement based on judgements which cannot be proven as true or false (it values judgement)
• Division of labour


  Specialisation of workers on specific tasks in the production process
• Advantages of the division of labour

  • More efficient labour
  • Increased productivity
  • Better quality goods
  • More profit made
  • Increased efficieny in the skill
  • Training costs are reduced
• Disadvantages of the division of labour

  • One person may be less efficient - disrupts production process
  • Repetitive tasks can become boring - decreased productivity
• Specialisation


  The process of breaking down the production process and assigning each individual worker a task
• Barter


  An exchange of goods for other goods, requiring the coincidence of wants (you need the other person to have what you have and have what you want) - inefficient method of trading
• Money

  Anything that is widely acceptable as a payment for goods and services
• Functions of money

  1. Medium of exchange -> enables transactions to happen without the need to a double coincidence of wants.
  2. Store of value -> Has to be worth something in the future.
  3. Measures of value -> Has a numerical value so that comparisons can be made easier.
  4. Method of deferred payment -> Can be given in the future in exchange for something now.
• Central purpose of economic activity

  To produce goods and services to fulfill our wants and needs
• Production possibility frontier (PPF)


  The maximum amount of goods and services which an economy/firm can produce, assuming all FOPs are fully and efficiently employed
• PPF points

  A,B,C -> Productively efficient. Maximum output is being made with the available resources.

  D -> Productively inefficient. Factors may not be fully or efficiently employed.

  E -> Unobtainable with available resources. Beyond the FOPs capacity.

  
• Resource depletion

  Fewer resources because resources are destroyed or used up
• Resource depreciation

  Resources are worn down over time
• Potential growth

  Where the maximum possible output increases because of increased resources/better technology

  
• Actual growth


  Where the amount of output produced increases because existing factors are being used more efficiently

  
• More PPF diagrams

  
• Different levels of specialisation

  Household -> Specialisation of tasks

  Firm -> Specialisation of product/industry

  National -> Specialisation within a particular region

  Global -> Specialisation across a whole country
• Primary sector


  Activities relating to the extraction of natural resources

  • Role in the economy: Supplying natural resources to the production process.
  • e.g. Farming, mining, forestry
• Secondary sector


  Activities relating to manufacturing or construction of finished goods

  • Role in the economy: Refining raw materials/producing capital goods
  • e.g. Making phones, making petrol, making a car
• Tertiary sector


  Activities involving the provision of a service

  • Role in the economy: Provides services
  • e.g. Commercial shops, restaurants, hairdresser
• Quaternary sector


  Activities related to the creation/distribution of knowledge

  • e.g. ICT and research & design
• Ceteris Paribus


  "All other things being equal"

  • The assumption that all other variables within a model remain constant whilst the change is being considered.