Econ 1.1

• Ceteris paribus


  All other things remaining equal
• 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
• Scarcity


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


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


  Represent the maximum productive potential of the economy, the most that the country can produce
• Economic efficiency


  Achieved when resources are used for their best use, all points on the PPF are efficient
• 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.
• Possible and efficient production


  Producing at any point on the PPF curve
• Inefficient production


  Producing within the PPF curve, not maximising output
• Unobtainable production


  Producing beyond the PPF curve, due to lack of resources/technology
• Change in production


  1. Fall in capital production but no change in consumer production

  2. Increase in ability to produce consumer goods but no change in capital goods
• Movement along the PPF curve


  Change in the combination of goods produced
• Shift of the PPF curve


  Change in the productive potential of the economy
• Types of goods


  • Consumer goods
  • Capital goods
• Specialisation


  Production of a limited range of goods by a company/individual/country, requiring trade to access all needed goods
• Division of labour


  Labour becomes specialised in a particular part of the production process
• Advantages of specialisation and division of labour


  • Increases labour productivity
  • Leads to higher quality of goods and services
  • More cost effective to develop specialist tools
  • Time not wasted moving between jobs
  • Workers only need to be trained for one specific task
• Disadvantages of specialisation and division of labour


  • Can make work boring, leading to poor quality and people leaving
  • Reduction of craftsmanship and more standardised products
  • If one process is delayed, every other task has to stop
  • Workforce may suffer from structural unemployment
• Comparative advantage


  Countries should specialise in producing goods where they have a lower opportunity cost, boosting global output
• Disadvantages of specialisation and trade


  • Countries may become over-dependent on one export
  • Non-renewable resources could run out
  • High interdependence can cause problems if trade is prevented
  • Wages may fall due to increased competition
• Functions of money


  • Medium of exchange
  • Measure of value
  • Store of value
  • Method for deferred payment
• Different types of markets answer the 'what to produce', 'how to produce it' and 'for whom to produce it' questions in different ways
• Free market economy


  Individuals are free to make their own choices and own the factors of production without government interference. Resources are allocated through the price mechanism.
• Willingness to spend money on a good

  Consumers make decisions based on satisfaction
• Advantages of free market economies


  • Automatic resource allocation
  • Consumer sovereignty
  • High motivation
  • Political freedom
  • Productive efficiency
  • Higher growth
• Disadvantages of free market economies


  • High inequality
  • Lack of merit goods and little control of demerit goods
  • Unproductive expenses
  • Monopolies
  • Externalities
• Command (planned) economy


  All factors of production, except labour, is owned by the state and labour is directed by the state
• Resource allocation is carried out by the government, rather than the price mechanism in a command economy
• Advantages of command economies


  • Minimum standard of living
  • Less wastage of resources
  • Long term planning
  • Standardised products
  • Objectives other than profit can be followed
• Disadvantages of command economies


  • Impossible for the state to make so many decisions correctly
  • Slow decision making and increase in bribery and corruption
  • Less motivation and efficiency
  • Consumers lose their freedom
• Most economies have tried to move towards some form of compromise economy, called a mixed economy
• In a mixed economy, both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country
• The government's role in a mixed economy


  • Creating a framework of rules
  • Supplements and modifies the price system
  • Redistributes income
  • Stabilises the economy
• The government prevents the abuse of monopolies, protects customers, property rights and ensures safety standards in a mixed economy
• The government produces public and merit goods, limits the production of demerit goods, and considers externalities in a mixed economy