economics

• Economics

  A social science concerned with income, wealth and well-being and the factors that influence how people, families, firms and governments make decisions
• Scarcity


  The underlying principle of economics - there are infinite wants but limited resources
• Economic problem


  The basic economic problem occurs because there are infinite wants but limited resources, so economic agents have to make choices when deciding how to allocate scarce resources between competing uses
• Needs


  The basic requirements necessary for human existence - such as food, water, and shelter
• Wants


  All the goods and services that we would like to have
• Opportunity cost


  The highest valued alternative that is foregone for the option chosen
• Economic goods


  Scarce resources that have an opportunity cost when they are used
• Free goods


  Resources that are not scarce and have no opportunity cost when they are used
• Renewable/sustainable resources


  Resources which can be exploited over again because they can renew themselves - e.g. forests and fish stocks
• Non-renewable/unsustainable resources


  Resources such as coal and oil that cannot be replaced when used
• Factors of production


  • Land
  • Labour
  • Capital
  • Entrepreneurship
• Economists classify resources into four factors of production: land, labour, capital, and entrepreneurship
• Economics uses positive statements which avoid value judgements
• Free goods


  Goods or services that do not require any other goods or services to be sacrificed
• Resources are being used (e.g. school building, workers) for free goods that could have been used for other purposes
• Renewable/sustainable resources


  Resources that can be exploited over again because they can renew themselves – e.g. forests and fish stocks – providing they are not overused
• Factors of production


  • Land
  • Labour
  • Capital
  • Entrepreneurship
• Land


  Physical land and all the natural resources that grow on the land or are found on/inside the land – e.g. oil, coal, gas, metals, etc.
• Labour


  Workers and human resources
• Capital


  Manufactured resources that are used to make other goods – e.g. machines, buildings, tools, vehicles, etc.
• Entrepreneurship


  Involves risk taking to set up new businesses or introduce new products
• Entrepreneurs bring together the factors of production above to make a good/service
• Production possibility frontier (PPF)


  A curve showing all the maximum possible combinations of two goods that a country can produce within a specified time period with all its resources (land, labour and capital) fully and efficiently used

  
• We have assumed that there are only two goods in the economy. We can put any two goods on the axes. However, it is usual to put consumer goods (e.g. goods ordinary people buy such as food, clothes, technology, and entertainment) on one axis and capital goods (e.g. machinery and buildings bought by firms and governments to produce other goods and services) on the other axis.
• We have also assumed that we can lump all consumer goods and all capital goods together as one particular type. This is a huge simplification as there are hundreds of thousands of different good and services.
• We have also assumed a fixed time period for example one year.
• PPF


  • Demonstrates limited resources (scarcity), the choices which must be made in terms of how the resources are used, and the opportunity costs of how we choose the use the resources
• Increasing opportunity cost


  As a country produces more of one good it has to sacrifice ever increasing amounts of the other good
• If opportunity costs are constant, the PPF will have a straight line
• The PPF will shift if there is an increase or decrease in the quality or quantity of the factors of production (land, labour, and capital)
• Factors that can shift the PPF right


  • Investment in capital goods
  • Immigration
  • Discovery of raw materials
  • Technological innovation
  • Training / education to increase labour productivity
• If one sector of the economy grows faster than another, it can lead to a skew in the PPF
• Specialisation


  Factors of production (e.g. labour) are focused on producing one particular good or service or one part of the production process
• Division of labour


  The production process is broken down into individual tasks and each worker is then allocated a particular task
• The combination of specialisation and division of labour leads to increased productivity
• Adam Smith: 'A workman not educated to this business … could scarce … make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, … it is divided into several branches. One man draws out the wire, another straightens it, a third cuts it, a forth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper.'
• Evaluation of specialisation and division of labour


  • Increase in labour productivity (output per worker)
  • Specialisation suits a modern economy as it encourages exchange
  • Workers can specialise in tasks in which they are best suited
  • If jobs are divided up too much, the work can become tedious and monotonous leading to workers becoming de-motivated and therefore less productive
  • Over-specialisation can lead to high long term unemployment
• Money


  Anything that is generally acceptable in the payment of a good or service, or a debt
• Specialisation and trade creates a need for money
• Trade without money (barter) requires a 'double coincidence of wants' – both people in the trade must be selling something the other person wants