paper 1

• • A ​positive statement is a statement which is objective and made without any obvious value judgements or emotions. They can be tested to be proven or disproven and they are often expressed in the form of a hypothesis that can be analysed and evaluated.
• • A ​normative statement ​is one which is subjective and based on opinion, so cannot be proven or disproven. It often includes words such as ought, maybe, unwise, should etc. or says that one action is better than another.
• Economists tend to ​use positive statements to back up normative statements​. For example, ‘​The government should increase the interest rate’ is a normative statement which can be a backed up by ‘​The rate of inflation is at 5%​’, a positive statement.
• • Value judgements can influence economic decision making and policy. Different economists may make different judgements from the same statistic, for example rising inflation could mean different things.
• • The ​basic problem of economics is that of scarcity​. People have ​finite needs​, but ​infinite wants​, as no one would choose to live at the level of basic human living standards if they can enjoy more. Although wants are infinite, ​resources are finite and limited​.
• • Scarcity is a ​relative concept as resources are not necessarily scarce in themselves but they are ​scarce in relation to the demands placed upon them​.
• • The same resources ​cannot be used to produce different goods at the same time so decisions have to be made on how to use them, this leads to the opportunity cost. The limited amount of resources allied to the unlimited wants means that choices have to be made.
• • The opportunity cost is the ​cost of one thing in terms of the next best option which has been given up.
• Four factors of production:

  • Land
  • Labour
  • Capital
  • Entrepeneurship
• Land is all the natural resources used in the production, such as raw materials, minerals, land and produce of the sea.
• Labour is all productive human effort, both physical and mental, paid or unpaid. The value of a coworker is their human capital.
• What is the purpose of government intervention in markets?

  To correct market failure.
• Why might governments provide healthcare and education?

  Because the free market would underprovide these services.
• What are indirect taxes?

  Taxes on expenditure that increase production costs for producers.
• How do indirect taxes affect market supply?

  They increase production costs, leading producers to supply less.
• What is an example of an indirect tax?


  A £1 tax per packet of cigarettes.
• What are the two types of indirect taxes?

  • Ad valorem taxes (e.g., VAT)
  • Specific taxes (e.g., fuel duty)
• How does the incidence of tax vary between consumers and producers?

  Producers may pass the entire tax to consumers or absorb part of it.
• What determines the incidence of tax on consumers and producers?

  The price elasticity of demand for the good.
• Why might consumers bear a larger burden of tax on cigarettes?

  Because the demand for cigarettes is fairly price inelastic.
• What is the intended effect of imposing indirect taxes on demerit goods?

  To discourage consumption and reduce negative externalities.
• How does government revenue from ad valorem taxes relate to price elasticity of demand?

  It is larger if demand is price inelastic.
• What is a specific tax?

  A set tax per unit, such as the 58p per litre fuel duty.
• How do indirect taxes affect the quantity of demerit goods consumed?

  They reduce consumption by increasing the price of the good.
• What happens to the supply curve when the tax equals the external cost of each unit?

  The supply curve becomes the marginal social cost (MSC) rather than the marginal private cost (MPC).
• What is a subsidy?


  A payment from the government to a producer to lower production costs.
• How do subsidies affect the consumption of merit goods?

  They encourage consumption by lowering the market price.
• What is an example of a subsidy in practice?

  Government subsidizing recycling schemes.
• What happens to the supply curve when a subsidy is provided?

  The supply curve shifts to the right.
• When do consumers gain more from a subsidy?

  When demand is price inelastic.
• What are some disadvantages of subsidies?

  Opportunity cost to the government and potential inefficiency in firms.
• What is a maximum price?

  A price set by the government to encourage consumption or production.
• Why must maximum prices be set below the free market price?

  Otherwise, they would be ineffective.
• What is the effect of maximum prices on consumer surplus?

  They can increase consumer surplus by keeping prices low.
• What could be a consequence of setting maximum prices?

  It could lead to government failure if the optimum market price is misjudged.
• What is a minimum price?

  A price set by the government to discourage consumption or production.
• What is an example of a minimum price?

  The National Minimum Wage.
• Why must minimum prices be set above the free market price?

  Otherwise, they would be ineffective.
• What is the effect of a minimum wage on employment rates?

  It could lead to a fall in the employment rate.
• What are tradeable pollution permits?

  Permits that limit the amount of pollution firms can produce and can be traded among firms.