Economics 1.1.1 to 1.2.4
The Basic Economic Problem
There are finite resources available to supply infinite wants which creates scarcity
Opportunity Cost
The next best alternative forgone when making a decision
The benefit lost of the next best alternative when making a decision
Free Goods
Unlimited in supply, no opportunity cost, no value attached
Economic Goods
Always have an opportunity cost, limited in supply, have an attached value.
The Economy
Microeconomics
The study of the relationship between households and firms
Macroeconomics
The study of the economy as a whole
An economy is made up of different economic agents/ actors
They all have different wants, aims, opinions and needs
Factors of production
Land
Labour
Capital
Enterprise
Natural resources, raw materials
people, workers
capital equipment
ideas, entrepreneurs
Resources
Renewable
Renewable resources are ones that can be replenished e.g. solar, wind ,oxygen
Non-Renewable
Non-renewable resources are finite in supply and therefore will run out e.e.oil, gas
A trade off is a balance achieved between two desirable but not compatible features; a compromise.
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Economic incentives will provide economists with the information required to tell them what goods and services to produce
Firms will combine the factors of production to produce good and services
In a free market economy we produce according to the forces of demand and supply
Economic Activity
Economic agents are individuals, firms and governments that partake in economic activity
Economic activity is the actions that involve the production,distribution and consumption of goods and services at all levels within society.
A recession occurs when there is a negative GDP for over 6 consecutive months.Wages/salaries decrease and unemployment rises.
Positive and normative statements
Value Judgements
A complete opinion
A judgement as to whether something is right or wrong
Positive statements
Can be tested/rejected using evidence/data
Normative statements
Usually contain a value judgement
Express an opinion about what ought to be done
Markets
Factor
Where the factors of production are bought and sold by firms
Product
Where goods and services produced by firms are sold
B2B - business to business
B2C - business to consumer
Specialisation and division of labour
Specialisation occurs when
A workers trains/focuses on a specific task
Producers focus on specific type of output
Countries produce a specific type of industry
Division of labour is when specific tasks are allocated to each member of staff
Functions of money
Medium of exchange
Method of deferred payment
Store of wealth / value
Unit of account
can be exchanged for good/ services
buy now pay later, finance
can save money, assets
prices,makes transactions transparent
PPF
Production possiblity frontier
Shows the maximum possible output combinations of 2 goods/services an economy can achieve when all resources in an economy are efficiently employed
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No ideal point on the curve
Any point inside the curve suggests not all resources are being fully utilised
Any point outside the curve is currently attainable with the current level of resources
PPF shifts inwards due to
Natural disasters
political instabilty
increased taxes
war/conflict
resource depletion
PPF shifts outwards due to
Investment in capital goods
decreased tax
specialisation
discovery of natural resources
economic boom
investment in economy/infrastructure
Price mechanism
The means by which the forces of supply and demand determine the the prices and quantities of goods and services offered for sale in a free market
Signalling function
Rationing function
Incentive function
messages that changes in price send to producers/consumers
Production/purchasing decreases
Firms - low prices - less produced
Consumers - high prices - less purchased
Production/purchasing increases
Producers - high prices - act as motivator to increase supply
consumers - low prices - encouraged to buy more
Supply and Demand
Demand
Is the amount a consumer is willing and able to buy at a specific price and time
Demand curves can be individual or for the whole market
As price increases, there is a contraction in demand
As price decreases there is an extension of demand
Supply
Is the amount of a product a producer is willing and able to sell at a specific price at a specific point in time.
Factors that influence supply
Materials
Population
Tariffs
Technology
climate
Capital equipment
Degree of competition
Workforce
Diminishing marginal utility
Utility is the satisfaction that an economic agent gains from consuming a good or service
Marginal utility is the extra satisfaction gained from consuming an additional unit of a good.
As we increase our consumption then our utility starts to decline as the utility from the first init will be greater than the utility gained from the second.
This means as we consume more our marginal utility diminishes so the price we are willing to pay for a good falls.
Price determination
Market forces are always pushing towards equilibrium - the price at which demand equals supply so there are no products left in the market
Market failure is when there is the incorrect allocation of resources
Merit and demerit goods
Merit goods have a positive effect on society and are more likely to get subsides from government
Demerit goods have negative externalities and are likely to be taxed highly by government
Public sector and goods
The public sector is funded by the government and includes schools and hospitals
Public goods are non excludable and non rival. It includes defence and infrastructure.
Consumer and producer surplus
Consumer surplus is the difference between what a consumer is willing to pay and what they actually paid
Producer surplus is the difference between the price a producer is willing to supply a product for and the price actually received