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ECONOMICS THEME 1 - TOPIC 1.1 - THE NATURE OF ECONOMICS - Coggle Diagram
ECONOMICS THEME 1 - TOPIC 1.1 - THE NATURE OF ECONOMICS
economics as a social science
economics is a social science concerned with the production, distribution and consumption of goods + services
the majority of models in economics assume that all other factors remain equal, this is known as
ceteris paribus
specialisation and division of labour
specialisation occurs when a country/business decides to focus making a particular good/service
the division of labour occurs when the production process of a good is broken down in to various small tasks
advantages
less wastage
lower unit costs
increased output
disadvantages
over reliance
structual unemployment
boredom
finite resources
functions of money
a method of deferred payment (e.g debt)
a store of value
a measure of value
a medium of exchange
scarcity - the economic problem
the economic problem is that resources are
scarce
but wants are unlimited
this is a problem due to the fact that there are finite resources and as a result of this decisions have to be made for what, how and whom goods and services are produced
the most common way that goods and services are rationed is by using money
renewable resources
are those that are being replaced the same, or faster than they're being consumed
e.g solar energy is renewable as it can be used without the effect of it running out
non-renewable
resources are being consumed faster than they're being replaced by natural means
e.g coal or oil
opportunity cost
is the cost of the next best alternative forgone
e.g government budget is spent more on healthcare so an opportunity cost is the reduction in spending on education
e.g consumers spends money on clothes instead of a book
e.g a producer has to decide whether to spend money on capital goods or increase dividends to shareholders
production possibilty frontiers
this is a curve depicting the various combinations of two products that can be produced when all the available resources are fully + efficiently employed
the only way to move the ppf curve outwards is if the quality or quantity of the factors of production increase
this also results in economic growth on due to improvements on the supply side
in contrast, a decrease in economic growth can result in the ppf curve shifting inwards
ppf diagram
positive + normative statements
a
positive economic statement
is one that is a fact and uses words such as "will"
e.g inflation has increased by 1% in the last quarter
a
normative economic statement
is an opinion rather than a fact and contains words such as "should"
e.g monetary policy should get us out of this economic recession
a
value judgement
is a decision that's based on a persons values and opinion, making the decision normative
free market and mixed economies
free market
individuals are free to make their own choices and own the factors of production
consumers make decisions based off satisfaction and producers through profit
adam smith believed in free market economy and explained there's an 'invisible hand' which allocates resources for the greater good
friedrich hayek argued that state control leads to loss of freedom
disadvantages
wasted resources
monopolies who dominate markets
lack of merit goods and more demerit goods
externalities problems
high levels of inequality
advantages
freedom of choice
high motivation due to rewards
system is automatic
competition ensures productive efficiency
higher economic growth
command economy
all factors of production, except labour, owned by state and labour is directed by the state
no private property and everyone is working for a common good
karl marx believed in the command economy and that capitalists profit came from expoliting labour
advantages
standardised products means they're cost effective
motivated by wellbeing of country
less inequality and wasteage
disadvantages
bribery and corruption
less motivation and freedom
wrong decisions impact citizens
mixed economy
where both free market mechanism and government planning process allocate a significant amount of the total resources
usually 40-60% government controlled
governments role...
limit demerit goods (e.g drugs)
redistributes income (through taxes)
create rules (stopping monopolies)
stabilise economy (e.g fiscal + monetary policies)