The Nature of Economics

Economics as a Social Science

Studies human behaviour and how people interact with money.

Looks at the social, psychological and political factors that affect economics decision making and how these decisions affect society.

Economic Statements

Positive Statement = A factual and objective statement. These can be tested, amended or rejected using available evidence.

Normative Statement = A subjective and opinionated statement containing a value judgement.

Value Judgement = An evaluative statement on how bad or good you think an idea or action is.

The Economic Problem

Scarcity Of Resources

Unlimited number of needs and wants but a limited amount of resources.

Factors of Production:

Land - All Natural Resources and the fertility of the soil

Labour - Those involved in the production of goods and services, physically and mentally

Capital - Any man-made aid in production to make other goods and services.

Enterprise - The entrepreneur performs tow essential functions: Taking risks involved in production and bringing together other factors of production.

Different types of Energy:

Renewable:

Non-Renewable:

Solar, Tidal, Wind, Geothermal, Hydroelectricity and Biomass

Rate of Production > Rate of Use

Petrol, Natural Gas, Coal, Minerals, Nuclear Power

Rate of Use > Rate of Production

Production Possibility Frontiers

Shows the maximum amount of output that can be produced from a fixed amount of inputs.

PPF is a curve that shows the combinations of two or more goods and services that can be produced whilst using all of the available factor resources EFFICIENTLY.

Illustrates the principle of opportunity cost

Opportunity Cost = The value of the next best alternative forgone.

Factors that cause PPF to shift outwards:

Technology

Economic Growth

Investment

Immigration

Educating or training a workforce

Increase in availability of resources

Factors that could cause PPF to shift inwards:

Natural Disasters

War

Epidemic of a disease

Disinvestment

Mass Emigration

Specialisation and the division of labour

Specialisation refers to the concentration of individuals, firms, or nations on producing a limited range of goods or services.

The division of labor is a form of specialisation where tasks are divided among workers.

Adam Smith - Analysed the benefits of specialisation in his book ' The wealth of Nations'. He argued that specialisation would lead to increased productivity and economic growth.

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  1. Advantages of Specialisation

Increased Productivity: Specialisation allows workers to become more skilled in specific tasks, leading to higher efficiency.

Economies of Scale: Larger quantities of identical goods can be produced more efficiently.

Lower Costs: Reduced training time and waste contribute to cost savings.

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Disadvantages of Specialisation

Monotony: Workers may find repetitive tasks monotonous, leading to job dissatisfaction.

Dependency: An economy heavily dependent on a single industry or export can be vulnerable to economic shocks.

Types of Economies:

Free Market:

Command Economy:

People are motivated by their own self-interests.

Nearly all the factors of production are privately owned

Free Enterprise

Everyone competes for everything (every man for himself)

Pros of a Free Market Economy:

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Key Figures: Adam Smith

Efficiency: Competition incentivizes firms to produce efficiently and innovate.

Consumer Choice: Consumers have a wide range of choices in products and services.

Economic Growth: Free markets can lead to rapid economic growth and higher living standards.

Cons of a Free Market Economy:

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Inequality: Income and wealth disparities can be significant.

Lack of Public Goods: Some essential services may be underprovided without government intervention (e.g., public healthcare).

Boom-Bust Cycles: Free markets can be prone to economic cycles of booms and busts.

In a command economy, the government or central authority makes all economic decisions.
Key figures: Karl Marx, who envisioned a classless society with centralised planning, and Friedrich Hayek, a critic of central planning who believed in free markets.

Pros of a Command Economy:

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Equality: Command economies aim to reduce income inequality through central planning.

Stability: Central control can provide stability during crises.

Prioritizing Social Goals: Resources can be directed toward public services and social welfare.

Cons of a Command Economy:

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Lack of Incentives: Central planning may discourage innovation and individual initiative.

Resource Misallocation: Inefficient allocation of resources can lead to shortages or surpluses.

Bureaucracy: Command economies often involve complex bureaucracies.