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Section 1 - Economic problem - Coggle Diagram
Section 1 - Economic problem
Economic statements
Positive
Objective statements that can be tested by referring to the available evidence
With suitable data you can tell if its true/ false
Tested to see if economic ideas are correct
Normative
Subjective statements which contain a value judgement (opnions)
Not possible to say whether its true or not, only whether you agree/ disagree
Important as opinions influence ecision making and government policy
Economic problem
Everybody has infinte wants, but there is a limited amount of resources available to satisfy these needs
How can available scarce resources be used to satisy people's infinite needs and wants
Factors of production
Scare resources used to make things people want and need can be divided into four factors of production
Land
Aswell as territory, it includes natural resources
Almost all these resources are scarce, there isn't enough to satisfy the demands of everyone
The only exception is air, there is enough for everyone, but not all air quality is good
Land is rewarded with rent
Individuals and firms are rewarded for providing these factors
Labour
Work done by people who contribute to the production process
Population available to work is called the labour force
Labour is rewarded with wages
Capital
Equipment used in producing goods and services
Capital is the equipment, factories and schools that help produce goods and services
Much o an economy's capital is paid for by the government
Rewarded with interest
Enterprise
People (entrepreneurs) who take risks and create things from the other factors of production
Set up and run businesses
If business fails, they can lose alot of money
If it succeeds they are rewarded with profit
Need - something people must have, can't live without, like food
Want - something people would like to have, not essential
Economic activity
Involves combining the FOPs to create outputs that people can consume
Purpose is to increase people's economic welfare by creating outpits to satisfy needs and wants
Making of goods and services
Goods - physical products you can touch
Services - Intangible things
Consumption is when you are trying to satisfy a need or want by consuming something
Three fundamental questions
What to produce
How to produce it
Who to produce it for
Investment - spending of firms that adds to the stock of capital
Economic agents
Participants in the economy
Producers - firms or people that make goods or provide services
Consumers - people or firms who buy goods and services
Governments - sets the rules for participants, but also produces and consumes
Decisions made by economic agents
Producers - what to make, how much to make and how much to sell it for
Consumers - what to buy and how much their willing to pay
Governments - how much to intervene in how consumes/ producers act
Answering fundamental questions
What - goods that firms can make a profit from
How - in the most efficient way inorder to maximise profits
Who - firms will produce goods for consumers who are willing to pay for them
Utility maximisers
Must act rationally to maximise ultiliy
Marginal utility - benefit gained from consuming one additions unit of a good
Total utility - overall benefit gained from consuming a good
Diminishing marginal utility - for each addition unit, marginal utility decreases
Rational consumer will choose to consumer up to a point where marginal utility = price
If marginal utility decreases with each extra good, then the price a consumer is willing to pay will decreases, and the demand curve slopes downwards
Objectives
Producers
Firm's profit is their total revenue minus costs
Firms might want to maximise profit to offer between rewards to shareholders or allow them to survive
Firms might want to increase the total sales/ firm's market share to lead to some market monopoly power, which allows them to charge higher prices due to lack of competition
Consumers
Act tationally to increase utility in a way that makes sense to them
Can act as workers, who want to maximise their income while having as much free tme as they need
Governments
Balance the resources of a country with the needs/ wants of the population
Aim for economic growht, full employment, low inflation and equilibrium in the balance of payments
Reasons why consumers don't act rationally
Habitual behaviour - doing the same things over and over again
Weakness at computation - not able to calculate the cost of alternatives
Social norms - people are ifluenced by the behaviour of their social group
Consumer intertia - Too busy to make a raitonal decision, be resistant to change