1.1.1 The Nature of Economics
- Economists need to make assumptions and develop models to make decisions.
- Ceteris paribus: hold everything else constant.
- Economists cannot conduct scientific experiments.
1.1.2 Positive and Normative Statements
- Positive statements can be tested.
- Normative statements are based on opinion.
- Economic decisions are often based on value judgement (an educated opinion of what is right or wrong).
1.1.3 The Economic Problem
- The basic economic problem is scarcity. There are unlimited wants but limited resources.
- Renewable resources can be replenished at the same rate they are being used.
- Non-renewable resources cannot be replaced naturally.
- Opportunity cost: the value of the next best alternative foregone.
1.1.4 Production Possibility Frontiers
- Any point on the curve shows the maximum productive potential of an economy (efficient allocation of resources).
- To produce more of Good A, we have to give up some of Good B. This is opportunity cost. The more of Good A we produce, the greater the opportunity cost increases, as we are giving up more of Good B as the curve becomes cheaper.
- Economic growth or decline can be shown by the curve shifting in or out.
- A shift in the PPF can be caused by better technology, more resources or greater productivity.
- Any point inside the curve is an inefficient allocation of resources.
- Any point outside the curve is impossible to attain.
- Capital goods: used to produce other goods and services.
- Consumer goods: purchased for personal use and consumption.
1.1.5 Specialisation and the Division of Labour
- Specialisation is when an individual/ firm/ nation focuses on producing a specific good or service.
- Division of labour is when an individual only completes a specific task in a large production process.
- Specialisation can be used to organise production. 😄lower cost, economies of scale, greater quality, greater quantity. 😦boring and repetitive tasks, structural unemployment, vulnerable to economic shocks.
- Specialisation can encourage trade. 😄each country has their own comparative advantage which can be exploited, greater living standards across the world. 😦 income inequality, vulnerable to economic shocks.
- Money is a medium of exchange, store of value, measure of value, and a method of deferred payment.
1.1.6 Free Market Economies, Mixed Economy and Command Economy
- In a free market economy, economic decisions are primarily made by private individuals and firms (Adam Smith's Invisible Hand).
- 😄: efficiency, choice, economic growth.
- 😦: inequality, no public goods.
- In a command economy, the government or central authority makes all economic decisions (Karl Marx and Hayek).
- 😄: equality, stability, social welfare.
- 😦: less innovation, misallocation of resources.
- In a mixed economy, both the private sector and the government play significant roles in economic decision-making. They are a combination of a free market and command economy.
- Role of state in a mixed economy: regulation, public goods, redistribution, stabilisation.