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-renewableresources 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.