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Economics is the social science that studies the choices that individuals, businesses, governments and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. The subject divides into two main parts: Microeconomics Macroeconomics Microeconomics
Example answers. Specimen paper. 6a) Explain why the price of the ‘average top-price ticket has risen by almost £10’ (Extract A, line 2). Use a supply and demand diagram in your answer. (5) The average top price ticket has risen for two reasons. Firstly, there is increased demand since there are “record numbers of people wanting to buy tickets”.
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Define economics. Explain the concepts of scarcity and opportunity cost and how they relate to the definition of economics. Understand the three fundamental economic questions: What should be produced? How should goods and services be produced? For whom should goods and services be produced?
- After you have studied this chapter, you should be able to:
- 1.01 The fundamental economic problem
- 1.02 Meaning of scarcity and the inevitability of choices at all levels
- 1.03 Opportunity cost
- 1.04 Ceteris paribus
- 1.05 Decision making at the margin
- 1.06 Positive and normative statements
- 1.07 Characteristics of factors of production and their rewards
- TERMS
- Revision activity A
- 1.08 Specialisation
- 1.09 Division of labour
- Progress check B
- 1.10 Different economic systems
- TERMS
- Market economies
- Planned economies
- Mixed economies
- 1.11 The role of the factor enterprise in a modern economy
- 1.12 Production possibility curves
- The shapes of production possibility curves
- 1.13 The functions and characteristics of money
- TERMS
- Near money
- Money and barter
- Liquidity
- Revision activity D
- 1.14 Economic goods and free goods
- Progress check D
- TERMS
- 1.15 Private goods and public goods
- Progress check E
- 1.16 Merit and demerit goods
- Progress check F
- Mind maps
deine the fundamental economic problem explain the meaning of scarcity, opportunity cost and the basic economic questions deine ceteris paribus recognise the importance of decision making at the margin distinguish between positive and normative statements outline the characteristics of factors of production distinguish between the rewards and the ...
The fundamental economic problem is that there are never enough resources to produce all the products people would like to have. Resources are limited in supply (inite) whilst wants are unlimited (ininite). explain the role of the factor enterprise in a modern economy draw and interpret production possibility curves explain how constant and increas...
As there is scarcity of resources, choices have to be made. Consumers have to decide what to buy, workers – which jobs to do, irms – what to produce, governments – what to spend tax revenue on.
Having to select one option involves an opportunity cost. Opportunity cost is the best alternative forgone. Due to the economic problem of wants exceeding resources, economies have to decide what to produce, how to produce it and who will receive what is produced. What to produce, how to produce and who will receive what is produced are sometimes r...
Ceteris paribus means other things being equal. Economists often make use of ceteris paribus to consider the possible effects of a change in one variable on another variable. For instance, an increase in real disposable income would be expected to lead to an increase in demand for gold watches, on the assumption that the other infl uences on demand...
Individuals, households, i rms and governments often have to make marginal decisions. These involve considering whether to make slight changes. For instance, whether to buy one more apple, produce one more car or to reduce the number of teachers employed in state schools.
positive statement is a statement of fact. It can be tested to assess whether it is right or wrong. normative statement is a statement based on opinion. It is a value judgement and, as such, cannot be proved right or wrong. There are both positive and normative statements in economics. ‘The unemployment rate in a country is 6%’ is a positive statem...
Factors of production are resources used to produce goods and services: Land covers all natural resources – for example, the surface of the earth, the sea, rivers, minerals below the earth. Most land is geographically immobile but occupationally mobile. The reward to land is rent. Labour is human effort, mental or physical, used in the production o...
Factors of production: resources used to produce goods and services. Land: natural resources both on the surface and beneath the earth. Labour: human effort used in production. Capital: goods used to produce other goods. Enterprise: organising the factors of production and bearing the risks of producing a product.
Identify an example of each factor of production that is employed in the i lm industry. Give an example of a capital intensive industry and a labour intensive industry. What factors infl uence the supply of labour to particular occupation? Explain the link between enterprise and opportunity cost. Why is the rent on land in city centres usually high...
Specialisation involves concentrating on particular tasks or products. Workers, i rms, regions and countries can concentrate on producing one product. Specialisation can increase output but there are risks attached. For instance, if a i rm makes only one product and demand for that product falls, the i rm would be in difi culty. Specialisation: con...
Division of labour involves breaking down the production into separate tasks and having each worker concentrate on a particular task. One of the i rst economists to describe division of labour was Adam Smith. In his book An Enquiry into the Nature and Causes of the Wealth of Nations (often shortened to The Wealth of Nations), he described the 18 se...
In what way do schools engage in division of labour? Division of labour: breaking down production into separate tasks to be carried out by separate workers.
An economic system is a way of allocating resources to answer the three fundamental questions of what to produce, how to produce it and for whom. There are three main types of economic systems: a market economy a planned economy a mixed economy
Market economy: resources are allocated by the price consumers are willing to pay for products. Planned economy: government decides how resources are allocated.
A market economy is one in which resources are allocated by means of the price mechanism. Consumers indicate what they are willing and able to buy through the prices they are prepared to pay. Private sector i rms respond to changes in consumer tastes by altering what they produce. Property is privately owned and the government’s role in the economy...
A planned economy is one in which the government makes most of the decisions on how resources are allocated. Property is largely state owned and most workers are employed in state owned enterprises (SOEs). The private sector’s role in the economy is minimal. The advantages of a planned economy include: full employment of resources avoidance of wast...
In a mixed economy, both the private and public sectors play a key role. Resources are allocated using both the price mechanism and state planning. A mixed economy seeks to gain the advantages of both a market and a planned economy whilst seeking to avoid the disadvantages. How successful it is depends on the effectiveness of government policies an...
In many countries enterprise is playing an increasing role. As the size of the private sector increases relative to the size of the public sector, there is more opportunity for new businesses to be set up. Enterprise can encourage invention, innovation and competition. Such effects can increase output and improve living standards.
production possibility curve (PPC) shows the maximum output of two types of products that can be produced with existing resources and technology. production point on the curve represents full use of resources, a production point inside the curve indicates unemployed resources and a production point outside the curve is currently unattainable. shift...
straight line PPC indicates a constant opportunity cost. PPC which is bowed out indicates an increasing opportunity cost. In this case, as more capital goods, for example, are produced, more consumer goods have to be sacrii ced. This refl ects the fact that the resources which are most suited to producing capital goods are used i rst. In drawing PP...
Money covers any item which carries out the functions of money. The four functions of money are: a medium of exchange a store of value a unit of account a standard of deferred payments Probably the best known function of money is as a medium of exchange. Money makes it easy for people to buy and sell products. In the absence of money, people would ...
Money: any item that acts as a medium of exchange, store of value, unit of account or standard of deferred payments. Barter: direct exchange of products.
Near money is a term for i nancial assets that can be converted into money relatively quickly. While such assets are not currently carrying out the essential function of money, that is acting as a medium of exchange, they have a high degree of liquidity. Examples of near money include treasury bills and short term government bonds. Commercial banks...
Barter is the direct exchange of products. Money has a number of advantages over barter. The key one is that it makes it easier and quicker to buy and sell products. As a result, money can encourage specialisation and trade. Money also makes it easier for people to save, value products, borrow and lend. A system of barter would involve uncertainty ...
Liquidity means the ability to turn an asset into cash quickly and without loss. Cash is obviously the most liquid asset. Current (checking) accounts at commercial banks are more liquid than deposit (savings) accounts. A commercial bank keeps some liquid assets to meet their customers’ demand for cash. Liquidity: being able to turn an asset into ca...
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
student’s choice of consumer’s choice of Best alternative forgone person’s courses use of time what to buy worker’s choice of job irm’s Deinition Application choice of what to produce
Progress check Section 1: The basic economic problem Answer the following questions to check your understanding: 1 What is the difference between a need and a want? 2 What is the economic problem? 3 Give an example of a free good and an economic good. Sample question Describe whether each of these is an economic good or a free good: i a mobile ...
Knowing the command terms enables the student to present their answers to examination questions in a way that meets the requirements of the question (for example, the answer to a ‘Define’ question
Another example is the commonly used command term ‘define’, which requires you to ‘give the precise meaning of a word, phrase, concept or physical quantity’ ( Economics guide , page 74).
