Theme 1 Micro ->
Chapter 1 ->
Need to know definitions in Red.
Branches of economics -> (Between micro and macro ->
- Microeconomics = individual markets, effect on price of a good, individual labour
market, individual consumer behaviour and supply of good.
- Macroeconomics = Whole economy GDP, inflation, employment/unemployment,
aggregate demand (AD), productive capacity of economy.
Economists use simplified assumptions in the form of models.
Model = simplified representation of reality used to aid and explain a fact, concept, or
theory.
Example of a model -> Consumers are rational. (Use this to assume a trend in consumer
pattern).
Most common assumption = “Ceteris Paribus” -> means: “holding all other things constant”
or “all other things being equal”. Used to isolate the effects of a specific variable while
keeping other relevant factors constant.
Example of uses of Ceteris Paribus in a model = Law of demand ->
Principle states that, all other things equal (ceteris Paribus), when the price of a good or
service decreases, the quantity demanded increases, and conversely when price increases,
quantity demanded decreases.
Natural science = scientists observe aspects of the universe
Social science = an observation of human behaviour & then theories are made based on
these discoveries. (Econ still a science, hypothesis still tested through data & evidence).
How are theories made -> (Theory of demand as example)
1 = Observe consumer behaviour. When prices are lower, consumers spend more.
2 = Form hypothesis of how consumers spend -> will form an ‘expectation’, that with low prices
consumers spend more.
3 = Economists would then form more precise predictions that can be tested.
4 = Use evidence from the real world in order to test the prediction.
Positive statement = when a statement can be tested against solid evidence. (Preferred)
Normative statement = Opinion based, carry value judgements about what ought to
be/should.
The economic problem -> Unlimited desires vs limited resources (results in scarcity).
These resources are referred to as Factors of production -> (CELL), and when combined they
can produce goods and services.
, - Capital = man-made aid to production (machines -> allow for greater production of goods
and services to take place), produce consumer goods. Example: tractor for farming.
- Enterprise (Entrepreneurs) = Risk takers who innovate and produce goods and services in
order to make profit.
- Land = natural land such as rainforest. Where goods can be produced and taken.
- Labour = Human resources, workers that can produce goods and services.
These are scarce resources (not enough to satisfy demand). Therefore, choices must be
made in their allocation. The three choices /questions of economics ->
1) What to produce -> in market economy businesses decide based on consumer demand.
2) How to produce -> Business decides on what is most cost effective -> minimise use of scarce
resources.
3) Whom to produce for -> answered by those who have enough income to afford goods &
services.
Way of measuring whether the choices are good = Opportunity cost.
Opportunity cost = the cost of the next best alternative foregone when a choice is made.
(The benefit we forego as we trade-off one alternative for another).
Explanation = if the value of the opportunity cost is better than the decision made, the
decision was bad & more resources should be allocated to the opportunity cost.
Satisfying one objective more means achieving other objectives less.
Example 1 ->
Example 2 -> Could have a Starbucks coffee (£3 a cup) or Nescafe (15p a cup). Therefore, the
opportunity cost of spending £3 on a Starbucks coffee, is not the £3 spent, but the
opportunity of having 20 cups of Nescafe instead for the same price.
Renewable and Non-renewable resources ->
, - A renewable resource = One who’s stock level can be naturally replenished over a
period of time. Example = solar energy. However, may decline if consumed at a
faster rate than the environment can replenish.
- A non-renewable resource = One who’s stock level decreases over time as it is
consumed. Example = oil & gas. (possible to reduce rate of decline through recycling)
Production possibility frontier -> The max potential level of output for a combination of
goods that an economy can produce when all resources are fully & efficiently employed
given the level of technology.
- Consumer goods = directly provide satisfaction/utility to consumers -> chocolate.
- Capital goods = used to produce consumer goods & services -> machines.
PPF curve acts as a simple way to illustrate four important economic ideas ->
1 = Scarcity (trade-offs) -> as there are finite resources.
Example -> an economy only produces pizza and robots, if more pizzas are produced then
the number of robots is diminished & vice versa. (finite resources).
2 = Law of increasing opportunity cost. The more that is made of anything, the greater the
opportunity cost. Greater quantity = greater cost
Example -> going from 0 robots to 4000 costs 100,000 fewer pizzas. So, -25 pizzas per robot.
But if we go from 4000 -> 7000 robots -> only get 3000 more robots, but still have
opportunity cost of making 100,000 pizzas. So, -33 pizza’s per robot.
“lowest hanging fruit” (described opp cost). Would take the fruit that can be most easily
reached, doesn’t take a lot of effort. However, if you wanted to get the highest fruit, would
take more time and effort (cost more). Opp cost rises with quantity, with more fruit, the
longer the time taken.
3 = A perfectly efficient economy, produces on the curve instead of inside. If an economy is
producing within a curve -> not being efficient. Example = unemployment -> labour is a
scarce resource and those not working, are not producing goods and services.
4 = Economic growth. Pushes the frontier outward. Goal of all economies. Curve will push
out if we increase factors of production.
LOOK AT PPF PRACTISE -> MAYBE PRINT SHEET.
Specialisation and the Division of labour.
Specialisation = the concentration of production on a narrow range of goods and services.
Advantages ->
- (1) = Maximisation of output = all resources being purely focused into efficient
production. (Good allocation of resources -> max output).
, Country level -> has to be mutually beneficial. The country needs to be able to import
services that they are producing and export services that they are good at producing. If
possible, export and economic growth can rise.
- (2) = Wider range of goods & services. Example = Dyson, even though has narrow
focus (air tech), produce a wide range of different hairdryers. Provide range within
narrow area.
- (3) = greater allocative efficiency = Can overcome problem of scarcity, as resources
spent more efficiently. (taken from inefficient -> efficient production to maximise
output). Countries can export goods & services that are good at producing.
- (4) = Higher productivity through better use of workers -> As workers specialise can
be used better (max productive potential). Good for firms as lower cost of
production & consumers can have lower prices.
Disadvantages ->
- (1) Finite resources = companies who are very over specialised create too much
dependency on other countries -> becomes a requirement. Vulnerable if resources
are denied.
- (2) Change in fashion or taste = could be an over-production of a product where
demand is low -> loss of profit. (Over specialisation).
- (3) De-industrialisation = if foreign firms suddenly become more efficient than
another industry abroad at the given product or service, then the other industry is
going to de-industrialize. Decline -> high unemployment.
- (4) National interdependence. Countries need to be able to import & export goods.
If there are issues in international relations -> trade could be blocked off.
Specialisation no longer effective.
Division of labour = When workers specialize into individual tasks within the production
process in order to increase efficiency. Adam Smith and the pin factory.
Advantages ->
- (1) Worker productivity = will increase as workers will do one specific task & become
efficient in this. Could drive up wages & means lower production cost for firm. Profit = high.
- (2) Specialisation capital for workers = workers can be complemented with
specialist machinery that can drive productivity.
=
- (3) Lower price, Higher quantity/choice & quality for consumers = Beneficial for
consumers will allow greater worker benefits -> better.
Disadvantage ->
Chapter 1 ->
Need to know definitions in Red.
Branches of economics -> (Between micro and macro ->
- Microeconomics = individual markets, effect on price of a good, individual labour
market, individual consumer behaviour and supply of good.
- Macroeconomics = Whole economy GDP, inflation, employment/unemployment,
aggregate demand (AD), productive capacity of economy.
Economists use simplified assumptions in the form of models.
Model = simplified representation of reality used to aid and explain a fact, concept, or
theory.
Example of a model -> Consumers are rational. (Use this to assume a trend in consumer
pattern).
Most common assumption = “Ceteris Paribus” -> means: “holding all other things constant”
or “all other things being equal”. Used to isolate the effects of a specific variable while
keeping other relevant factors constant.
Example of uses of Ceteris Paribus in a model = Law of demand ->
Principle states that, all other things equal (ceteris Paribus), when the price of a good or
service decreases, the quantity demanded increases, and conversely when price increases,
quantity demanded decreases.
Natural science = scientists observe aspects of the universe
Social science = an observation of human behaviour & then theories are made based on
these discoveries. (Econ still a science, hypothesis still tested through data & evidence).
How are theories made -> (Theory of demand as example)
1 = Observe consumer behaviour. When prices are lower, consumers spend more.
2 = Form hypothesis of how consumers spend -> will form an ‘expectation’, that with low prices
consumers spend more.
3 = Economists would then form more precise predictions that can be tested.
4 = Use evidence from the real world in order to test the prediction.
Positive statement = when a statement can be tested against solid evidence. (Preferred)
Normative statement = Opinion based, carry value judgements about what ought to
be/should.
The economic problem -> Unlimited desires vs limited resources (results in scarcity).
These resources are referred to as Factors of production -> (CELL), and when combined they
can produce goods and services.
, - Capital = man-made aid to production (machines -> allow for greater production of goods
and services to take place), produce consumer goods. Example: tractor for farming.
- Enterprise (Entrepreneurs) = Risk takers who innovate and produce goods and services in
order to make profit.
- Land = natural land such as rainforest. Where goods can be produced and taken.
- Labour = Human resources, workers that can produce goods and services.
These are scarce resources (not enough to satisfy demand). Therefore, choices must be
made in their allocation. The three choices /questions of economics ->
1) What to produce -> in market economy businesses decide based on consumer demand.
2) How to produce -> Business decides on what is most cost effective -> minimise use of scarce
resources.
3) Whom to produce for -> answered by those who have enough income to afford goods &
services.
Way of measuring whether the choices are good = Opportunity cost.
Opportunity cost = the cost of the next best alternative foregone when a choice is made.
(The benefit we forego as we trade-off one alternative for another).
Explanation = if the value of the opportunity cost is better than the decision made, the
decision was bad & more resources should be allocated to the opportunity cost.
Satisfying one objective more means achieving other objectives less.
Example 1 ->
Example 2 -> Could have a Starbucks coffee (£3 a cup) or Nescafe (15p a cup). Therefore, the
opportunity cost of spending £3 on a Starbucks coffee, is not the £3 spent, but the
opportunity of having 20 cups of Nescafe instead for the same price.
Renewable and Non-renewable resources ->
, - A renewable resource = One who’s stock level can be naturally replenished over a
period of time. Example = solar energy. However, may decline if consumed at a
faster rate than the environment can replenish.
- A non-renewable resource = One who’s stock level decreases over time as it is
consumed. Example = oil & gas. (possible to reduce rate of decline through recycling)
Production possibility frontier -> The max potential level of output for a combination of
goods that an economy can produce when all resources are fully & efficiently employed
given the level of technology.
- Consumer goods = directly provide satisfaction/utility to consumers -> chocolate.
- Capital goods = used to produce consumer goods & services -> machines.
PPF curve acts as a simple way to illustrate four important economic ideas ->
1 = Scarcity (trade-offs) -> as there are finite resources.
Example -> an economy only produces pizza and robots, if more pizzas are produced then
the number of robots is diminished & vice versa. (finite resources).
2 = Law of increasing opportunity cost. The more that is made of anything, the greater the
opportunity cost. Greater quantity = greater cost
Example -> going from 0 robots to 4000 costs 100,000 fewer pizzas. So, -25 pizzas per robot.
But if we go from 4000 -> 7000 robots -> only get 3000 more robots, but still have
opportunity cost of making 100,000 pizzas. So, -33 pizza’s per robot.
“lowest hanging fruit” (described opp cost). Would take the fruit that can be most easily
reached, doesn’t take a lot of effort. However, if you wanted to get the highest fruit, would
take more time and effort (cost more). Opp cost rises with quantity, with more fruit, the
longer the time taken.
3 = A perfectly efficient economy, produces on the curve instead of inside. If an economy is
producing within a curve -> not being efficient. Example = unemployment -> labour is a
scarce resource and those not working, are not producing goods and services.
4 = Economic growth. Pushes the frontier outward. Goal of all economies. Curve will push
out if we increase factors of production.
LOOK AT PPF PRACTISE -> MAYBE PRINT SHEET.
Specialisation and the Division of labour.
Specialisation = the concentration of production on a narrow range of goods and services.
Advantages ->
- (1) = Maximisation of output = all resources being purely focused into efficient
production. (Good allocation of resources -> max output).
, Country level -> has to be mutually beneficial. The country needs to be able to import
services that they are producing and export services that they are good at producing. If
possible, export and economic growth can rise.
- (2) = Wider range of goods & services. Example = Dyson, even though has narrow
focus (air tech), produce a wide range of different hairdryers. Provide range within
narrow area.
- (3) = greater allocative efficiency = Can overcome problem of scarcity, as resources
spent more efficiently. (taken from inefficient -> efficient production to maximise
output). Countries can export goods & services that are good at producing.
- (4) = Higher productivity through better use of workers -> As workers specialise can
be used better (max productive potential). Good for firms as lower cost of
production & consumers can have lower prices.
Disadvantages ->
- (1) Finite resources = companies who are very over specialised create too much
dependency on other countries -> becomes a requirement. Vulnerable if resources
are denied.
- (2) Change in fashion or taste = could be an over-production of a product where
demand is low -> loss of profit. (Over specialisation).
- (3) De-industrialisation = if foreign firms suddenly become more efficient than
another industry abroad at the given product or service, then the other industry is
going to de-industrialize. Decline -> high unemployment.
- (4) National interdependence. Countries need to be able to import & export goods.
If there are issues in international relations -> trade could be blocked off.
Specialisation no longer effective.
Division of labour = When workers specialize into individual tasks within the production
process in order to increase efficiency. Adam Smith and the pin factory.
Advantages ->
- (1) Worker productivity = will increase as workers will do one specific task & become
efficient in this. Could drive up wages & means lower production cost for firm. Profit = high.
- (2) Specialisation capital for workers = workers can be complemented with
specialist machinery that can drive productivity.
=
- (3) Lower price, Higher quantity/choice & quality for consumers = Beneficial for
consumers will allow greater worker benefits -> better.
Disadvantage ->
