Economics Theme 1
Microeconomics is the study of individuals or groupswithin a market context.
1.1.1 Economics as a social science
There are two types of sciences: natural sciences (biology or chemistry) and social sciences
(economics or sociology).
Social science is the study of how people or societiesinteract with each other and how they work.
Natural and social sciences similarity: collect data, conduct research and use algorithms to create
models and theories.
Natural and social science difference: Only precise experiments can be done in natural sciences by
changing only one variable. In economics it’s difficult to set up experiments to test hypotheses as
there are too many variables in the everyday world changing constantly bringing different conclusions.
Also, it is argued that human behaviour cannot be reduced to scientific laws, it is easier to predict
groups.
There is no distinction between theory or model, except models normally use numbers and are to
higher precision. They can both be simplified. Laws are a theory or model that has gained universal
acceptance and has been verified by empirical evidence.
CETERIS PARIBUS – All other things remain equal.
This term is how economists make assumptions as everything they are saying is held constant except
for one thing. This helps economists to make simplified models.
Inflation is the general rise in price levels.
Base period/year is an arbitrary time period selected to compare all other years. The selected year is
denoted by 100.
Index number is a simplified and quick method of comparingnumbers in a given time period.
1.1.2 Normative and positive statements
Positive statements are objective statements that can be tested with factual/scientific evidence and
thus rejected or accepted. They describe the world how it is.
Normative statements are subjective statements that are based on value judgements and cannot be
proved correct or wrong. They describe the world as it should be.
Value judgement is a subjective statement of opinion.
Positive statement example ‘economics is the most popular subject in the school.’
Normative statement example ‘economics is the most interesting subject in the school.’
Statements can be both normative and positive, ‘The UK has had over 300,000 coronavirus cases
since January. The UK government thinks they have handled coronavirus better than any other
country.’
Value judgements influence economic decision making and policy due to making different decisions
from the same statistics.
1.1.3 The economic problem
People's finite needs are a necessity for survival e.g. water whilst their unlimited wants and desires
are not needed for survival e.g. car. Though resources are scarce and are exhausted by people.
Resources are only scarce due to the relation of demand placed upon them.
BASIC ECONOMIC PROBLEM – How can scarcity where resources are finite and wants infinite by
dealt with.
The three economic questions this leaves us with are:
What to produce? (What proportion is spent on protecting the environment/manufactured goods?)
How to produce it? (Produce smartphones in Taiwan or Japan? / To make it use steel or fibre?)
For whom do we produce it? (What proportion of outputto go to workers/to give to pensioners?)
,Opportunity cost is the value of the next best alternative foregone. This is because the resources to
produce goods cannot be used for something else at the same time due to limited resources. This
leads to choosing the best outcome for the economic agent involved.
The problem is consumers may not know alternative options, it may be hard to switch to alternatives,
some factors dont have alternatives and there may be a lack of information on alternatives.
The four factors of production (inputs in production process):
● Land which are natural resources for production e.g. raw material, land and minerals (reward
is rent).
● Labour which is productive human effort, with a worker valued as their human capital
representing future earnings and production this can be increased through education and
training (reward is wages).
● Capital is all man-made manufactured resources used to produce future goods and services
(reward is interest). They are two types working or circulating capital which are resources in
the production system being transformed into another good to be sold. There is also fixed
capital which is used to transfer working capital into goods and services.
● Entrepreneurship which is the willingness and ability to take risks of combining the other three
factors of production to make a good or product through organising production (reward is
profit). Not only owners but also managers can be entrepreneurs.
Economic good is a product or service made with scarce resources that can command a price when
sold which has an opportunity cost e.g. road, apple.
Free good is where no resources are exhausted to be made and has no opportunity cost when
supplied e.g. air, sunlight. – some free goods have become economic goods e.g. clean beaches.
Renewable recourse is a recourse of economic valuethat is sustainable and can be replenished at an
equal level to consumption e.g. oxygen, solar power.
Non-renewable resources are a resource of economicvalue that cannot be replaced by natural means
on an equal level to consumption e.g. oil, coal.
Sustainable resource is a renewable resource that if exploited economically efficiently can be used
again in the future e.g. fishery.
Good is tangible like a table or bottle.
Service is intangible like teaching.
Primary sector is where resources are collected through extraction, fishing, quarrying etc.
Secondary sector is where resources are turned into goods via manufacturing like a chair factory.
Tertiary sector is where manufactured goods are sold.
1.1.4 Production possibility frontiers
A capital good such as a sewing machine is brought to aid production of other goods not for personal
consumption. This is long term orientated as benefits are observed when goods are produced which is
in the long run. A good like a computer can be both types.
A consumer goods such as a laptop is used for personal consumption not to produce other goods.
This is purchased by households and individuals. This is short term orientated as you get personal
consumption straight away.
If we increase the production of capital goods compared to consumer goods we are going to have
economic growth. Though if we move from capital goods to consumer goods the economy will stay the
same.
Production possibility frontiers show the maximum combination of goods that
can be produced within an economy using all available resources efficiently at a
given time period. These show the opportunity cost of using scarce resources
as there is a trade-off of what to produce.
The opportunity cost on the graph is the alternative goods you give up through
producing the goods of your choice. E.g. when 100 healthcare goods are made the opportunity, cost is
100 education goods as the opportunity cost. The opportunity cost concept can also be called the
margin which is the point of possible change.
As you move along the graph you reallocate resources:
● Anywhere along the curve the resources are being allocated efficiently.
● Anywhere inside the curve the resources are being inefficiently allocated or resources are
unemployed, so the economy is under producing. This can happen in situations like
unemployment.
, ● Anywhere outside the graph is unattainable as the resources at this current period can only
be stretched to the boundary of the graph.
Economic efficiency is achieved when resources are used for their best use. At all points on the PPF,
resources are productively efficient as production is taking place at the lowest cost producing the
maximum goods.
Allocatively efficient is when social welfare is maximised so not all points on the PPF are allocatively
efficient.
A shift of the curve outwards suggests economic growth (increase production potential). This can be
done when:
● There is an increase in finance
● Improvement of technology
● Increased skilled migration
● Discovery of raw materials
● Good weather
● Increase in education
● Increase in resources and their quality Shift in production of one good
A shift of the curve inwards suggests economic decline (decrease production potential). This can be
due to:
● Natural disasters
● Bad weather
● Wars
● Fall in education spending
● Migration (labour quantity and quality)
These can destroy capital or consumer goods removing economic potential. It also can remove skilled
labour.
Movement along the curve indicates a change in the combination of goods produced, the same amount
of resources are allocated amongst the two goods differently.
A shift of the curve indicates a change in the productive potential of the economy; this is either growth
or decline. There has been a change in the number of resources and/or the technology available to the
country and so their potential output has changed.
A linear ppf shows constant opportunity cost (same ratio) whilst the concave ppf shows that
opportunity cost varies as more of one good is made.
The PPF is limited as it shows choices not an indication of what will be produced. It is a simplified
model of reality, only considers two variables and does not show where maximum social welfare is
achieved.
1.1.5 Specialisation and division of labour
Specialisation is a system of organisation where economicunits such as households are not
self-sufficient but focus on producing certain goods and services and trading the surplus with others.
Division of labouris where the production process is divided into different stages allowing workers to
specialise in different tasks to make a good or service in cooperation with other workers.
This concept was created by the Scottish economist Adam Smith. He focused on a pin factory to show
that when a production of a pin was divided into separate tasks and the workers divided accordingly
resulted in an exponential increase in productivity compared to one person making the pin, he claimed
this was because workers were specialised and so were more efficient. He argued one person could
make 20 pins whilst 10 specialised workers could make 48000 pins a day.
The car manufacturer that modernised this concept was ford motors.
This increased productivity (output per unit input employed) is due to increase in labour productivity
(output per worker) and capital productivity (output per unit of capital employed).
Microeconomics is the study of individuals or groupswithin a market context.
1.1.1 Economics as a social science
There are two types of sciences: natural sciences (biology or chemistry) and social sciences
(economics or sociology).
Social science is the study of how people or societiesinteract with each other and how they work.
Natural and social sciences similarity: collect data, conduct research and use algorithms to create
models and theories.
Natural and social science difference: Only precise experiments can be done in natural sciences by
changing only one variable. In economics it’s difficult to set up experiments to test hypotheses as
there are too many variables in the everyday world changing constantly bringing different conclusions.
Also, it is argued that human behaviour cannot be reduced to scientific laws, it is easier to predict
groups.
There is no distinction between theory or model, except models normally use numbers and are to
higher precision. They can both be simplified. Laws are a theory or model that has gained universal
acceptance and has been verified by empirical evidence.
CETERIS PARIBUS – All other things remain equal.
This term is how economists make assumptions as everything they are saying is held constant except
for one thing. This helps economists to make simplified models.
Inflation is the general rise in price levels.
Base period/year is an arbitrary time period selected to compare all other years. The selected year is
denoted by 100.
Index number is a simplified and quick method of comparingnumbers in a given time period.
1.1.2 Normative and positive statements
Positive statements are objective statements that can be tested with factual/scientific evidence and
thus rejected or accepted. They describe the world how it is.
Normative statements are subjective statements that are based on value judgements and cannot be
proved correct or wrong. They describe the world as it should be.
Value judgement is a subjective statement of opinion.
Positive statement example ‘economics is the most popular subject in the school.’
Normative statement example ‘economics is the most interesting subject in the school.’
Statements can be both normative and positive, ‘The UK has had over 300,000 coronavirus cases
since January. The UK government thinks they have handled coronavirus better than any other
country.’
Value judgements influence economic decision making and policy due to making different decisions
from the same statistics.
1.1.3 The economic problem
People's finite needs are a necessity for survival e.g. water whilst their unlimited wants and desires
are not needed for survival e.g. car. Though resources are scarce and are exhausted by people.
Resources are only scarce due to the relation of demand placed upon them.
BASIC ECONOMIC PROBLEM – How can scarcity where resources are finite and wants infinite by
dealt with.
The three economic questions this leaves us with are:
What to produce? (What proportion is spent on protecting the environment/manufactured goods?)
How to produce it? (Produce smartphones in Taiwan or Japan? / To make it use steel or fibre?)
For whom do we produce it? (What proportion of outputto go to workers/to give to pensioners?)
,Opportunity cost is the value of the next best alternative foregone. This is because the resources to
produce goods cannot be used for something else at the same time due to limited resources. This
leads to choosing the best outcome for the economic agent involved.
The problem is consumers may not know alternative options, it may be hard to switch to alternatives,
some factors dont have alternatives and there may be a lack of information on alternatives.
The four factors of production (inputs in production process):
● Land which are natural resources for production e.g. raw material, land and minerals (reward
is rent).
● Labour which is productive human effort, with a worker valued as their human capital
representing future earnings and production this can be increased through education and
training (reward is wages).
● Capital is all man-made manufactured resources used to produce future goods and services
(reward is interest). They are two types working or circulating capital which are resources in
the production system being transformed into another good to be sold. There is also fixed
capital which is used to transfer working capital into goods and services.
● Entrepreneurship which is the willingness and ability to take risks of combining the other three
factors of production to make a good or product through organising production (reward is
profit). Not only owners but also managers can be entrepreneurs.
Economic good is a product or service made with scarce resources that can command a price when
sold which has an opportunity cost e.g. road, apple.
Free good is where no resources are exhausted to be made and has no opportunity cost when
supplied e.g. air, sunlight. – some free goods have become economic goods e.g. clean beaches.
Renewable recourse is a recourse of economic valuethat is sustainable and can be replenished at an
equal level to consumption e.g. oxygen, solar power.
Non-renewable resources are a resource of economicvalue that cannot be replaced by natural means
on an equal level to consumption e.g. oil, coal.
Sustainable resource is a renewable resource that if exploited economically efficiently can be used
again in the future e.g. fishery.
Good is tangible like a table or bottle.
Service is intangible like teaching.
Primary sector is where resources are collected through extraction, fishing, quarrying etc.
Secondary sector is where resources are turned into goods via manufacturing like a chair factory.
Tertiary sector is where manufactured goods are sold.
1.1.4 Production possibility frontiers
A capital good such as a sewing machine is brought to aid production of other goods not for personal
consumption. This is long term orientated as benefits are observed when goods are produced which is
in the long run. A good like a computer can be both types.
A consumer goods such as a laptop is used for personal consumption not to produce other goods.
This is purchased by households and individuals. This is short term orientated as you get personal
consumption straight away.
If we increase the production of capital goods compared to consumer goods we are going to have
economic growth. Though if we move from capital goods to consumer goods the economy will stay the
same.
Production possibility frontiers show the maximum combination of goods that
can be produced within an economy using all available resources efficiently at a
given time period. These show the opportunity cost of using scarce resources
as there is a trade-off of what to produce.
The opportunity cost on the graph is the alternative goods you give up through
producing the goods of your choice. E.g. when 100 healthcare goods are made the opportunity, cost is
100 education goods as the opportunity cost. The opportunity cost concept can also be called the
margin which is the point of possible change.
As you move along the graph you reallocate resources:
● Anywhere along the curve the resources are being allocated efficiently.
● Anywhere inside the curve the resources are being inefficiently allocated or resources are
unemployed, so the economy is under producing. This can happen in situations like
unemployment.
, ● Anywhere outside the graph is unattainable as the resources at this current period can only
be stretched to the boundary of the graph.
Economic efficiency is achieved when resources are used for their best use. At all points on the PPF,
resources are productively efficient as production is taking place at the lowest cost producing the
maximum goods.
Allocatively efficient is when social welfare is maximised so not all points on the PPF are allocatively
efficient.
A shift of the curve outwards suggests economic growth (increase production potential). This can be
done when:
● There is an increase in finance
● Improvement of technology
● Increased skilled migration
● Discovery of raw materials
● Good weather
● Increase in education
● Increase in resources and their quality Shift in production of one good
A shift of the curve inwards suggests economic decline (decrease production potential). This can be
due to:
● Natural disasters
● Bad weather
● Wars
● Fall in education spending
● Migration (labour quantity and quality)
These can destroy capital or consumer goods removing economic potential. It also can remove skilled
labour.
Movement along the curve indicates a change in the combination of goods produced, the same amount
of resources are allocated amongst the two goods differently.
A shift of the curve indicates a change in the productive potential of the economy; this is either growth
or decline. There has been a change in the number of resources and/or the technology available to the
country and so their potential output has changed.
A linear ppf shows constant opportunity cost (same ratio) whilst the concave ppf shows that
opportunity cost varies as more of one good is made.
The PPF is limited as it shows choices not an indication of what will be produced. It is a simplified
model of reality, only considers two variables and does not show where maximum social welfare is
achieved.
1.1.5 Specialisation and division of labour
Specialisation is a system of organisation where economicunits such as households are not
self-sufficient but focus on producing certain goods and services and trading the surplus with others.
Division of labouris where the production process is divided into different stages allowing workers to
specialise in different tasks to make a good or service in cooperation with other workers.
This concept was created by the Scottish economist Adam Smith. He focused on a pin factory to show
that when a production of a pin was divided into separate tasks and the workers divided accordingly
resulted in an exponential increase in productivity compared to one person making the pin, he claimed
this was because workers were specialised and so were more efficient. He argued one person could
make 20 pins whilst 10 specialised workers could make 48000 pins a day.
The car manufacturer that modernised this concept was ford motors.
This increased productivity (output per unit input employed) is due to increase in labour productivity
(output per worker) and capital productivity (output per unit of capital employed).
