Economics Notes Theme 1 Nikhil Patel
THEME 1 NOTES
Positive & Normative Statements:
POSITIVE: Free of value judgement. Can be tested.
NORMATIVE: Involves value judgement.
LAW OF DIMINISHING MARGINAL RETURNS: As more of a good is
consumed, it’s utility increases at a decreasing rate, hence the marginal utility
is always falling.
UTILITY: The satisfaction or use gained from consuming a good or service.
EFFICIENT: The resources available are allocated optimally to maximise
utility.
PRODUCTIVE: More output per unit of labour.
Production Possibility Frontier:
Shows the maximum potential level of output for 2 goods or services, and
therefore the opportunity costs involved at producing at various points on
the curve.
If an economy or firm operates at any point on the curve, there is an efficient
allocation of resources.
An increase in the potential output of an economy or firm (indicating economic
growth or productivity), means the PPF can see an outward shift.
Specialisation & Labour Division:
SPECIALISATION: The concentration on the production of a certain good or
service by an economy or a firm.
Increases productivity and efficiency.
If demand falls for this specialised good falls however, the human
capital involved will be left structurally unemployed.
DIVISION OF LABOUR: The specialisation of workers in a production
process, which increases output per worker and therefore productivity.
Increased skill due to repetition.
Less time/cost wasted on training workers for a wider range of tasks.
Price Elasticity of Demand:
The responsiveness in the demand of a good due to a change in it’s price.
PED = %Change in Demand / %Change in Price
The lower the PED, the more inelastic a good is.
PED of 1 is unit elasticity.
Determined by: availability of substitutes, necessity, luxury of the good, brand.
Income Elasticity of Demand:
The responsiveness in the demand of a good to a change in income.
YED = %Change in Demand / %Change in Income
YED is generally positive as people consume less when they have less
disposable income. These are Normal goods.
THEME 1 NOTES
Positive & Normative Statements:
POSITIVE: Free of value judgement. Can be tested.
NORMATIVE: Involves value judgement.
LAW OF DIMINISHING MARGINAL RETURNS: As more of a good is
consumed, it’s utility increases at a decreasing rate, hence the marginal utility
is always falling.
UTILITY: The satisfaction or use gained from consuming a good or service.
EFFICIENT: The resources available are allocated optimally to maximise
utility.
PRODUCTIVE: More output per unit of labour.
Production Possibility Frontier:
Shows the maximum potential level of output for 2 goods or services, and
therefore the opportunity costs involved at producing at various points on
the curve.
If an economy or firm operates at any point on the curve, there is an efficient
allocation of resources.
An increase in the potential output of an economy or firm (indicating economic
growth or productivity), means the PPF can see an outward shift.
Specialisation & Labour Division:
SPECIALISATION: The concentration on the production of a certain good or
service by an economy or a firm.
Increases productivity and efficiency.
If demand falls for this specialised good falls however, the human
capital involved will be left structurally unemployed.
DIVISION OF LABOUR: The specialisation of workers in a production
process, which increases output per worker and therefore productivity.
Increased skill due to repetition.
Less time/cost wasted on training workers for a wider range of tasks.
Price Elasticity of Demand:
The responsiveness in the demand of a good due to a change in it’s price.
PED = %Change in Demand / %Change in Price
The lower the PED, the more inelastic a good is.
PED of 1 is unit elasticity.
Determined by: availability of substitutes, necessity, luxury of the good, brand.
Income Elasticity of Demand:
The responsiveness in the demand of a good to a change in income.
YED = %Change in Demand / %Change in Income
YED is generally positive as people consume less when they have less
disposable income. These are Normal goods.
