Unit 1 - Basic economic ideas and resource allocation
Chapter 1 - Scarcity, choice and opportunity cost
1.1 Fundamental economic problem
Fundamental economic problem: Resources are scarce while people’s wants are
unlimited.
Needs and wants are different; needs are things like food, water and shelter that are
necessary for survival and wants are things you want no matter your income. What
one person may consider a want for another person it may be a need.
1.3 Choice and opportunity cost
Given limited resources and unlimited wants, individuals, firms and governments
need to decide which wants to satisfy. They have to make a choice between
alternative wants.
Opportunity cost: The sacrifice of the next best available alternative.
1.4 What to produce, how to produce and for whom to produce?
The fundamental economic problem leads to 3 important questions:
● What - Economies cannot produce everything so they have to decide what to
produce and in what quantities.
● How - Firms have to consider how to use the factors of production so that they
can achieve the best outcome. They need to consider how they can get the
most out of the resources available. Sometimes they have to consider other
factors which are not economics-based.
● For whom - Governments have to decide whether everyone is going to have a
more or less equal share of what is produced or whether some will have more
than others. Some economies aim to create a more equal society by
redistributing income through taxes.
Chapter 2 - Economic methodology
2.1 What is economics?
Economics: The study of how to allocate resources in the most efficient way.
, Microeconomics: The study of individual markets.
Macroeconomics: The study of the whole economy or group of economies.
2.3 Positive and normative statements
Positive statements: Statements that refer to what will happen, based on evidence
or observation. The economist does not state his opinion. Eg. The inflation rate in
2021 was 8%.
Normative statements: Statements that express an opinion or make a value
judgement within their analysis. Eg. A fall in the supply of petrol should lead to an
increase in price.
2.4 Ceteris Paribus
Ceteris Paribus: A situation where ‘other things remain equal’ or unchanged.
Margin: A small change in one variable will lead to other small changes in other
variables.
2.5 Time periods
Short-run: A time period in which it is possible to change only some inputs. This is
typically when labour, a variable resource or a factor of production, can be increased
or decreased to increase its output.
Long-run: A time period in which it is possible for all factors of production or
resources to change. So in the long run, a firm may choose to increase the quality
and quantity of its capital and build a new factory, allowing it to be more efficient.
Very long-run: A time period in which all factors of production and key inputs are
variable. Key inputs can include technology, government regulations and social
concerns.
Chapter 3 - Factors of production
3.1 Factors of production
Chapter 1 - Scarcity, choice and opportunity cost
1.1 Fundamental economic problem
Fundamental economic problem: Resources are scarce while people’s wants are
unlimited.
Needs and wants are different; needs are things like food, water and shelter that are
necessary for survival and wants are things you want no matter your income. What
one person may consider a want for another person it may be a need.
1.3 Choice and opportunity cost
Given limited resources and unlimited wants, individuals, firms and governments
need to decide which wants to satisfy. They have to make a choice between
alternative wants.
Opportunity cost: The sacrifice of the next best available alternative.
1.4 What to produce, how to produce and for whom to produce?
The fundamental economic problem leads to 3 important questions:
● What - Economies cannot produce everything so they have to decide what to
produce and in what quantities.
● How - Firms have to consider how to use the factors of production so that they
can achieve the best outcome. They need to consider how they can get the
most out of the resources available. Sometimes they have to consider other
factors which are not economics-based.
● For whom - Governments have to decide whether everyone is going to have a
more or less equal share of what is produced or whether some will have more
than others. Some economies aim to create a more equal society by
redistributing income through taxes.
Chapter 2 - Economic methodology
2.1 What is economics?
Economics: The study of how to allocate resources in the most efficient way.
, Microeconomics: The study of individual markets.
Macroeconomics: The study of the whole economy or group of economies.
2.3 Positive and normative statements
Positive statements: Statements that refer to what will happen, based on evidence
or observation. The economist does not state his opinion. Eg. The inflation rate in
2021 was 8%.
Normative statements: Statements that express an opinion or make a value
judgement within their analysis. Eg. A fall in the supply of petrol should lead to an
increase in price.
2.4 Ceteris Paribus
Ceteris Paribus: A situation where ‘other things remain equal’ or unchanged.
Margin: A small change in one variable will lead to other small changes in other
variables.
2.5 Time periods
Short-run: A time period in which it is possible to change only some inputs. This is
typically when labour, a variable resource or a factor of production, can be increased
or decreased to increase its output.
Long-run: A time period in which it is possible for all factors of production or
resources to change. So in the long run, a firm may choose to increase the quality
and quantity of its capital and build a new factory, allowing it to be more efficient.
Very long-run: A time period in which all factors of production and key inputs are
variable. Key inputs can include technology, government regulations and social
concerns.
Chapter 3 - Factors of production
3.1 Factors of production
