A LEVEL MICRO ECONOMICS
Theme 1 - markets and market failure
Chapter 1 - 1.1
1.1.1 - Economics as a social science
Economics - the study of how individuals make decisions on how to allocate scarce resources
A model - a hypothesis which is capable of refutation by empirical (hard) evidence
Ceteris paribus is an assumption used when creating models - while studying one variable
e.g price, it assumes that all others are constant and equal
Microeconomics is the study of individual markets within an economy e.g the petrol market
Macroeconomics is the study of the economy as a whole
1.1.2 - Economics statements
A positive statement = a statement that can be supported or refuted by empirical evidence
(it is a STATEMENT, true or false that can be tested)
A normative statement = a statement that cannot be supported or refuted because it is a
value judgement
(an OPINION that can’t be tested, e.g unfair, should be…)
Normative statements contain Value judgements- these are people’s opinions that are
backed up by positive statements, which make more economists agree with them.
Assumptions
In economics, rather than conducting experiments in a lab like scientists, they create
models. These are based on assumptions. For example:
- People react to signals and incentives
- People are rational
- People have access to relevant information
- Assuming ‘all other things are equal’ or ceteris Paribus.
1.1.3 - The basic economic problem
The basic problem of economics is that of scarcity. People have finite needs, but infinite
wants. Resources are scarce but there are unlimited things we could choose to do with
them.
Wants are infinite, resources are finite and limited.
, - Scarcity = the economic agents (eg. individuals, firms and governments) can only
obtain a limited amount of resources at any moment in time.
- Scarcity is a relative concept as resources are not necessarily scarce in themselves
but they are scarce in relation to the demands placed upon them.
Renewable resources = resource of economic value that can be replenished or replaced on
a level equal to consumption, called free goods, eg. oxygen
Non-renewable resources = a resource of economic value that cannot be readily replaced by
natural means on a level equal to consumption, called economic goods, eg. wood, oil, gas
Economics is how to allocate these scarce resources. Every choice allocation causes an
opportunity cost- the benefits lost of the next best alternative foregone.
Four factors of production
Land - natural resources used in production e.g land, raw materials, minerals, produce from
the sea
Labour - people needed to transform resources and produce goods/services
Capital - physical equipment and money used to buy resources
Enterprise - the activity and management to make profit from these factors e.g managers,
investors …
1.1.4 - PPFs
What is it?
- A production possibility frontier is a graphical representation of the maximum
number of goods and services an economy can produce using all of its resources to
their full potential.
- It is drawn on the basis that only 2 goods or services are produced
- And that the resources (land, labour, capital and entrepreneurship) are perfectly
mobile.
- Any point on the curve represents the maximum productive potential of the
economy, the most that the country can produce
This PPF shows:
- Movement from A to B shows that more cotton will be made
and less wine
- Points on the curve show maximum efficiency and maximum
output
- Points inside the curve are inefficient
- Points outside the curve are unattainable.
,The principle of opportunity cost can be seen in this:
This shows that as you move along the curve, as you gain eg.
more cotton, you lose the units of wine, therefore the
increasing opportunity cost is the wine that you can no longer
make.
Economic growth
Short run: increase in output
Long run: increase in real GDP
To obtain a point outside of the PPF, a business will have to increase the quality or quantity
of the factors of production.
Eg. technological advancements, more educated workers, more raw materials.
This will shift the PPF to the right.
, 1.1.5: Specialisation and division of labour
- Specialisation- the production of a limited range of goods and services by an
individual business or country, in cooperation with others so that together a
complete range of goods is produced.
- Globalisation is intensifying the process of specialisation between nations.
- Eg. in the UK, Cornwall focuses on tourism whilst London focuses on financial
services.
- Division of labour- specialisation by workers, who perform tasks at different stages of
production to make a good or service, in cooperation with others.
Productivity
Specialisation increases productivity, both in labour and capital because:
- It enables workers to gain skills in a narrow range of tasks, rather than being less
skilled for a wide range of tasks.
- It makes it cost effective to provide workers with specialist tools.
- Time is saved because workers aren’t constantly changing tasks, machinery and tools
and they don’t have to move around.
- Workers can specialise in the tasks they are best suited for
However, it can only be done to a degree:
- If it is done too much work can be tedious
- This will result in poorer quality and less productivity
- If there is breakdown in one part of a system, then the whole chain will break down
Theme 1 - markets and market failure
Chapter 1 - 1.1
1.1.1 - Economics as a social science
Economics - the study of how individuals make decisions on how to allocate scarce resources
A model - a hypothesis which is capable of refutation by empirical (hard) evidence
Ceteris paribus is an assumption used when creating models - while studying one variable
e.g price, it assumes that all others are constant and equal
Microeconomics is the study of individual markets within an economy e.g the petrol market
Macroeconomics is the study of the economy as a whole
1.1.2 - Economics statements
A positive statement = a statement that can be supported or refuted by empirical evidence
(it is a STATEMENT, true or false that can be tested)
A normative statement = a statement that cannot be supported or refuted because it is a
value judgement
(an OPINION that can’t be tested, e.g unfair, should be…)
Normative statements contain Value judgements- these are people’s opinions that are
backed up by positive statements, which make more economists agree with them.
Assumptions
In economics, rather than conducting experiments in a lab like scientists, they create
models. These are based on assumptions. For example:
- People react to signals and incentives
- People are rational
- People have access to relevant information
- Assuming ‘all other things are equal’ or ceteris Paribus.
1.1.3 - The basic economic problem
The basic problem of economics is that of scarcity. People have finite needs, but infinite
wants. Resources are scarce but there are unlimited things we could choose to do with
them.
Wants are infinite, resources are finite and limited.
, - Scarcity = the economic agents (eg. individuals, firms and governments) can only
obtain a limited amount of resources at any moment in time.
- Scarcity is a relative concept as resources are not necessarily scarce in themselves
but they are scarce in relation to the demands placed upon them.
Renewable resources = resource of economic value that can be replenished or replaced on
a level equal to consumption, called free goods, eg. oxygen
Non-renewable resources = a resource of economic value that cannot be readily replaced by
natural means on a level equal to consumption, called economic goods, eg. wood, oil, gas
Economics is how to allocate these scarce resources. Every choice allocation causes an
opportunity cost- the benefits lost of the next best alternative foregone.
Four factors of production
Land - natural resources used in production e.g land, raw materials, minerals, produce from
the sea
Labour - people needed to transform resources and produce goods/services
Capital - physical equipment and money used to buy resources
Enterprise - the activity and management to make profit from these factors e.g managers,
investors …
1.1.4 - PPFs
What is it?
- A production possibility frontier is a graphical representation of the maximum
number of goods and services an economy can produce using all of its resources to
their full potential.
- It is drawn on the basis that only 2 goods or services are produced
- And that the resources (land, labour, capital and entrepreneurship) are perfectly
mobile.
- Any point on the curve represents the maximum productive potential of the
economy, the most that the country can produce
This PPF shows:
- Movement from A to B shows that more cotton will be made
and less wine
- Points on the curve show maximum efficiency and maximum
output
- Points inside the curve are inefficient
- Points outside the curve are unattainable.
,The principle of opportunity cost can be seen in this:
This shows that as you move along the curve, as you gain eg.
more cotton, you lose the units of wine, therefore the
increasing opportunity cost is the wine that you can no longer
make.
Economic growth
Short run: increase in output
Long run: increase in real GDP
To obtain a point outside of the PPF, a business will have to increase the quality or quantity
of the factors of production.
Eg. technological advancements, more educated workers, more raw materials.
This will shift the PPF to the right.
, 1.1.5: Specialisation and division of labour
- Specialisation- the production of a limited range of goods and services by an
individual business or country, in cooperation with others so that together a
complete range of goods is produced.
- Globalisation is intensifying the process of specialisation between nations.
- Eg. in the UK, Cornwall focuses on tourism whilst London focuses on financial
services.
- Division of labour- specialisation by workers, who perform tasks at different stages of
production to make a good or service, in cooperation with others.
Productivity
Specialisation increases productivity, both in labour and capital because:
- It enables workers to gain skills in a narrow range of tasks, rather than being less
skilled for a wide range of tasks.
- It makes it cost effective to provide workers with specialist tools.
- Time is saved because workers aren’t constantly changing tasks, machinery and tools
and they don’t have to move around.
- Workers can specialise in the tasks they are best suited for
However, it can only be done to a degree:
- If it is done too much work can be tedious
- This will result in poorer quality and less productivity
- If there is breakdown in one part of a system, then the whole chain will break down
