Economics
, Unit 1 ~ the economic problem
Economics as a social science: Ceteris paribus:
• looks at human behaviour (individuals + organisations) and their Normative statement - statements that
• all other things being equal contain valued judgement but are
scarce resources • Used when looking at the
• develop theories to create economic models subjective and based on opinion.
relationship between two factors “Should”
• Use simplified assumptions to limit the number of variables where other variables remain the
• Test theories and modes against relevant known facts same Positive statement - objective statements
• Use empirical data (made by scientists) to improve economic that can be tested by referring to
models available evidence. “Will or is”
• Use economic models to make predictions
Factors of production:
Land :
Basic economic problem: • territory or the earths natural resources
• everyone has certain needs in their life such as food, water, • Renewables - can regrow or regenerate and with sustainable use
shelter won’t run out eg. Wood and tidal power
• Everyone has an infinite list of wants such as designer • Non renewables - will eventually run out if we keep using them eg.
clothes, holidays, smartphones Coal and oil
• Limited amount of resources available to satisfy everyone’s Labour:
needs and wants • work done by those who contribute to the productive process (labour
force)
• Human capital~ how valuable or productive a person is in a workplace
Economic agents:
Producers ~ firms or people that make good or provide services Capital:
Consumers ~ people or firms who buy the goods and services • equipment, factories, schools that help produce good and services
Governments ~ sets the rules that other participants in the economy follow, Enterprise:
also produces good and services • entrepreneurs who take risks and create things from the other three
factors
Production possibility frontier (PPF):
• shows options that are available when you consider the production of just Opportunity cost:
two types of goods or services • benefit lost when the best option is chosen over the secound best option
( trade off )
good Points A+B ~ all are achievable without
using any extra resources. Productivity
• Used to ensure more efficient allocation of resource
• Problems ~ not all alternatives known, lake of information about
A efficient, maximum possible output.
alternatives and costs, some factors don’t have alternatives or alternatives
D Point C ~ making this mix of goods is are hard to switch too
productively inefficient.
B
Point D ~ isn’t achievable using the
current level of resources in the Market types:
C economy.
Free market economy: Pros: Command economy:
• Efficiency ~ any product can be • Maximise welfare ~ governments have
bought or sold but only those that are more control over the economy so can
best value will have demand, prevent inequality and redistributes
good Y
incentive for firms to improve income fairly. They ensure the
good (c efficiency production of goods that people need
• Entrepreneurship ~ the rewards for and are beneficial to society
good ideas can make entrepreneurs • Low unemployment ~ government can
Factors that move the PPF outwards:
a lot of money encourages risk taking try to provide everyone with a job and
• improvements in technology or
and innovation salary
&
labour as it allows more output with
• Choice ~ incentives for innovation • Prevent monopolies ~ market
⑧ the same resources
can lead to an increase in choice for dominance of monopoly’s can be
Shows economic growth consumers prevented by the government
Cons:
• Inequalities ~ can lead to huge • Poor decision making ~ lack of
goodY differences in incomes, anyone who information means the government may
is unable to work would receive no make poor decisions on what needs to
Behavioural economics: income be produced
Key assumptions of traditional economy theory: • Non profit goods may not be made ~
• Restricted choice ~ consumers have
• economic agents are utility maximisers not sell enough so no incentive to be limited choice on what they consume as
• economic agents are rational made firms will be told what to make
Limitations to rationality : • Monopolies ~ successful business
• Lack of risk talking and efficiency ~
• Imperfect information ~ they won’t have all the information they can become the only supplier of a government owned firms have no
need to make rational decisions which leads to market failure product incentive to increase efficiency, take
• Asymmetric information ~ when one party has more information risks or innovate as they don’t make
than another profit
• people might not be able to process and evaluate the vast Bias in rationality:
amount of information involved in making the decision • Rule of thumb ~ useful tool to make decisions, often based on experience or observations
• Anchoring ~ placing a lot of emphasis on one piece of information
Bounded rationality ~ limits on decision making, people tend to make • Availability bias ~ judgement made on probably of an event happening
a satisfactory decision rather than spending ages trying to make a • Social norms ~ influence by a social group
rational decision • Habitual behaviour ~ doing the same thing over and over again
• Framing ~ how information is passed on
• Nudges ~ some alternatives are made easier to choose without removing the freedom of
choice
• Restricted choice ~ people’s choice is restricted
• Mandated choice ~ where people have to make decisions
• Default options ~ automatic choice decided for u
, Unit 1 ~ the economic problem
Economics as a social science: Ceteris paribus:
• looks at human behaviour (individuals + organisations) and their Normative statement - statements that
• all other things being equal contain valued judgement but are
scarce resources • Used when looking at the
• develop theories to create economic models subjective and based on opinion.
relationship between two factors “Should”
• Use simplified assumptions to limit the number of variables where other variables remain the
• Test theories and modes against relevant known facts same Positive statement - objective statements
• Use empirical data (made by scientists) to improve economic that can be tested by referring to
models available evidence. “Will or is”
• Use economic models to make predictions
Factors of production:
Land :
Basic economic problem: • territory or the earths natural resources
• everyone has certain needs in their life such as food, water, • Renewables - can regrow or regenerate and with sustainable use
shelter won’t run out eg. Wood and tidal power
• Everyone has an infinite list of wants such as designer • Non renewables - will eventually run out if we keep using them eg.
clothes, holidays, smartphones Coal and oil
• Limited amount of resources available to satisfy everyone’s Labour:
needs and wants • work done by those who contribute to the productive process (labour
force)
• Human capital~ how valuable or productive a person is in a workplace
Economic agents:
Producers ~ firms or people that make good or provide services Capital:
Consumers ~ people or firms who buy the goods and services • equipment, factories, schools that help produce good and services
Governments ~ sets the rules that other participants in the economy follow, Enterprise:
also produces good and services • entrepreneurs who take risks and create things from the other three
factors
Production possibility frontier (PPF):
• shows options that are available when you consider the production of just Opportunity cost:
two types of goods or services • benefit lost when the best option is chosen over the secound best option
( trade off )
good Points A+B ~ all are achievable without
using any extra resources. Productivity
• Used to ensure more efficient allocation of resource
• Problems ~ not all alternatives known, lake of information about
A efficient, maximum possible output.
alternatives and costs, some factors don’t have alternatives or alternatives
D Point C ~ making this mix of goods is are hard to switch too
productively inefficient.
B
Point D ~ isn’t achievable using the
current level of resources in the Market types:
C economy.
Free market economy: Pros: Command economy:
• Efficiency ~ any product can be • Maximise welfare ~ governments have
bought or sold but only those that are more control over the economy so can
best value will have demand, prevent inequality and redistributes
good Y
incentive for firms to improve income fairly. They ensure the
good (c efficiency production of goods that people need
• Entrepreneurship ~ the rewards for and are beneficial to society
good ideas can make entrepreneurs • Low unemployment ~ government can
Factors that move the PPF outwards:
a lot of money encourages risk taking try to provide everyone with a job and
• improvements in technology or
and innovation salary
&
labour as it allows more output with
• Choice ~ incentives for innovation • Prevent monopolies ~ market
⑧ the same resources
can lead to an increase in choice for dominance of monopoly’s can be
Shows economic growth consumers prevented by the government
Cons:
• Inequalities ~ can lead to huge • Poor decision making ~ lack of
goodY differences in incomes, anyone who information means the government may
is unable to work would receive no make poor decisions on what needs to
Behavioural economics: income be produced
Key assumptions of traditional economy theory: • Non profit goods may not be made ~
• Restricted choice ~ consumers have
• economic agents are utility maximisers not sell enough so no incentive to be limited choice on what they consume as
• economic agents are rational made firms will be told what to make
Limitations to rationality : • Monopolies ~ successful business
• Lack of risk talking and efficiency ~
• Imperfect information ~ they won’t have all the information they can become the only supplier of a government owned firms have no
need to make rational decisions which leads to market failure product incentive to increase efficiency, take
• Asymmetric information ~ when one party has more information risks or innovate as they don’t make
than another profit
• people might not be able to process and evaluate the vast Bias in rationality:
amount of information involved in making the decision • Rule of thumb ~ useful tool to make decisions, often based on experience or observations
• Anchoring ~ placing a lot of emphasis on one piece of information
Bounded rationality ~ limits on decision making, people tend to make • Availability bias ~ judgement made on probably of an event happening
a satisfactory decision rather than spending ages trying to make a • Social norms ~ influence by a social group
rational decision • Habitual behaviour ~ doing the same thing over and over again
• Framing ~ how information is passed on
• Nudges ~ some alternatives are made easier to choose without removing the freedom of
choice
• Restricted choice ~ people’s choice is restricted
• Mandated choice ~ where people have to make decisions
• Default options ~ automatic choice decided for u
