AS Microeconomics Notes
Scarcity, choice and opportunity cost
Resources : money, oil, coal, wood, food, iron etc.
Scarcity : resources that are finite and limited
Needs : resources needed to survive – finite
Wants : resources that are not a necessity – infinite
Economic goods : a scarce of finite resource (e.g. food)
Free goods : limitless and won’t run out – its use will not effect others
ability to use (e.g. air)
Choices must be made on how economic good are allocated, no choices
need to be made on the allocation of free goods.
Opportunity cost : the value of the next best alternative forgone.
(e.g. the opportunity cost of staying home to revise would be not going
out with friends)
Production Possibility Frontiers (PPFs)
Factors of production:
Land : any natural resources needed (e.g. space, water, minerals
etc.)
Labour : the amount of people needed, their ability and time
Capital : physical assets and financial capital (e.g. tools, machinery
etc.)
PPF : a graph showing the possible production of two products given a
certain amount of factor input. It can be for an individual business or a
whole economy.
The curve represents the maximum possible output – this is rare and
usually the point falls inside the curve as resources are often not used
efficiently.
,Economic growth occurs when there is an increase in the factors of
production or an increase in productivity. This causes an outward shift in
the PPF.
Individual firm Economy
Increase - Move to a bigger factory - Invasion (land)
in factors (land) - Migration / natural
of - Hire more workers (labour) population growth (labour)
productio - Invest in machinery - New political relationships
n (capital) (capital)
Increase - Better management (all) - Better management (all)
in - Employee training (labour) - Improve education (labour)
efficiency - New technology (capital) - New discoveries (capital)
Economies can also shrink and the curve can shift inwards. (e.g. war,
disease etc.)
Factor substitution : how easy it is to switch the factors of production from
producing one good to another.
This determines the PPF curve. If it is close to the axis then there is good
factor substitution (e.g. phones and tablets). If it is far from the axis then
there is poor factor substitution (e.g. computers and chairs). If there is
perfect factor substitution, then the PPF is a straight line as factors are
perfectly substitutional.
Good factor Poor factor Perfect factor
substitution substitution substitution
,What affects substitution?:
How comparative the products are.
The suitability of skills of labour.
If the machinery is capable of making the other product.
The land/resources required for each product.
Specialisation
Productivity : output of a good/service, per factor, per period of time
Specialisation : a focus on one particular product or task
Specialisation increases productivity because:
By spending all time on one skill, the job will be done better and
quicker.
Its cheaper to only buy the equipment needed for that job.
Time is saved as people do not have to switch tasks.
Disadvantages of specialisation:
Increased boredom
Overreliance
Finite resources
Changing tastes
A country may decide to specialise in a product, sell surplus and use that
money to import. Countries focus on producing the specialised good to
maximise output and welfare. (e.g. Cardiff and coal during the industrial
revolution)
Primary product dependency : typically LIC economies which are reliant on
few raw materials (e.g. Zambia and copper)
Comparative advantage : some firms have a naturally better scope for
producing a certain good (there is a lower opportunity cost)
Demand and supply in product markets
Product market : place where goods/services are bought or sold.
We assume that consumers and producers behave rationally.
Producers seek to maximise profits. Consumers seek to maximise utility.
Utility : satisfaction gained from consuming a product. We buy something
because we want something from it (e.g. food – hunger) It is measured by
the price.
Marginal utility : the additional satisfaction gained per extra consumed.
We usually experience diminishing marginal utility.
, Demand : the amount of a product consumers are willing and able to
purchase at a given price. Demand is derived from marginal utility.
Shifting demand
Factors affecting demand :
Disposable income / Tax rates
Inflation / Prices
Seasonal products
Fashion trends
Advertising
Scarcity, choice and opportunity cost
Resources : money, oil, coal, wood, food, iron etc.
Scarcity : resources that are finite and limited
Needs : resources needed to survive – finite
Wants : resources that are not a necessity – infinite
Economic goods : a scarce of finite resource (e.g. food)
Free goods : limitless and won’t run out – its use will not effect others
ability to use (e.g. air)
Choices must be made on how economic good are allocated, no choices
need to be made on the allocation of free goods.
Opportunity cost : the value of the next best alternative forgone.
(e.g. the opportunity cost of staying home to revise would be not going
out with friends)
Production Possibility Frontiers (PPFs)
Factors of production:
Land : any natural resources needed (e.g. space, water, minerals
etc.)
Labour : the amount of people needed, their ability and time
Capital : physical assets and financial capital (e.g. tools, machinery
etc.)
PPF : a graph showing the possible production of two products given a
certain amount of factor input. It can be for an individual business or a
whole economy.
The curve represents the maximum possible output – this is rare and
usually the point falls inside the curve as resources are often not used
efficiently.
,Economic growth occurs when there is an increase in the factors of
production or an increase in productivity. This causes an outward shift in
the PPF.
Individual firm Economy
Increase - Move to a bigger factory - Invasion (land)
in factors (land) - Migration / natural
of - Hire more workers (labour) population growth (labour)
productio - Invest in machinery - New political relationships
n (capital) (capital)
Increase - Better management (all) - Better management (all)
in - Employee training (labour) - Improve education (labour)
efficiency - New technology (capital) - New discoveries (capital)
Economies can also shrink and the curve can shift inwards. (e.g. war,
disease etc.)
Factor substitution : how easy it is to switch the factors of production from
producing one good to another.
This determines the PPF curve. If it is close to the axis then there is good
factor substitution (e.g. phones and tablets). If it is far from the axis then
there is poor factor substitution (e.g. computers and chairs). If there is
perfect factor substitution, then the PPF is a straight line as factors are
perfectly substitutional.
Good factor Poor factor Perfect factor
substitution substitution substitution
,What affects substitution?:
How comparative the products are.
The suitability of skills of labour.
If the machinery is capable of making the other product.
The land/resources required for each product.
Specialisation
Productivity : output of a good/service, per factor, per period of time
Specialisation : a focus on one particular product or task
Specialisation increases productivity because:
By spending all time on one skill, the job will be done better and
quicker.
Its cheaper to only buy the equipment needed for that job.
Time is saved as people do not have to switch tasks.
Disadvantages of specialisation:
Increased boredom
Overreliance
Finite resources
Changing tastes
A country may decide to specialise in a product, sell surplus and use that
money to import. Countries focus on producing the specialised good to
maximise output and welfare. (e.g. Cardiff and coal during the industrial
revolution)
Primary product dependency : typically LIC economies which are reliant on
few raw materials (e.g. Zambia and copper)
Comparative advantage : some firms have a naturally better scope for
producing a certain good (there is a lower opportunity cost)
Demand and supply in product markets
Product market : place where goods/services are bought or sold.
We assume that consumers and producers behave rationally.
Producers seek to maximise profits. Consumers seek to maximise utility.
Utility : satisfaction gained from consuming a product. We buy something
because we want something from it (e.g. food – hunger) It is measured by
the price.
Marginal utility : the additional satisfaction gained per extra consumed.
We usually experience diminishing marginal utility.
, Demand : the amount of a product consumers are willing and able to
purchase at a given price. Demand is derived from marginal utility.
Shifting demand
Factors affecting demand :
Disposable income / Tax rates
Inflation / Prices
Seasonal products
Fashion trends
Advertising
