1.1 What is Economics?
Economics is the study of how individuals’ firms and governments make decisions in a
world of scarce resources. Scarcity forces choice because human wants are unlimited,
but resources such as land labour and capital are limited. Economics examines how
resources are allocated and what determines production consumption and distribution.
Economics is divided into microeconomics, which studies individual markets, firms and
consumers, and macroeconomics, which studies aggregate outcomes such as national
income, inflation, unemployment, economic growth, and government policy.
Key Terms:
• Scarcity: Limited resources versus unlimited wants.
• Choice: Selecting one alternative over another.
• Opportunity Cost: The value of the next best alternative foregone. For example
spending 10,000 pounds on marketing may mean not upgrading machinery.
• Factors of Production:
o Land: Natural resources including oil, minerals, water, and farmland.
o Labour: Human effort and skills used in production.
o Capital: Machinery, factories, infrastructure.
o Enterprise: Risk taking and innovation by entrepreneurs.
Economic Agents:
• Consumers: Maximise utility by choosing goods that satisfy preferences.
• Firms: Maximise profits by producing goods efficiently.
• Government: Provides public goods, corrects market failures, redistributes
income and stabilises the economy.
Evaluation Points:
• Scarcity requires trade-offs; not all wants can be satisfied.
• Opportunity cost highlights the cost of decision making.
• Different societies allocate resources differently depending on priorities.
Diagram Placeholder:
• PPF curve showing efficient, inefficient, and unattainable points. Include
concave shape to show increasing opportunity cost.
,2. The Basic Economic Problem
The basic economic problem arises because resources are limited but human wants
are unlimited. Every society must answer:
1. What to produce? Limited resources mean not everything can be produced.
2. How to produce? Choices between labour intensive or capital-intensive
production.
3. For whom to produce? How goods and services are distributed among society.
Production Possibility Frontier (PPF)
• Shows the maximum combination of two goods an economy can produce given
current resources and technology.
• Points inside the curve are inefficient, on the curve are efficient, outside the
curve are unattainable.
Example: Choosing between healthcare and defence. Allocating more to defence
reduces healthcare output.
Diagram Placeholder:
• X axis: Good A, Y axis: Good B
• Concave curve to show increasing opportunity cost
• Label efficient, inefficient and unattainable points
Evaluation:
• Trade-offs exist in all economies; PPF shows opportunity cost clearly
• Shifts in the PPF reflect economic growth (outward) or contraction (inward)
• Real-life trade-offs: balancing NHS funding with infrastructure projects
3. Economic Systems
An economic system determines how resources are allocated and how production
decisions are made.
• Market Economy: Resources allocated by prices and market forces. Efficient but
can lead to inequality and market failure.
• Planned Economy: Government controls allocation. Reduces inequality but can
be inefficient and inflexible.
, • Mixed Economy: Combines market forces with government intervention to
correct failures and provide public goods.
Examples:
• UK has a mixed economy: market forces dominate but NHS, regulation and
subsidies exist.
• Cuba has historically been a planned economy; Singapore is mostly market
oriented.
Evaluation:
• Efficiency versus equity trade-off
• Market economies can innovate faster
• Planned economies can provide universal basic goods
4. Rational Decision Making and Behavioural Economics
Rational agents are assumed to maximise utility or profit using available information.
• Utility maximisation: Consumers choose the combination of goods that gives
highest satisfaction.
• Profit maximisation: Firms choose output where marginal cost equals marginal
revenue.
Behavioural Economics:
• Real-world decisions often deviate from rationality. Biases, heuristics, and
imperfect information affect decisions.
• Examples: Over-consumption of sugary drinks, under-saving for retirement.
Diagram Placeholder:
• Budget line showing trade-offs in consumption
• Indifference curves to illustrate utility maximisation
5. Exam Evaluation and Mini Case Studies
• COVID stimulus choices illustrate scarcity and opportunity cost: government
had to choose between healthcare support, business loans and infrastructure.
Economics is the study of how individuals’ firms and governments make decisions in a
world of scarce resources. Scarcity forces choice because human wants are unlimited,
but resources such as land labour and capital are limited. Economics examines how
resources are allocated and what determines production consumption and distribution.
Economics is divided into microeconomics, which studies individual markets, firms and
consumers, and macroeconomics, which studies aggregate outcomes such as national
income, inflation, unemployment, economic growth, and government policy.
Key Terms:
• Scarcity: Limited resources versus unlimited wants.
• Choice: Selecting one alternative over another.
• Opportunity Cost: The value of the next best alternative foregone. For example
spending 10,000 pounds on marketing may mean not upgrading machinery.
• Factors of Production:
o Land: Natural resources including oil, minerals, water, and farmland.
o Labour: Human effort and skills used in production.
o Capital: Machinery, factories, infrastructure.
o Enterprise: Risk taking and innovation by entrepreneurs.
Economic Agents:
• Consumers: Maximise utility by choosing goods that satisfy preferences.
• Firms: Maximise profits by producing goods efficiently.
• Government: Provides public goods, corrects market failures, redistributes
income and stabilises the economy.
Evaluation Points:
• Scarcity requires trade-offs; not all wants can be satisfied.
• Opportunity cost highlights the cost of decision making.
• Different societies allocate resources differently depending on priorities.
Diagram Placeholder:
• PPF curve showing efficient, inefficient, and unattainable points. Include
concave shape to show increasing opportunity cost.
,2. The Basic Economic Problem
The basic economic problem arises because resources are limited but human wants
are unlimited. Every society must answer:
1. What to produce? Limited resources mean not everything can be produced.
2. How to produce? Choices between labour intensive or capital-intensive
production.
3. For whom to produce? How goods and services are distributed among society.
Production Possibility Frontier (PPF)
• Shows the maximum combination of two goods an economy can produce given
current resources and technology.
• Points inside the curve are inefficient, on the curve are efficient, outside the
curve are unattainable.
Example: Choosing between healthcare and defence. Allocating more to defence
reduces healthcare output.
Diagram Placeholder:
• X axis: Good A, Y axis: Good B
• Concave curve to show increasing opportunity cost
• Label efficient, inefficient and unattainable points
Evaluation:
• Trade-offs exist in all economies; PPF shows opportunity cost clearly
• Shifts in the PPF reflect economic growth (outward) or contraction (inward)
• Real-life trade-offs: balancing NHS funding with infrastructure projects
3. Economic Systems
An economic system determines how resources are allocated and how production
decisions are made.
• Market Economy: Resources allocated by prices and market forces. Efficient but
can lead to inequality and market failure.
• Planned Economy: Government controls allocation. Reduces inequality but can
be inefficient and inflexible.
, • Mixed Economy: Combines market forces with government intervention to
correct failures and provide public goods.
Examples:
• UK has a mixed economy: market forces dominate but NHS, regulation and
subsidies exist.
• Cuba has historically been a planned economy; Singapore is mostly market
oriented.
Evaluation:
• Efficiency versus equity trade-off
• Market economies can innovate faster
• Planned economies can provide universal basic goods
4. Rational Decision Making and Behavioural Economics
Rational agents are assumed to maximise utility or profit using available information.
• Utility maximisation: Consumers choose the combination of goods that gives
highest satisfaction.
• Profit maximisation: Firms choose output where marginal cost equals marginal
revenue.
Behavioural Economics:
• Real-world decisions often deviate from rationality. Biases, heuristics, and
imperfect information affect decisions.
• Examples: Over-consumption of sugary drinks, under-saving for retirement.
Diagram Placeholder:
• Budget line showing trade-offs in consumption
• Indifference curves to illustrate utility maximisation
5. Exam Evaluation and Mini Case Studies
• COVID stimulus choices illustrate scarcity and opportunity cost: government
had to choose between healthcare support, business loans and infrastructure.
