1.1 NATURE OF ECONOMICS
1.1.1ECONOMICS AS A SOCIAL SCIENCE
a) Thinking like an economist: the process of developing models in economics, including the need
to make assumptions
The scientific method:
A scientist:
Puts forward (postulates) a theory
Gathers evidence to support or refute a theory
Accepts, modifies or refutes the theory
A law is a theory that gains universal acceptance
Simplification and assumptions:
Simple models are more useful
Simplification means that some factors have been omitted from the model
In some cases, factors are distorted to emphasise certain points in a model
Assumptions allow scientists to simplify the model in order to make the problem they are
looking at more manageable to solve.
b) The use of the ceteris paribus assumption in building models
Certeris paribus means ‘all other things remain equal’ and is used to help scientists to simplify a
problem.
c) The inability in economics to make scientific experiments
In economics it’s difficult to set up experiments to test a hypothesis and can be hard to
establish control groups
It’s also difficult to carry out experiments so that one factor is varied whilst the others are
kept constant.
Nearly all economics is based on the study of groups of individuals as this is more
predictable that looking at people’s behaviours individually
1.1.2 POSITIVE AND NORMATIVE ECONOMICS
a) Distinction between positive and normative economic statements
Positive statement a statement that can be proven to be true or false (objective)
Normative statement a statement which cannot be supported or refuted (Value
judgement/opinions)
b) The role of value judgements in influencing economic decision making and policy
Value judgements are assessments of how good or bad something is based on someone’s own
opinion and priorities.
They influence economic policies and decision making as different people have different views on
what is desirable for society (although they may all agree on how policies work)
1.1.3 THE ECONOMIC PROBLEM
a) The problem of scarcity – where there are unlimited wants and finite resources
The basis economic problem is the problem of scarcity – people have infinite wants but there are
limited (finite) resources.
Economic goods are resources that are scarce.
Free goods are resources which are not scarce
b) The distinction between renewable and non-renewable resources
Non renewable resources are resources which once used, cannot be replaced.
Renewable resources are resources which can be used over and over again as they have the ability
to be replaced.
A sustainable resource is similar to a renewable resource but it can be economically exploited in
such a way that it will not run out. (e.g. a forest is renewable but not sustainable as if its exploited
through logging it will not survive)
c) The importance of opportunity costs to economic agents (consumers, producers and
government)
The basic economic problem means that economic agents need to choices on how to allocate their
resources.
-Opportunity cost is the benefit lost from forgoing the next best alternative.
Consumers Opportunity cost is what is given up when deciding to spend on a particular item
Producers Opportunity cost may be focused on what capital they invest in
Government Opportunity cost may be which public service to invest in e.g. NHS or police
[Free goods have no opportunity cost]
1.1.4 PRODUCTION POSIBILITY FRONTEIRS
a) The use of production possibility frontiers to depict:
the maximum productive potential of an economy
, The PPF shows the different combinations of capital and consumer goods that the economy can
produce with the current level of resources available.
The maximum productive potential is anywhere on the curve.
opportunity cost (through marginal analysis)
When comparing A and B – the opportunity cost of producing 15 more
capital goods ( 75 – 60 ) is 20 consumer goods ( 70 – 50 ).
-The opportunity cost of producing 70 consumer goods is 20 capital
goods ( 80 – 60 ) this is because if they produced no consumer goods,
80 capital goods could have been produced.
Economic growth or decline
Economic growth means that the economy can produce more
of both capital and consumer goods, so the curve shifts
outwards.
-Growth can occur because:
Quantity of resources available has increased
Increased quality of resources such as
education
Economic decline means that the economy cannot
produce as much capital and consumer goods, this
caused the curve to shift inwards.
-Decline can occur because:
Natural disasters
Decreased quality/quantity of labour
War
Migration
Poor education
Efficient or inefficient allocation of resources
Possible and unobtainable production
A Efficient and possible production
B Possible but inefficient – underusing resources
C Unobtainable – not enough resources to
produce that amount
b) The distinction between movements along and shifts in production possibility curves,
considering the possible causes for such changes
Movement Caused by a change in the combination of goods produced
Shift Caused by change in productive potential of the economy
c) The distinction between capital and consumer goods
Capital goods Used in the production of other goods
Consumer goods Goods and services used by consumers in order to satisfy their wants and
needs
1.1.5 SPECIALISATION AND THE DIVISION OF LABOUR
a) Specialisation and the division of labour: reference to Adam Smith
The division of labour is a type of specialisation where production is split into different
tasks and specific people are given a task each which they become very efficient at
carrying out, it saves time from switching between multiple tasks
Specialisation occurs when an individual/firm/country produces a narrow range of goods
and over time develops a cost advantage in producing these. Due to this narrow focus, it
means the producer is reliant on trade in order to access other goods that they require.
Adam smith wrote about the division of labour is ‘The wealth of Nations’ and focused on
the study of a pin factory. He found that output was much lower when workers completed
all of the tasks for each pin, but when splitting production into a number of tasks and
1.1.1ECONOMICS AS A SOCIAL SCIENCE
a) Thinking like an economist: the process of developing models in economics, including the need
to make assumptions
The scientific method:
A scientist:
Puts forward (postulates) a theory
Gathers evidence to support or refute a theory
Accepts, modifies or refutes the theory
A law is a theory that gains universal acceptance
Simplification and assumptions:
Simple models are more useful
Simplification means that some factors have been omitted from the model
In some cases, factors are distorted to emphasise certain points in a model
Assumptions allow scientists to simplify the model in order to make the problem they are
looking at more manageable to solve.
b) The use of the ceteris paribus assumption in building models
Certeris paribus means ‘all other things remain equal’ and is used to help scientists to simplify a
problem.
c) The inability in economics to make scientific experiments
In economics it’s difficult to set up experiments to test a hypothesis and can be hard to
establish control groups
It’s also difficult to carry out experiments so that one factor is varied whilst the others are
kept constant.
Nearly all economics is based on the study of groups of individuals as this is more
predictable that looking at people’s behaviours individually
1.1.2 POSITIVE AND NORMATIVE ECONOMICS
a) Distinction between positive and normative economic statements
Positive statement a statement that can be proven to be true or false (objective)
Normative statement a statement which cannot be supported or refuted (Value
judgement/opinions)
b) The role of value judgements in influencing economic decision making and policy
Value judgements are assessments of how good or bad something is based on someone’s own
opinion and priorities.
They influence economic policies and decision making as different people have different views on
what is desirable for society (although they may all agree on how policies work)
1.1.3 THE ECONOMIC PROBLEM
a) The problem of scarcity – where there are unlimited wants and finite resources
The basis economic problem is the problem of scarcity – people have infinite wants but there are
limited (finite) resources.
Economic goods are resources that are scarce.
Free goods are resources which are not scarce
b) The distinction between renewable and non-renewable resources
Non renewable resources are resources which once used, cannot be replaced.
Renewable resources are resources which can be used over and over again as they have the ability
to be replaced.
A sustainable resource is similar to a renewable resource but it can be economically exploited in
such a way that it will not run out. (e.g. a forest is renewable but not sustainable as if its exploited
through logging it will not survive)
c) The importance of opportunity costs to economic agents (consumers, producers and
government)
The basic economic problem means that economic agents need to choices on how to allocate their
resources.
-Opportunity cost is the benefit lost from forgoing the next best alternative.
Consumers Opportunity cost is what is given up when deciding to spend on a particular item
Producers Opportunity cost may be focused on what capital they invest in
Government Opportunity cost may be which public service to invest in e.g. NHS or police
[Free goods have no opportunity cost]
1.1.4 PRODUCTION POSIBILITY FRONTEIRS
a) The use of production possibility frontiers to depict:
the maximum productive potential of an economy
, The PPF shows the different combinations of capital and consumer goods that the economy can
produce with the current level of resources available.
The maximum productive potential is anywhere on the curve.
opportunity cost (through marginal analysis)
When comparing A and B – the opportunity cost of producing 15 more
capital goods ( 75 – 60 ) is 20 consumer goods ( 70 – 50 ).
-The opportunity cost of producing 70 consumer goods is 20 capital
goods ( 80 – 60 ) this is because if they produced no consumer goods,
80 capital goods could have been produced.
Economic growth or decline
Economic growth means that the economy can produce more
of both capital and consumer goods, so the curve shifts
outwards.
-Growth can occur because:
Quantity of resources available has increased
Increased quality of resources such as
education
Economic decline means that the economy cannot
produce as much capital and consumer goods, this
caused the curve to shift inwards.
-Decline can occur because:
Natural disasters
Decreased quality/quantity of labour
War
Migration
Poor education
Efficient or inefficient allocation of resources
Possible and unobtainable production
A Efficient and possible production
B Possible but inefficient – underusing resources
C Unobtainable – not enough resources to
produce that amount
b) The distinction between movements along and shifts in production possibility curves,
considering the possible causes for such changes
Movement Caused by a change in the combination of goods produced
Shift Caused by change in productive potential of the economy
c) The distinction between capital and consumer goods
Capital goods Used in the production of other goods
Consumer goods Goods and services used by consumers in order to satisfy their wants and
needs
1.1.5 SPECIALISATION AND THE DIVISION OF LABOUR
a) Specialisation and the division of labour: reference to Adam Smith
The division of labour is a type of specialisation where production is split into different
tasks and specific people are given a task each which they become very efficient at
carrying out, it saves time from switching between multiple tasks
Specialisation occurs when an individual/firm/country produces a narrow range of goods
and over time develops a cost advantage in producing these. Due to this narrow focus, it
means the producer is reliant on trade in order to access other goods that they require.
Adam smith wrote about the division of labour is ‘The wealth of Nations’ and focused on
the study of a pin factory. He found that output was much lower when workers completed
all of the tasks for each pin, but when splitting production into a number of tasks and
