AS level
Economics
, Basic economic ideas and resource allocation
Economics as a social science
Model → a simpli ed view of reality used to explain economic problems. They can be used again and again
to test a theory in di erent contexts.
positive and normative statements
Positive statements → based on facts or actual evidence
Normative statements → based on an economist’s opinion or value judgement and which cannot be
proven
meaning of the term ceteris paribus
Latin phrase meaning ‘other things are equal / unchanged.’ This is used by economists to model the e ects
of one change at a time.
‘The margin’ (the current level of any activity: consumption/production of g/s) → involves analysing
microeconomic decisions. It suggests that a small change in one variable will lead to further (small) changes
in other variables. Used to predict what the impact of a change might be. Decision making by consumers,
rms and governments is based on choices at the margin.
importance of time periods
Short run → when a rm can change at least 1 but not all factor inputs
Long run → all FOP are variable but with 1 constant, such as the state of technology
Very long run → all key inputs into production are variable.
factors of production
Land - natural resources in an economy. ● reward → rent
● surface of the earth, lakes, rivers, ● Quantity: depends on geographical region
forests, mineral deposits, climate ● quality: depends on soil type, fertility, weather
etc. ● mobility: geographically immobile, occupationally mobile
Labour - human resources ● reward → wages/salaries.
● skills of workers/labourers. ● quantity: depends on num. of workers available (in uenced by
population, age structure, number of hours they work.)
● quality: depends on skills, education, quali cation of labour.
● mobility: occupationally mobile if they have the right quali cations.
geographically mobility depends on transport facilities, costs, housing
facilities, family and personal priorities etc
Capital - all the man-made resources used ● reward → interest
to nish making economic goods ● quantity: depends on demand for goods and services, how well
● Machinery, buildings, tools businesses are doing, the economic state of the country
● quality depends on how many good quality products can be produced
using the given capital. E.g - using mechanisation and technology
rather than manual labour
, ● mobility depends on nature and use of the capital.
an o ce building is geographically immobile but occupationally
mobile. But a pen is geographically and occupationally mobile.
Enterprise - involves taking risks and ● reward → pro t (from business)
organising FOPs ● quantity: dependents on entrepreneurial skills (risk-taking,
● Entrepreneur- individual seeking innovation, e ective communication), education, corporate taxes,
business opportunities who’s regulations
willing to take risks to make a rm ● Quality: depends on how well it is able to satisfy & expand
run successfully demand in cost-e ective and innovative ways.
● Mobility: highly mobile.
the difference between human capital and physical capital
Physical capital → FOP like machinery, buildings, infrastructure. Quality + quantity is considered the
most important source of economic growth in low + lower - middle income countries.
Human capital → value of labour in contributing to the productive potential or future growth in an
economy. Covers skills, knowledge, experience and anything else that can contribute to an inc. in growth.
specialisation and the division of labour
Specialisation → process by which individuals, rms and economies concentrate on producing those g + s
where they have an advan over others.
Advantages Disadvantages
More is produced at a high quality and - no one is self-su cient, meaning relying on one-another to satisfy
more e ciently. needs is inevitable.
- Pace of tech advancement means that specialist skills may become
redundant, so individuals must be multi-skilled and exible to move
between occupations.
- Changes in consumer wants can mean a country’s goods are no
longer required in the same quantity → unemployment
Division of labour
Where a manufacturing process is split into a sequence of individual tasks
Advantages Disadvantages
- Faster, cheaper production - Dissatisfaction and monotony. Workers may also
- Workers become more specialised → inc in become deskilled.
output per worker
- Improved quality of product
the role of the entrepreneur →
, the market economy
- Market (price) mechanism → resource allocation decisions are taken by individual producers and
consumers with no govt. intervention.
- How the price mechanism works: excess supply → fall in price → rms less willing to
supply → increase in price → more rms willing to supply → increase in supply
- economic system where decisions are taken through the market mechanism. Allocation driven by
forces of demand and supply. In a market economy, there is little to no government intervention.
The government is involved ONLY when the price mechanism fails to allocate resources e ectively
(market failure). They seek to regulate situations to prevent rms using their power to control the
market for excessive gain.
the planned economy
- Resources are state owned and allocated by a central body. Price mechanism is not used; basic foods
are highly subsidised by the govt. to maintain low prices, which consequently leads to a shortage.
The objective is to achieve a high rate of growth, and reach a maximum productive potential. This
is done through production targets which focus mainly on the growth of agriculture and
manufacturing. E.g - Cuba, North Korea
the mixed economy
- Privatisation → change in ownership from public to private sector
- Emerging economy → making quick progress towards becoming a high income economy
- Asian tiger economy → export-led, high growth economies
- Both market forces and government are involved in resource allocation decisions mainly through
the market mechanism.
- E.g - Privatisation has been the key for emerging economies. The restructuring of the
economy (perestroika) of former soviet states led to huge inward ows of foreign
investment, esp. in manufacturing + retail sectors.
- E.g - Asian Tiger economies (Singapore, Hong Kong, China): Focus strongly on the
market to allocate resources. Free enterprise encouraged. China’s growth can be linked to
controlled management of the economy yet the clear opportunities for foreign investors +
domestic companies to in uence allocation of resources.
the production possibility curve
- Quality and quantity of fop determines an economy’s production possibilities.
- PPC → maximum level of output an economy can achieve, given its current resources + state of
technology.
the shape of the PPC
- Steep PPC → in order to produce more of good A, an inc. amount of
productive capacity for making good B is sacri ced.
- Flat PPC → each good B that is sacri ced gives a much smaller increase in
Economics
, Basic economic ideas and resource allocation
Economics as a social science
Model → a simpli ed view of reality used to explain economic problems. They can be used again and again
to test a theory in di erent contexts.
positive and normative statements
Positive statements → based on facts or actual evidence
Normative statements → based on an economist’s opinion or value judgement and which cannot be
proven
meaning of the term ceteris paribus
Latin phrase meaning ‘other things are equal / unchanged.’ This is used by economists to model the e ects
of one change at a time.
‘The margin’ (the current level of any activity: consumption/production of g/s) → involves analysing
microeconomic decisions. It suggests that a small change in one variable will lead to further (small) changes
in other variables. Used to predict what the impact of a change might be. Decision making by consumers,
rms and governments is based on choices at the margin.
importance of time periods
Short run → when a rm can change at least 1 but not all factor inputs
Long run → all FOP are variable but with 1 constant, such as the state of technology
Very long run → all key inputs into production are variable.
factors of production
Land - natural resources in an economy. ● reward → rent
● surface of the earth, lakes, rivers, ● Quantity: depends on geographical region
forests, mineral deposits, climate ● quality: depends on soil type, fertility, weather
etc. ● mobility: geographically immobile, occupationally mobile
Labour - human resources ● reward → wages/salaries.
● skills of workers/labourers. ● quantity: depends on num. of workers available (in uenced by
population, age structure, number of hours they work.)
● quality: depends on skills, education, quali cation of labour.
● mobility: occupationally mobile if they have the right quali cations.
geographically mobility depends on transport facilities, costs, housing
facilities, family and personal priorities etc
Capital - all the man-made resources used ● reward → interest
to nish making economic goods ● quantity: depends on demand for goods and services, how well
● Machinery, buildings, tools businesses are doing, the economic state of the country
● quality depends on how many good quality products can be produced
using the given capital. E.g - using mechanisation and technology
rather than manual labour
, ● mobility depends on nature and use of the capital.
an o ce building is geographically immobile but occupationally
mobile. But a pen is geographically and occupationally mobile.
Enterprise - involves taking risks and ● reward → pro t (from business)
organising FOPs ● quantity: dependents on entrepreneurial skills (risk-taking,
● Entrepreneur- individual seeking innovation, e ective communication), education, corporate taxes,
business opportunities who’s regulations
willing to take risks to make a rm ● Quality: depends on how well it is able to satisfy & expand
run successfully demand in cost-e ective and innovative ways.
● Mobility: highly mobile.
the difference between human capital and physical capital
Physical capital → FOP like machinery, buildings, infrastructure. Quality + quantity is considered the
most important source of economic growth in low + lower - middle income countries.
Human capital → value of labour in contributing to the productive potential or future growth in an
economy. Covers skills, knowledge, experience and anything else that can contribute to an inc. in growth.
specialisation and the division of labour
Specialisation → process by which individuals, rms and economies concentrate on producing those g + s
where they have an advan over others.
Advantages Disadvantages
More is produced at a high quality and - no one is self-su cient, meaning relying on one-another to satisfy
more e ciently. needs is inevitable.
- Pace of tech advancement means that specialist skills may become
redundant, so individuals must be multi-skilled and exible to move
between occupations.
- Changes in consumer wants can mean a country’s goods are no
longer required in the same quantity → unemployment
Division of labour
Where a manufacturing process is split into a sequence of individual tasks
Advantages Disadvantages
- Faster, cheaper production - Dissatisfaction and monotony. Workers may also
- Workers become more specialised → inc in become deskilled.
output per worker
- Improved quality of product
the role of the entrepreneur →
, the market economy
- Market (price) mechanism → resource allocation decisions are taken by individual producers and
consumers with no govt. intervention.
- How the price mechanism works: excess supply → fall in price → rms less willing to
supply → increase in price → more rms willing to supply → increase in supply
- economic system where decisions are taken through the market mechanism. Allocation driven by
forces of demand and supply. In a market economy, there is little to no government intervention.
The government is involved ONLY when the price mechanism fails to allocate resources e ectively
(market failure). They seek to regulate situations to prevent rms using their power to control the
market for excessive gain.
the planned economy
- Resources are state owned and allocated by a central body. Price mechanism is not used; basic foods
are highly subsidised by the govt. to maintain low prices, which consequently leads to a shortage.
The objective is to achieve a high rate of growth, and reach a maximum productive potential. This
is done through production targets which focus mainly on the growth of agriculture and
manufacturing. E.g - Cuba, North Korea
the mixed economy
- Privatisation → change in ownership from public to private sector
- Emerging economy → making quick progress towards becoming a high income economy
- Asian tiger economy → export-led, high growth economies
- Both market forces and government are involved in resource allocation decisions mainly through
the market mechanism.
- E.g - Privatisation has been the key for emerging economies. The restructuring of the
economy (perestroika) of former soviet states led to huge inward ows of foreign
investment, esp. in manufacturing + retail sectors.
- E.g - Asian Tiger economies (Singapore, Hong Kong, China): Focus strongly on the
market to allocate resources. Free enterprise encouraged. China’s growth can be linked to
controlled management of the economy yet the clear opportunities for foreign investors +
domestic companies to in uence allocation of resources.
the production possibility curve
- Quality and quantity of fop determines an economy’s production possibilities.
- PPC → maximum level of output an economy can achieve, given its current resources + state of
technology.
the shape of the PPC
- Steep PPC → in order to produce more of good A, an inc. amount of
productive capacity for making good B is sacri ced.
- Flat PPC → each good B that is sacri ced gives a much smaller increase in
