Nature of Economics (1.1)
Economics as a Social Science
• All sciences make assumptions when developing models which makes it manageable
to solve
• Adapt ‘Ceteris Paribus’ – all other things being equal
o In demand – economists consider how price affects amount demanded
o Assume all other factors remain unchanged such as price of other goods
Positive and Normative Statements
• Positive statements are objective statements that are capable of being tested.
• Normative statements are subjective statements. They are NOT capable of being
tested
o Include words – should, ought, better
• Positive statements are important in being able to put together a normative
statement which is useful in influencing policies
The Economic Problem
• Resources are scarce – there are unlimited wants with finite resources
• Scarce goods are called economic goods
• Free Goods have no scarcity such as air
• Economic goods give rise to the basic economic problem
o Resources have to be allocated
• Needs to be decided
o Who to produce for
o What to produce
o How to produce it
Economic Resources
• Renewable Resources – resources replenished faster than rate of extraction
• Non renewable resources – once exploited – cannot be replaced
Opportunity Cost
• Benefit lost from the next best alternative is called the opportunity cost
• Consumers – opportunity cost is what has to be given up when spending on an item
o Opp. cost of 1 chocolate bar is 2 bags of crisps
• Producers – opp. cost of buying a machine might be wages of workers
• Government – opp. cost of buying a fighter plane might be 2 schools
Factors of Production
• These factors are
o Land
o Labour
o Capital
o Enterprise
• If an economy has a large quantity and a good quality of factors, they can produce a
lot of goods and services
, Production Possibility Frontiers
• The PPF shows how resources are allocated in an economy
• It shows the maximum productive potential of an economy when goods are used
fully and efficiently
• Economy cannot be on a point outside the curve because it exceeds maximum
efficiency – inefficient if inside the curve
• As you move along, opportunity cost is incurred
Concave
• Concave due to diminishing marginal returns – not all
factor inputs are suited to producing different goods
and services
• If a straight line – perfect factor substitution
• If moves from B – C resources are diverted away from
wine production to cotton production
• At the start – least efficient resources are transferred
but as more and more transferred, opportunity cost
increases
Economic Growth and Shifts in PPF
• When PPF shifts outwards – economic growth
• Economic growth is the expansion of the productive
capacity of an economy
• Can be caused by increase in quantity of factors of
production
• Increase in quality of factors of production
• Shifts inwards due to depletion of resources/ natural
disasters
Capital Goods vs Consumer Goods
• Capital Goods are goods that are used in the production of other goods
• Consumer goods are goods that satisfy needs and wants directly
Specialisation and Division of Labour
• Specialisation – the production of a limited range of goods and services by an
individual/ firm/ country in cooperation with others so a complete range of goods
are produced
• Specialisation by individuals is called the division of labour
o Adam Smith stated that due to the long process of production – productivity
could increase if production process was split up into tasks due to repetition
of their tasks
Advantages
ü Increased productivity – increase in outputs so higher profits
ü More goods availale as more specialised goods are available for export
ü Less training costs
ü Higher quality foods and services
Economics as a Social Science
• All sciences make assumptions when developing models which makes it manageable
to solve
• Adapt ‘Ceteris Paribus’ – all other things being equal
o In demand – economists consider how price affects amount demanded
o Assume all other factors remain unchanged such as price of other goods
Positive and Normative Statements
• Positive statements are objective statements that are capable of being tested.
• Normative statements are subjective statements. They are NOT capable of being
tested
o Include words – should, ought, better
• Positive statements are important in being able to put together a normative
statement which is useful in influencing policies
The Economic Problem
• Resources are scarce – there are unlimited wants with finite resources
• Scarce goods are called economic goods
• Free Goods have no scarcity such as air
• Economic goods give rise to the basic economic problem
o Resources have to be allocated
• Needs to be decided
o Who to produce for
o What to produce
o How to produce it
Economic Resources
• Renewable Resources – resources replenished faster than rate of extraction
• Non renewable resources – once exploited – cannot be replaced
Opportunity Cost
• Benefit lost from the next best alternative is called the opportunity cost
• Consumers – opportunity cost is what has to be given up when spending on an item
o Opp. cost of 1 chocolate bar is 2 bags of crisps
• Producers – opp. cost of buying a machine might be wages of workers
• Government – opp. cost of buying a fighter plane might be 2 schools
Factors of Production
• These factors are
o Land
o Labour
o Capital
o Enterprise
• If an economy has a large quantity and a good quality of factors, they can produce a
lot of goods and services
, Production Possibility Frontiers
• The PPF shows how resources are allocated in an economy
• It shows the maximum productive potential of an economy when goods are used
fully and efficiently
• Economy cannot be on a point outside the curve because it exceeds maximum
efficiency – inefficient if inside the curve
• As you move along, opportunity cost is incurred
Concave
• Concave due to diminishing marginal returns – not all
factor inputs are suited to producing different goods
and services
• If a straight line – perfect factor substitution
• If moves from B – C resources are diverted away from
wine production to cotton production
• At the start – least efficient resources are transferred
but as more and more transferred, opportunity cost
increases
Economic Growth and Shifts in PPF
• When PPF shifts outwards – economic growth
• Economic growth is the expansion of the productive
capacity of an economy
• Can be caused by increase in quantity of factors of
production
• Increase in quality of factors of production
• Shifts inwards due to depletion of resources/ natural
disasters
Capital Goods vs Consumer Goods
• Capital Goods are goods that are used in the production of other goods
• Consumer goods are goods that satisfy needs and wants directly
Specialisation and Division of Labour
• Specialisation – the production of a limited range of goods and services by an
individual/ firm/ country in cooperation with others so a complete range of goods
are produced
• Specialisation by individuals is called the division of labour
o Adam Smith stated that due to the long process of production – productivity
could increase if production process was split up into tasks due to repetition
of their tasks
Advantages
ü Increased productivity – increase in outputs so higher profits
ü More goods availale as more specialised goods are available for export
ü Less training costs
ü Higher quality foods and services
