Download Topic 1.1 Nature of economics student version

The Economic Problem
1.1 Unit content
Six topics:
1.1.1 Economics as a social science
1.1.2 Positive and normative economic
statements
1.1.3 The economic problem
1.1.4 Production possibility frontiers
1.1.5 Specialisation and the division of
labour
1.1.6 Free market economies, mixed
economy and command economy
1.1.1 Economics as a social science - syllabus
Students should be able to:
• Explain the process of thinking like an
economist: the process of developing
models in economics, including the need
to make assumptions
• Define ‘ceteris paribus’ and explain its
use in building models
• Explain why economists are unable to
carry out scientific experiments
1.1.1 Introduction
What is economics?
Economics is usually divided into two parts:
microeconomics and macroeconomics.
What is the difference?
1.1.1 Models and assumptions
Economics is a social science:
Economists develop models.
What is a model?
But models require assumptions.
1.1.1 What are the assumptions?
“Free school meals for children at infant
school will reduce the cost in the future for
the NHS”
Assumptions:
1.1.1 Ceteris paribus
Ceteris paribus is a _______ phrase
meaning “other things being equal”.
It is used in economics when we focus on
changes in one variable while holding other
influences constant
1.1.1 Why can’t economists use scientific experiments?
1.1.2 Positive and normative economic statements - syllabus
Students should be able to:
• Distinguish between positive and
normative economic statements
• Assess the role of value judgements in
influencing economic decision making
and policy
1.1.2 Value judgements
Value judgements are statements or
opinions that are not testable (cannot be
verified) and depend on the views of the
individual and the values they hold.
E.g.
1.1.2 Normative statements
Normative statements are based on value
judgements which cannot be proven or
tested as true or false.
E.g.
So normative statements depend on
___________________________
Value judgements influence economic
decision making and policy.
1.1.2 Positive statements
Positive statements are statements that
can be tested against real data. Positive
statements are more objective and
scientific.
E.g.
Note: positive statements can be tested
and possibly found to be _________
1.1.2 Positive and normative statements
_______ statements are assertions of a fact
They can be tested and proved or disproved.
They are value free and are scientific or
objective.
________ statements are value judgements
They cannot be tested as true or false. They
often contain words such as fair or unfair.
Remember to read the news – look for
examples!
1.1.3 The economic problem - syllabus
Students should be able to:
Explain the problem of scarcity – where
there are unlimited wants and finite
resources
• Distinguish between renewable and nonrenewable resources
• Evaluate the importance of opportunity
costs to economic agents (consumers,
producers and government)
•
1.1.3 Needs and wants
What do you need?
What do you want?
1.1.3 The Economic Problem and opportunity cost
The basic economic problem is that there
are __________ wants and ____________
resources.
Who does this problem affect?
___________________________________
Resources are scarce (finite or limited).
If resources (e.g. money) are used for one
thing (e.g. buying a ___________) then they
cannot be used for something else (e.g.
buying a ___________).
This is called opportunity cost.
1.1.3 Definition and example of opportunity cost
So opportunity cost is the next best
alternative foregone (given up) when an
economic decision is made.
Note: it is only the next best alternative not a
range of alternatives.
E.g. if the government builds a new toll road
for £Xmillion pounds the opportunity cost
could be ____________________________
Drivers will have to pay £10 to use the road
and their opportunity cost could be _______
______________________________
1.1.3 Marginal analysis
Marginal cost (or benefit) analysis is based
on the idea that people take decisions by
considering the cost (or benefit) of one more
item.
E.g. the benefit of another bag of crisps is
_______ than the first bag. When firms
manufacture a large number of the same
good they will find the cost of producing one
more tends to _________ but it will
eventually ___________
1.1.3 Economics agents
In economics we tend to talk about three
groups of economic agents: households,
firms (producers) and the government.
If is often a good idea to evaluate how
these three will be affected.
1.1.3 Factors of production
Factors of production are the economic
resources used for producing goods and
services. What do you need to produce
goods? (Hint - there are four groups)
1.1.3 Examples of factors of production
1.
Land includes
2.
Labour includes
3.
Capital:
4.
Enterprise:
1.1.3 Capital
NOTE capital has different meanings but
all imply that capital can be used to
generate income.
So cash or a bank loan would not count as
capital (in economic terms); it is what the
money is used for which is the factor of
production.
1.1.3 Resources
A resource is a factor of production used
to produce goods and services.
There is a wide range of resources ranging
from renewable resources (things which
can be replenished e.g. ______________)
to non-renewable resources (e.g. _______
___________).
1.1.3 Renewable versus non-renewable resources
Renewable resources are also called
sustainable resources.
What is a sustainable resource? E.g.?
Non-renewable resources are also known
as finite resources (or finite economic
resources).
E.g.
1.1.3 Free goods versus economic goods
Free goods are those which are not scarce
and they have no opportunity cost.
E.g.
Economic good are goods which are
scarce and have an ______________ cost
1.1.4 Production possibility frontiers - syllabus
Students should be able to:
Use PPFs to depict opportunity cost,
economic growth and the efficient (or
inefficient) allocation of resources
• Distinguish between movements along
and shifts in PPFs and assess possible
causes of such changes
• Distinguish between capital and
consumer goods
•
1.1.4 The production possibility frontier
A production possibility frontier shows the
different combination of economic goods
which an economy is able to produce if all
resources are used.
For example consider an island which can
only produce wine or grain. In a given
period of time islanders can choose to
produce only wine, only grain or a
combination of the two according to the
table on the next slide:
1.1.4 Example of PPF
Wine (thousands of
bottles)
Grain (thousands of
bushels)
0
15
5
14
9
12
12
9
14
5
15
0
1.1.4 PPF questions
The PPF shows the different combinations
of output for this island if all resources are
used to their full potential.
What would happen at point a?
What would happen at point b?
1.1.4 PPF and productive efficiency
Points on the PPF occur when the country
is using its resources efficiently. This is
called productive efficiency. It is producing
as much as physically and technologically
possible given the technology at the time.
Points on the PPF do not necessarily
maximise economic welfare but they do
show that resources are not being _______
1.1.4 PPF summary
What does a PPF show?
1.1.4 PPF and opportunity cost
The PPF also illustrates the idea of choice
and opportunity cost. What does a movement
along the PPF show?
The PPF is curved and so moving along does
not show a constant opportunity cost –
opportunity cost is ____________
1.1.4 Straight line PPF
Sometimes PPFs are shown as straight lines.
If they spent half their time on each what would A
produce? What would B produce? What would the
total production be?
When would output
be maximised?
1.1.4 PPF and economic growth
Why might the economy be able to shift to
the right of its PPF in the future?
1.1.4 Reasons for economic growth
How can an economy grow?
1.1.4 Economic growth – new or more resources
How could an economy ‘find’ new
resources?
How could an economy improve the
quantity of resources?
1.1.4 PPF and inward shifts
When might an economy shift to the left of
its PPF? Sketch this.
1.1.4 PPF – change in shape
If efficiency and productivity increases in
the production of one good rather than all
goods then the PPF can change shape.
E.g. technological improvements can mean
that one good can be produced more
easily without impacting on the other.
Sketch this
1.1.4 Consumer and capital goods
Often a PPF is used to show the different
combinations of consumer goods and
capital goods that the whole economy can
produce.
Consumer goods are items used by
consumers to meet their needs or wants
(e.g. ___________). They are also known
as final goods.
They can be divided into consumer durable
goods and non-durable consumer goods.
1.1.4 Capital goods and economic growth
Capital goods are goods used to produce
other goods (e.g. ____________________).
They are also known as producer goods or
intermediate goods.
Capital goods are very important for
economic growth as they are used to
increase the future capacity of the economy.
Why is education a capital good?
1.1.4 Investment and consumption
The purchase of capital goods (by firms) is
known as investment.
The purchase of consumer goods (by
individuals or households) is called
consumption.
In general, if an economy decides to
produce capital goods rather than
consumer goods, will the economy grow at
a faster or slower rate?
1.1.4 Marginal cost
The marginal cost of a good is the
opportunity cost of producing one more
unit of it.
This is not the same as the total
opportunity cost.
1.1.5 Specialisation and the division of labour - syllabus
Students should be able to:
• Define specialisation and the division of
labour (with reference to Adam Smith)
• Assess the advantages and disadvantages
of specialisation and the division of labour
• Analyze the advantages and disadvantages
of specialising in production
• Evaluate the functions of money (as a:
medium of exchange, measure of value,
store of value, method of deferred payment)
1.1.5 The point of economic activity
What is an economy? In other words, what
is the purpose of economic activity?
An economy and the central purpose of
economic activity is to produce g_____ and
s_______ to provide what we need and
want.
What does economic activity include?
1.1.5 Division of labour and specialisation
What is division of labour?
What is specialisation?
1.1.5 What are the advantages and disadvantages of
division of labour and specialisation?
1.1.5 What are the functions of money?
•
A medium of exchange –
•
A measure of value –
•
A store of value –
•
A method of deferred payment – e.g.
1.1.6 Free market, mixed and command economy - syllabus
Students should be able to:
• Distinguish between free market, mixed
and command economies (with reference
to Adam Smith, Friedrich Hayek and Karl
Marx)
• Assess the advantages and
disadvantages of a free market economy
and a command economy
• Evaluate the role of the state in a mixed
economy
1.1.6 Economic systems
An economic system tries to answer three
questions:
1. What should be produced?
2. How should it be produced?
3. For whom should it be produced?
If we could organise a system that would
meet wants and needs more effectively
then overall economic welfare would
increase.
1.1.6 Free market and mixed economies
Free market economies are where resources
are allocated by market forces (demand and
supply and the price mechanism).
Command economies are where resources
are allocated by the state.
Mixed economies are where resources are
partly allocated by the market (price
mechanism) and partly by the government
What are the advantages and disadvantages
of free market and mixed economies?
Why are there mixed economies?