Edexcel A-Level Economics Notes | 1.1

1.1.1 The Nature of Economics

  • Economists need to make assumptions and develop models to make decisions.
  • Ceteris paribus: hold everything else constant.
  • Economists cannot conduct scientific experiments.

1.1.2 Positive and Normative Statements

  • Positive statements can be tested.
  • Normative statements are based on opinion.
  • Economic decisions are often based on value judgement (an educated opinion of what is right or wrong).

1.1.3 The Economic Problem

  • The basic economic problem is scarcity. There are unlimited wants but limited resources.
  • Renewable resources can be replenished at the same rate they are being used.
  • Non-renewable resources cannot be replaced naturally.
  • Opportunity cost: the value of the next best alternative foregone.

1.1.4 Production Possibility Frontiers

  • Any point on the curve shows the maximum productive potential of an economy (efficient allocation of resources).
  • To produce more of Good A, we have to give up some of Good B. This is opportunity cost. The more of Good A we produce, the greater the opportunity cost increases, as we are giving up more of Good B as the curve becomes cheaper.
  • Economic growth or decline can be shown by the curve shifting in or out.
  • A shift in the PPF can be caused by better technology, more resources or greater productivity.
  • Any point inside the curve is an inefficient allocation of resources.
  • Any point outside the curve is unattainable.
  • Capital goods: used to produce other goods and services.
  • Consumer goods: purchased for personal use and consumption.

1.1.5 Specialisation and the Division of Labour

  • Specialisation is when an individual/ firm/ nation focuses on producing a specific good or service.
  • Division of labour is when an individual only completes a specific task in a large production process.
  • Specialisation can be used to organise production. 😄lower cost, economies of scale, greater quality, greater quantity. 😦boring and repetitive tasks, structural unemployment, vulnerable to economic shocks.
  • Specialisation can encourage trade. 😄each country has their own comparative advantage which can be exploited, greater living standards across the world. 😦 income inequality, vulnerable to economic shocks.
  • Money is a medium of exchange, store of value, measure of value, and a method of deferred payment.

1.1.6 Free Market Economies, Mixed Economy and Command Economy

  • In a free market economy, there is no government intervention. Price and quantity are determined by market forces (supply and demand - Adam Smith's Invisible Hand).
  • 😄: no risk of government failure, efficient (consumer and producer surplus)
  • 😦: risk of market failure (complete and partial), inequality (goods and services are only allocated to those who are willing and able to pay).
  • In a command economy, the government allocates all resources (Karl Marx and Hayek).
  • 😄: equality
  • 😦: risk of government failure
  • In a mixed economy, there is some goverment intervention. They are a combination of a free market and command economy.
  • Role of state in a mixed economy: government intervention.