1. Introduction to Economies (Peter cramp)

market economies: how is the question 'what goods and services are to be produced?' answered in a market economy?

- answered by the interaction of supply and demand in the price mechanism - goods that generate high levels of satisfaction or utility have high demand -> high demand forces the rice of these goods up, giving an incentive to profit maximizing producers to extend the supply of them.

Production possibility frontiers (PPFs): Draw a PPF of an economy which allocates all its resources to providing either manufactured goods or services.

- refer

Mixed economies: economic activity produced by other economic agents other than the government constitutes what sector?

The private sector

Opportunity cost: What opportunity costs may exist for workers?

Workers must decide if it is worth sacrificing leisure time so that they earn extra income to raise their standard of living.

specialisation (the division of labour): What do we need for specialisation to work well?

an efficient means of exchanging products and services with those who have other specialisations (the market economy serves this purpose well)

Opportunity cost: What opportunity costs may exist for consumers?

an individual/ consumer does not have an unlimited income and must therefore make economic choices on a daily basis. The opportunity cost to purchase a video game may be the foregone opportunity to buy a cinema ticket for example.

Normative and Positive economics: Define positive economic statement

an objective statement. A statement of fact or a testable hypothesis (a claim for which evidence to support or reject the claim can be gathered)

Normative and Positive economics: Define normative statements

an opinion or view (a value judgement about what ought to be, or should be, done)

market economies: define 'market'

any place in which a buyer and seller interact (does not imply face-face interaction, think about ebay for instance)

Economic agents: who are the main agents/ participants in the economy?

consumers workers firms government

market economies: What do consumers maximize?

consumers try to maximize their satisfaction or utility from consumption, subject to the constraint of the income available to them.

Factors of production (economic resources): how can goods be further subdivided?

durable (such as furniture) non-durable (such as food)

Economic goods and free goods: define economic goods

economic goods are those that use scarce resources when they are produced and therefore carry opportunity cost

Production possibility frontiers (PPFs): The increasing opportunity cost can be explained by what?

explained by the fact that not all resources are equally suited to the provision of manufactured goods and services - the factors of production used in increasing manufactured output from 75 to 98 units are far better suited to the provision of services and this explains why the output of manufactured goods only increases by a relatively small amount.

Production possibility frontiers (PPFs): Points within the PPF show what?

factors of production are not fully employed and/ or are being used inefficiently

Factors of production (economic resources): How can output be subdivided?

goods and services

Production possibility frontiers (PPFs): What does a PPF illustrate?

illustrates what an economy can produce using the resources of land, labour, capital and enterprise.

market economies: in a market economy, resources are allocated through the interactions of ............ and ...............

in a market economy, resources are allocated through the interactions of individuals and firms.

Factors of production (economic resources): Each factor of production earns a reward known as a factor payment. What are the factor payments of.. 1. land 2. labour 3. capital 4. enterprise

land = rent labour = wages and salaries capital = interest enterprise = profit

Production possibility frontiers (PPFs): points outside of the PPF show what?

levels of production not yet attainable given the current level of resources in the economy

market economies: firms try to maximize what?

maximize profits

market economies: in market theory, it is assumed that economic agents adopt what kind of behavior?

maximizing behaviour

Factors of production (economic resources): When economists look at economic activity, do they only consider output that is traded?

no they take a broad view of economic activity. For instance, housework and DIY could be included because they involve combining resources to produce valuable output, even when that output is not traded.

Production possibility frontiers (PPFs): we use PPFs to illustrate ............ cost

opportunity cost

specialisation (the division of labour): specialisation is a means of avoiding the need to be self-sufficient, thereby increasing ........... and ................

output living standards

market economies: the role of the government is limited to what things?

protecting people's rights to their property issuing notes and coins

market economies: it is also assumed that economic agents are ...............

rational - individuals choose activities which maximize their utility, acting out of rational decision making.

Economists must attempt to reconcile the problem of ........... and ...........

scarce resources infinite desires

specialisation (the division of labour): Specialisation is a means of avoiding the need to be ...................

self-sufficient

Production possibility frontiers (PPFs): Points on the PPF show what?

show maximum production when all economic resources are fully employed and used efficiently

market economies: workers try to maximize their income subject to what?

subject to the constraint of wanting to enjoy leisure time

Production possibility frontiers (PPFs): - what is the opportunity cost of the 55 unit increase in manufactured goods?

the 38 units of services that have been foregone

Production possibility frontiers (PPFs): - what is the opportunity cost of this small 23 unit rise in manufactured output?

the 40 units of services that have been foregone

scarcity and the economic problem: define the basic economic problem and explain what it means.

the basic economic problem is scarcity of resources. This occurs because society's finite resources are scarce relative to infinite needs and wants.

Production possibility frontiers (PPFs): The concavity of the frontier indicates what? (Think about what it shows in terms of opportunity cost)

the concavity illustrates that the opportunity cost of manufactured goods in terms of services increases as more manufactured goods are produced

market economies: how is the question 'for whom are they produced' answered in a market economy?

the distribution of income. - those with more income consume more goods than those with less income.

Factors of production (economic resources): The finite resources used to produce output can be divided into four groups. Collectively, they are called what?

the factors of production

Opportunity cost: define opportunity cost

the next best alternative foregone

Economic goods and free goods: What is a free good?

the only major resource on earth that is not scarce is the air we breathe; known as a free good

Mixed economies: the government sector of the economy is known as what?

the public sector

Define the 'basic economic problem'

there are only a limited number of resources available to satisfy our needs and wants.

market economies: how is the question of 'How are they produced?' answered in a market economy?

this is largely answered by firms. - firms seek the lowest cost methods of production in order to maximize profits.

Production possibility frontiers (PPFs): What happens when the economy specialises even further, increasing manufactured output from 75 units to 98 units?

this leads to a relatively large fall in the provision of services from 60 to 20 units.

Factors of production (economic resources): What is the central purpose of economic activity?

to combine factors of production to produce output for consumption.

Mixed economies: when might governments intervene in markets?

when markets fail to produce desirable outcomes (market failures)

Opportunity cost: what opportunity costs may exist for the government?

whether to spend on the NHS or on education

Production possibility frontiers (PPFs): - describe what happens on the PPF when the economy decides to specialise in producing manufactured goods, increasing output from 20 to 75 units.

would lead to a relatively small fall in the production of services from 98 to 60 units.

Factors of production (economic resources): By satisfying needs and wants, the output produced generates ..... and thus increases .........

By satisfying needs and wants, the output produced generates satisfaction and thus increases economic welfare.

Opportunity cost: What opportunity costs exist for firms?

Firms may have to decide whether to use profits to invest in new machinery or to increase dividends to shareholders

Factors of production (economic resources): Define each factor of production (land, labour, capital, enterprise)

Land - natural resources of the planet. Labour - Human resources used to produce goods and services. Capital - Items used by labour in the production process e.g. factories, machines, roads and computers. These capital items allow the production of goods and services in future time periods. Enterprise - The individual, or group of individuals, prepared to take a risk and combine the three other factors of production.

What do we mean by 'needs and wants'?

Man's physical needs are limited; food, water, clothing, warmth and shelter. Man's wants are unlimited (even a person with great wealth and possessions is likely to want more)

Shifts in the production possibility frontier: Let us say that a new computerised production process only impacts the manufacturing sector, and not the services sector. How would you show this on a PPF?

The PPF shifts, but only for manufactured output. the productive potential of the service sector remains unchanged.

Shifts in the production possibility frontier: - Outline two possible causes for an outward shift in the PPF

1. An increase in the quantity of the factors of production (shift may have originated from the discovery of new energy supplies, an increase in the active workforce or investment in new machinery) 2. Improvements in efficiency or new technology (an increase in the productivity of factors of production allows more output to be produced. The IT revolution of the last few years has caused the PPFs of many economies to shift outwards.

specialisation (the division of labour): What are the potential disadvantages of specialisation? (2)

1. Boredom for workers engaged in repetitive tasks, which may in turn make them less productive. 2. Regions or countries that specialise are dependent on other regions or countries for obtaining other products and services. This could cause problems in the event of trade disputes or wars between countries.

Factors of production (economic resources): What are the 4 main factors of production?

1. Land 2. Labour 3. Capital 4. Enterprise

scarcity and the economic problem: the basic economic problem means that decisions must be made by society, or by individuals, about how to allocate resources. This involves answering what 3 key questions?

1. What goods and services are to be produced? 2. How are they produced? 3. For whom are they produced?

specialisation (the division of labour): Specialisation allows greater output. Why? (4)

1. Workers can be assigned to tasks to which they are well suited 2. Workers 'learn by doing' and efficiency improves through experience 3. production line methods save time changing tools 4. production line methods may make it cost effective to provide specialist capital equipment for workers

Mixed economies: define 'mixed economy'

An economy where both markets and governments play a role in resource allocation.