Scarcity, Choice and Resource allocation

Planned/ Command Economy

Allocated entirely by government

Positive Statement

Can be tested or rejected by referring to available evidence

Disadvantages of PPF

Can only compare 2 products, very simple Assumes everything else stays the same e.g the more you produce the longer it takes?

Advantages of PPF

Can see the differences when increasing production of one product Can see the maximum efficiency

Normative Statement

Cannot be tested, requires value judgement

If point is on PPF line

Efficient levels as you can only make more of one good by decreasing the other

If PPF is a straight line

Equal opportunity cost

Advantages of Free Markets

Firms can compete Consumer choice to match production of consumer wants Incentives to work increase as there is no tax so profits for firms increase

Mixed Economy

Government and consumers contribute

Production Possibility Frontier (PPF)

Graphical representation of the maximum achievable combinations of output between 2 goods with a fixed quantity of inputs

Basic Economic Problem

Human wants are infinite where as resources are finite

If point is under PPF line

Inefficient level produced as you are able to produce more

Disadvantages of Free Markets

Inequality as there are no benefits meaning the poor stay poor and will continue to struggle Market failure as resources may not be allocated properly meaning dominant firms may take over or some goods may be over provided e.g alcohol

4 Factors of Production

Land Labour Capital Enterprise

Rewarding Factors of Production

Land- Rent Labour- Wage Capital- Interest Enterprise- Profit

Free Market Economy

Price of goods and services are determined by the open market and consumers by observing supply and demand

Specialisation

Process by which individuals, firms and economies concentrate on producing a limited number goods and services in order to maximise productivity and efficiency

Microeconomics

Study of how households and firms make decisions in markets

Economics

Study of how to allocate scarce resources in the most effective way

Macroeconomics

Study of issues that affect economies as a whole

Pareto Efficiency

When the economy is operating at full potential so no more input from existing resources

Trade-off

Where one product must be decreased so that another can be increased

Opportunity Cost

The cost of something that is the next best to what is decided (what you are giving up)

PPF shifts outwards

There was an increase in resources so more of both goods can be produced by the firm

Firms Aim

To maximise profits

Economic Agents Aim

To maximise the welfare (satisfaction) gained from the consumption of goods and services

If point is above PPF line

Unobtainable with current inputs, more inputs would be needed to achieve this

When is there no opportunity cost?

When moving from inefficient levels to efficient on the PPF graph (moving from under the PPF line to on the PPF line)

Division of labour

When production is broken down into a sequence of stages with workers assigned to specific stages in order to increase efficiency by reducing time needed to produce the product