Notes on chapter one Economics A level AQA

1.1
Positive and Normative statements
Positive statement- A statement of fact that can be scientifically tested to see if it is correct or
incorrect.
Normative statement- A statement that includes a value judgement and cannot be refuted just
by looking at evidence.
Ceteris paribus-All other things remain the same
The difference between positive and normative statements is that normative statements cannot
be scientifically tested whilst positive statements can be tested to see if it is incorrect.
A positive statement can also be incorrect, for example the statement the earth is flat is
incorrect and can be scientifically proven to be wrong, but is a positive statement.
How value judgements influence economic decision making and policy
Economics necessarily requires government ministers to make value judgements.
For example, once a chancellor of the exchequer said “ Rising unemployment and the recession
had been the price that we had to pay to get inflation down”, this is an example of a value
judgement. However the public may get hostile at these decisions, so government ministers
often create the illusion that the decision was based on research and data.
The impact of moral and political judgements
When a decision is made there will always be losers and winners to the policy. Governments
often turn to their manifesto made before the last general election to show how they are epping
to their ideas, which was voted for by the voters.
1.2
Needs and wants
Need- Something that is necessary for human survival, such as food, clothing and warmth.
Want- Something that is desirable, such as fashionable clothing, but is not necessary for human
survival.
Economic welfare- The economic wellbeing of an individual, a group within society,or an
economy. Welfare basically means human happiness, anything that makes a person happier
improves their economic welfare. Someone’s short term economic welfare may be improved if
they buy lots of food, however if they continue to consume there long term health may decline.
The key decisions off what and how to produce
Economic system- the set of institutions within which a community decides what, how and
whom to produce.
Market economy- This is an economy in which goods and services are purchased through the
price mechanism in a system of markets.
Command Economy- (also known as planned economy) An economy in which government
officials or planners allocate economic resources to firms and other productive enterprises.
Mixed economy- An economy that continues both a large market sector and a large nonmarket sector in which the planning mechanism operates.
1.3
The factors of production
Production- Converts inputs or factor services into outputs of goods and services
Capital good- A good which is used the production of other goods and services
Consumer good- A good which is consumed by individuals or households to satisfy their needs
and wants.
Factors of production- These are the inputs into the production process, such as land, labour,
capital and enterprise.
Land- The natural resources
Capital- manufactured aid to production
Labour- The human labour required to produce
Enterprise- The people who take risks and decide how much other factor productions to use in
order to get profit.
1.4
Scarcity: the fundamental economic problem
Scarcity- Results from the fact that people have unlimited wants but there isn’t the resources
available to supply these unlimited wants.
Fundamental economic problem-how best to allocate resources for the unlimited wants, to
improve and maximise human happiness and welfare.
The need for choice
Choice- Choosing between alternatives when making a decision on how to use scarce
resources.
Choices have an opportunity cost
Opportunity cost-The cost of giving up the next best alternative,when choosing as you did.
Homo oeconomicus- People behave rationally and seek to maximise and benefit themselves.
Examples:
Whether to buy a toyota aygo or buy an mg zr.
Whether to work during the summer or have more free time during the summer.
Wellington country park- Whether to man the ice cream hut or whether to keep it closed.
1.5-Production possibility diagrams
Production possibility frontier- A curve depicting the various
combinations of two products that can be produced when all the
available resources are fully and efficiently employed.
Technical progress-New and better ways of making goods and
new techniques for producing more output from scarce resources.
Macroeconomics PPF diagrams
A PPF diagram can be used to show economic growth, for example
if the frontier shifts outwards then the potential level of output has
increased.
Economic growth-The increase in the potential level of real output the economy can produce
over a period of time.
Full employment-When all who are able and willing to work are employed
Unemployment-When not all of those are able and willing to work are employed.
A- unemployment could be occurring as there is efficiency
in the production.
C
c
b
B and D- It is maximum efficiency pareto efficiency
a
p
C-Impossible
d Potential growth-Where there are more factors of
it
a
a
production, and there is capability to increase production.
l
g
o
o
d
s
Go
od
y
Consu
mer
goods
Cap
ital
goo
d
a
Goo
dy
b
PPF PPF
1
2
Consumer
goods
If there was no rise in demand
then the new factors of production
would not be used because there
is no demand for the product and
hence producers are unable to
sell the extra goods. Therefore
unemployment levels will stay at
the same level
Manufactured
goods
c
G
oo
d
x
G
oo
d
x
Agric
ulture
An increase in
total factors of
production and
this would be a
sign of
economic
Depletion of
growth.
the natural
resources,
causing the
potential
output of the
economy to
A drop.
change in the
industry,
causes one
industry to be
affected, for
example the
invention of
pesticides in
agriculture.
Microeconomics PPF diagram
A PPF diagram can be used to show all the possible ways scarce resources can be allocated to
making products.
Resource allocation-The process through which the available factors of production are
assigned to produce different goods and services. For example how many resources are
devoted to making food.
Production possibility curves clearly show opportunity cost because it shows if you want to
make more of one good you have to give up making the same amount of other products.
Allocative efficiency-This occurs when the best combination of goods and services are being
produced, and available to be consumed, taking into account consumers preferences.
Productive efficiency and production possibility diagrams
Productive efficiency- For the economy as a whole occurs when it is impossible to produce
more of one good without producing less of another good. For a firm it occurs when the average
total cost of production is minimised.
A- productive efficiency.
Q^2 CELL- Quantity and quality of the factors of production can shift the PPF
Pareto efficient-When all resources are allocated in the most economically efficient way.
Q1-22in workbook topics 1-8.
1.Economics is the study of choice and decision and it tries to explain the economic decisions of
individuals and groups of people, it is also a social science. Correct
2. A need is something which is needed to survive or survive economically, whilst a want is a
desire and is not needed for survival, such as fashionable clothing, whilst the need is just any
Clothes. Correct
3.Economics is a social science, because it looks into the relationship between individuals in a
society, such as the demand theory as it looks into why consumers decide to buy or not. For
example why consumers buy more strawberries when the price is lower.Correct
4. An economist will use this hypothesis and will test it by taking data by recording how many
cars are demanded at different price levels, so therefore he will be able to plot a graph and will
be able to see tahta when the price level is low the demand is higher.Correct
5. The level of unemployment in the UK is 4.8%Correct
6.England are better at rugby compared to wales.Correct
7. The definition of a want and need would be different in different countries, because of
different economic situations, for example in the UK an economic need may be a car to be able
to get to work, whilst an economic need in a less developed country may be a place to live as
they cant afford shelter.Correct
8.A market economy will use market focus in order to allocate scarce resources and then
answering the fundamental economic problem of how best to allocate scarce resources to cover
the unlimited wants. Correct – how do firms find out what goods and services consumers
demand?
9. Value judgements are crucial for influencing government policy with regard to healthcare
spending, as they have to decide whether to spend money on the health care or other sectors.
For example they may have to decide to withdraw money from the health care sector to spend
money on social protection, because there may be high levels of unemployment so therefore
money needs to be spent on benefits, therefore the government needs to make a value
judgement on whether to spend money on healthcare or cover benefits. Hence it influences
government policy as it is not based on facts but in fact a normative decision, it often comes
down to the government manifesto, as they can use this to show to other parties or the press
that the value judgement was actually due to the fact that voters voted for the manifesto.
Correct
Q10. The basic economic problem is the idea that there aren’t enough scarce resources to
supply the unlimited wants of consumers, so therefore the problem is how best to allocate these
scarce resources to make the most of the scarce resources. Correct
Q11. Opportunity cost is the cost of giving up the next best alternative when making a choice.
Correct
Q12. Capital- Tractor Correct
Land- oil Correct
Enterprise- Elon Musk Correct
Labour- the labour force.Correct – can you provide a specific example?
Q13. An example for an individual would be whether to buy a video game or not, if they buy the
video game then they are unable to buy movies, which would have been the next best
alternative for the consumer. Correct
Q14. The environment is a scarce resource because for example clean air is a scarce resource,
as lots of the air is not polluted, for example in Beijing the inhabitants have turned to wearing
masks to avoid. Furthermore drinkable water could also be seen as a scarce resource as large
quantities are contaminated by salt or by faeces. Correct
Have you got the answers for question 15 and 16?
17.Countries have to spend money on capital goods to gain long term economic growth,
because it permanently increases the ability to produce more goods and services, hence will
cause economic growth in the long run. Without sufficient spending on capital equipment,
the productive capacity of the economy will decrease, reducing the possibility of longrun economic growth.
18. Factors of production are the inputs into production, which include land, labour, capital,
enterprise. Increasing the factors of production will in turn increase the outputs. ONe way the
government could increase capital is by decreasing corporate tax in order to give more money
to invest into their company, and in turn they might invest in more capital goods to increase
production. One way there could also increase labour is by reducing the minimum wage, so
therefore companies could afford to employ more workers and therefore produce more goods.
In conclusion there are many ways the government could increase the factors of production,
due to their use of policies. Correct
19. A production possibility curve is a curve diagram which shows the different amounts of two
products if both require the same scarce resources. Produced by a firm or an economy,
assuming full employment of efficient resources.
Maternity
services
a
b
PP
F2
P
P
F
1
Consu
mer
goods
2
2
b
Capital
goods
21
a
Capital
goods
Hip
replacemen
ts
20. An improvement in technology of capital goods, making production more efficient.
More labour available to produce more goods.
The finding of new oil deposits, giving more finite resources allowing for more production.
PP
F2
PP
F1
Consu
mer
goods
Correct – excellent work Mattie, well done!
23.An economics PPC would shift outwards over time if its production capability increases, and
therefore economic growth will occur. Production capability will increase if their is more factors
of production available to the economy
End of unit Questions in second workbook
1. A positive statement is a statement which can be proven by data. For example New zealand
have won the most world cups. Whilst a normative statement is one which is a judgement and
cant be proven for example england are better at rugby compared to wales. Correct
2. The fundamental economic problem is where there aren’t enough scarce resources to supply
the unlimited wants. Correct
3. Scarcity is the fact that there aren’t enough scarce resources, so therefore economic choices
have to be made on how much of a scarce resource is used, and hence to reduce the
opportunity cost, when choosing what product to make with the limited scarce resources.
Correct
4.Land- the natural resources Correct
Capital- Human made aides to productionCorrect
Enterprise- the individual who makes the choices and risks in order to make profit.Correct
Labour-The human labour required to produce a good or service.Correct
5.A production possibility curve depicts the possible combinations of the production of two
goods. Also shows how efficiently you are able to produce a good or service. Correct
6.
Consum
er goods
7.
b
Capital
goods
Capit
al
good
s
a
P
P
F
P2
P
FCon
1sum
er
goo
ds
1.2 case study
1. A mixed up economy could be one which leans more to a market economy rather than a
mixed economy which is directly between a command and market economy. Who was
the Prime Minister in 1980? What was their famous quote about the mixed-up
economy?
2. A private enterprise is an enterprise which is owned by an individual or a commercial
company, but is not owned by the government. Correct – what types of business
ownership are classed as privately owned businesses?
3. Privatisation is the selling of publicly owned companies to private individuals or
companies, whilst marketisation is where governments introduce competition to the
previous public sector. Marketisation is when prices are charged for goods and
services that were previously provided for free.
4. I do not believe that there is a case to increase state ownership of the UK industry as it
reduces competition in the sectors and hence will reduce pressure, which can increase
quality as companies have to increase quality in order to attract new customers,
however this is not the case for public transport which has been deteriorating over the
past decade, hence i believe this may be better state owned as it can spend more
money on improving the quality, as it does not need to make a profit. On the other hand
reducing state ownership will increase the GDP as companies filling these previously
public sectors will need to become more efficient to beat competition, and therefore will
reduce the cost to gain more customers, hence giving consumers more disposable
income to spend on more goods and services. So therefore I believe that we should not
be increasing the public sector. What other industry do you think would benefit the
most from privatisation?
1.3 case study
1. Economic growth is the increase in the potential level of real output the economy can produce
over a time. – correct
2. Economic growth can be classed as both a good and bad thing, due to many things. For
example an increase in Economic growth can lead to an increase in the standard of living
because more goods are being produced, so hence the GDP will increase and therefore
producers may give their labour a pay rise and hence they can then spend this extra income on
more products. Also this would increase cash flow because consumers would have more money
improving the circulation of money in the economy. However Economic growth could also lead
to more natural resources being used and hence it will lead to the depletion of scarce resources,
hence in the long term there may be negative economic growth, because of the lack of factors
of production in particular land. Excellent answer
3. There is a huge environmental impact by buying bottled water. This is because large amount
of plastics used in the production of bottled water, which is not biodegradable, whilst when you
use tap water no plastic is used in the production, however tap water goes through lots of
chemical cleaning process, which could be argued is more environmentally damaging, because
of the high chlorine levels. Would your answer change, if I told you the tap water was
unsafe to drink?
4. Although it would be more environmentally friendly to read the books online, I believe that it is
easier to read hard copy books, as it is easier to read and understand, and I believe it does not
have a huge environmental impact as the books are used till they become out of date. So I
believe it is not a huge impact. How has technological advancements made it easier to read
books online?
Questions in first booklet
1.1a.1%
b.+1083
c.The relationship is that as the price of goods rise, salary and wages will increase.
1.2.1.17 euro
1.3.D
3.a.Production possibility diagram
b.Normative statement
C. Negative externality
5a. Milton Freidman
b.Adam smith
c.Keynesian economics
6.2 .Income elasticity may be higher for mini abroad because there might be a higher income
rise in other countries compared to the UK.
7.A change in price is just a movement along a demand curve and does not shift it because the
average income or fashion has not changed.
b.Supply will be price inelastic in the short run because at least one factor of production will be
fixed, for example a farmer will be supply price inelastic because it will not be able to instantly
change what goods they grow on their scarce resource of their land. Excellent answers and
good research skills
Exam questions
1.A
2.D
3.D
Essay practice
question-When resources are finite but wants are infinite, some means of allocation or
deciding who gets what must be found. What is the best means of allocation when no
markets are present?
Basic economic problem
Introduction- outline your 3 to 4 points, summarise your conclusion. Give definition of basic
economic problem.
Point one-why resources are scarce
Point two- how the Government could choose how to allocate scarce resources.
Point three-Market forces.
Point four-Why are no markets present? What that would mean for the allocation of resources.
Point five- Could you re-establish the market.
Point six- what implication would no markets have on tax.
Point seven- who would benefit the most.
Conclusion- Summary of your evaluation
Point one- how the government could choose how to allocate scarce resources- this would be
more of a command economy like the soviet system, lack of choice for consumers, less power
of producers.
Point two- Could re establish the market- impossible to introduce a market economy, with
complete market forces. Absent of price mechanism- Poland is an example of that as it break
away from the communism and started a market economy, however this did not instanyl work
with two consecutive years when the GDP decreased, however since 1991 it continued to rise,
and has rinse 827% since then, best in the EU.
Point three-What implication would no markets have on tax- no tax reduce the power of the
government and hence they would not be able to restart markets because of the lack funds,
also wouldn’t be able to give subsidies to businesses to be able to restart.
When resources are finite but wants are infinite, some means of allocation or deciding
who gets what must be found. What is the best means of allocation when no markets are
present?
In this essay I will be outlining what ways an economy can allocate resources when no
market is present. This revolves around the basic economic problem, where there are limited
resources to supply the unlimited wants of the consumers, hence there needs to be a way how
resources can be allocated to satisfy as many of these wants as possible. One of the ways this
could be done is by the government allocating resources, another way would be to find out why
there are no market presents and how to re-establish them. However if there are no markets
present then there will be a lack of tax revenue and hence the government might be unable to
perform many of its functions.
As I established in my introduction, one way you could allocate resources when no
market is present is through the use of a command economy. This will mean that the
government is in complete control of the economy and decides which sectors get the resources.
An example of this type of economy would be North Korea, or the old Soviet Union. The
government will decide who gets the resources to produce goods and services, these goods
and services are often not what consumers demand but are usually what the government wants.
For example in the Nazis Germany in the 1930s and 1940s there was a lack of consumer
goods, as all resources were focused on making war focused goods, in order to win the war,
however this decreased heavily the economic welfare of the individuals, and this could be
argued to why the Germans lost the war because of the lack of interests. This clearly shows
how a command economy can fail to fully fill the consumer wants of a consumer. Furthermore
the role of the government deciding which producers, may put some producers at a
disadvantage, as producers may not be able to produce their goods or services and hence
cause them to close. This will reduce competition in the economy, and will make the whole
economy less efficient, and will reduce choice for consumers. Overall, Although a command
economy might be useful for a country at war, it will reduce the economic welfare of the
individuals in the economy and will reduce competition.
Another way you could allocate resources in an economy is by reestablishing the
market. You would need to be able to establish why the market failed and collapsed in the first
place to make sure it doesn’t happen again. Re-establishing the economy would reintroduce
market forces,and hence resources would be allocated through the price mechanism structure.
This works as resources are allocated to where there is a shortage in supply for one good or
service, so therefore resources are allocated to this good or service. An example of a country
which went from having no market to having a free market, is Poland after the cold war, who
had been under soviet control since the end of world war 2. AFter their break from communism
in 1989 it tried to develop its economy, for the first couple years there GDP decreased as it is
extremely difficult to go from no economy to a free market, however since 1991 it has continued
to rise and its GDP has risen 827% since then, the highest percentage increase in the EU. ON
the other hand though it is extremely difficult to establish a free market from no market, so
therefore you may need to go through a period of when you have a command economy,
because otherwise the market may collapse again, because there will be a lack of consumer
demand because there is no money in circulation, hence consumer have no money to spend on
goods and services, so the government may need to be heavily involved in order to give
subsidies to companies to reduce their total costs to make goods and services cheaper for
consumers. In conclusion, re-establishing an economy will significantly help to allocate
resources.
On the other hand, if there are no market presents, the government will have a small tax
revenue, and hence the government will be unable to set up either a command economy or free
market because they do not have enough money to complete the plans. This was clear during
the period after world war 2 as many countries did not have enough money to restart their
economies, for example many countries were given marshall aid, which was given to economies
to re-establish their markets. This clearly shows that in order to restart a market, large amounts
of money is needed, and if there is not enough tax revenue there it would be extremely difficult
to restart the market. This is because the circulation of money is incredibly low, partly because
of a lack of confidence to spend money, and also because if there is no market then there will
be a lack of jobs, so hence consumers disposable income will be low. Due to this the
government will need to subsidize producers, to reduce the cost of production, to encourage
consumers to spend more money. However as the tax revenue is low they will be unable to
spend money on subsidies.
In conclusion, I believe that in order to allocate resources most efficiently when no market is
present, you need to establish why no market is present and then re-establish them because
the price mechanism is the best way to allocate scarce resources, and hence the best way to
reduce the basic economic problem.
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