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The economic problem
Scarcity, Resources which are needed to produce any good or service are
scarce. Limited.
Resources are split into four categories:
+ Land: all resources that can be used to produce goods
and services. Eg. Timber, fish, oil, wind and rain
+Labour: All human effort, physical and mental used in
the production of goods and services
+Capital: Manmade goods that are used to produce
other goods and services. Eg. Factories, offices, machines
+Enterprise: the entrepreneur takes risks and organises
the other economic resources
Resources are often referred to as the factors of production
Consumers have wants and needs, these are always changing and so they
can never be satisfied. We say they are unlimited.
Choice exists about what is the best use of a particular resource, in other
words they have alternatives.
Opportunity cost measure the benefit a party could have
obtained from the next best use of a resource you have gone
with out.
OR The benefit of the next best alternative forgone because of
a particular choice.
We summarise by saying: Resources are scarce and have alternative uses,
but wants are unlimited.
Resource allocation
Economists try to decide or advice governments/firms how best to use
scarce resources to produce goods and service to satisfy as many wants as
Conflicts of interest: different uses of scarce resources can only satisfy
certain people. Different parties will want to use the resources in different
ways. They can arguer over Where? How? When? Resources are allocated.
Economists are not concerned with statements such as: should, think,
believe. These are called value judgements (normative statements), we are
only concerned with statements which can be proved against fact. (positive

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Economy: an area in which parties produce and buy goods and services. Eg.
`The Uk economy,' `The local economy,' `The global economy'
Production: any activity designed to satisfy wants and needs, producing
goods and services
Consumption: using up goods and services to satisfy wants and needs.
Exchange: few people can make what they need and want and so they must
Market: a group of buyers and sellers. Producers and consumers who meet
to exchange. Eg.…read more

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Economic rent: the amount of money a factor of production earns minus its
transfer earnings.
Wealth, social wealth ­ assets owned by the government for the benefit of
the public.
Private wealth ­ assets owned by individuals and private firms.…read more

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Some countries have tried to plan the answers to the
economic problem (what? How? For whom?) eg.…read more

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Work may become boring (repetition for workers)
Workers may feel alienated (do not see whole finished
People/countries become dependant on each other
Products are all the same
Not suitable for all types of production
Some firms may become too efficient, putting other firms out
of business ending up with monopoly power.
Market systems
Demand is the want or willingness of consumers to buy goods and services.…read more

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Related goods, substitutes and compliments eg. MP3 players
and iPods, tennis rackets and tennis balls. It goods are
complements they are equally demanded, Car and car
insurance. Most products have alternatives
Seasons, goods may be affected by season, eg. Christmas
Price elasticity of demand, measures the responsiveness in demand of a
product to a change in its price.
Elastic=responsive, inelastic=unresponsive
Perfectly inelastic, perpendicular to xaxis
Perfectly elastic, parallel to xaxis
Factors affecting PED, availability of subsitiutes, more substitutes > more
elastic.…read more

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XED=%QD of good x/%P of good y
Substitutes have a positive XED, as the prices of one good rises the
demand for the other good increases.
Complements have a negative XED, as the price of one good rises the
demand for the other falls.…read more

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Economies of scale, the benefits a firm receives in the form of lower
longrun average costs as a result of production on a large scale.
Split into internal, cost savings resulting from a firm being large, and
external, cost savings to firm resulting from being in a growing market.
Financial economies, cost savings resulting from the way in which
firms raise money.…read more

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Ancillary firms, in areas with lots of firms in the same market,
other firms will arrive to cater to the others' needs.
Cooperation, if firms locate together they tend to help each
other even though they are in competition. Eg. delivering costs
cheaper as they are close together
Eg. Tottenham court road, silicon valley
Diseconomies of scale
Internal, when a firm becomes too large it may start to experience
inefficiencies.…read more


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