ECONOMICS AS- Markets in action

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  • Created on: 14-01-13 14:28
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CHAPTER ONE SUMMARY- the reasons for individuals, organisations
and societies to make choices
Economics: the study of how to allocate scarce resources in the most effective way
Economic problem: how to allocate scarce resources among alternative uses
Household: group of people whose spending decisions are connected
Economics is split into two:
Microeconomics ­ study how households and firms make decisions in markets
Macroeconomics - study of issues that affect economies as a whole
Fact that resources are scarce in relation to wants that are unlimited
The resources available in an economy known as factors of production
Factors of production: resource inputs available in an economy for production of goods and
There are four factors of production:
Capital- man-made aids to production
Entrepreneurship- willingness of entrepreneur to take risks and organise production
Labour- quantity and quality of human resources
Land- natural resources in an economy
The world poorest countries have few and/or poor quality factor endowments
Factor endowments: stock of factors of production
More prosperous economies exploited factors of production for economic development
Production: the output of goods and services
Factor endowment is not the only explanation for the huge inequalities between world economies
Economic problem- the resources claimed by the factors of production are scarce
Fundamental economic concepts: scarcity, choice and opportunity cost
Want: anything you would like, irrespective of whether you have the resources to purchase it
Scarcity: a situation where there are insufficient resources to meet all wants
Choice: the selection of appropriate alternatives
Opportunity cost: the loss of the next best alternative which is forgone when a choice is made
What is essential for some is not necessarily essential for others ­ what may be a luxury for one may
be an essential item for another
Our income acts as a constraint on what we want to buy and as a consequence of our scarcity we
have to make choices
Want Scarcity Choice Opportunity cost
The government has an unlimited want for funding. However, this is limited so chancellor has to make
a choice of distribution between:

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Defence, social services, education , transport and the national health service
They need to make sure that the money has been allocated in the best way possible- this is critical
for the NHS at present because we have an expanding and ageing population in the UK ­ spend it on
new hospitals or new drugs
Specialisation plays a significant role on the idea of scarcity
Specialisation: the concentration by worker(s), firm region or whole economy on a narrow range of
goods and…read more

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In order to be competitive labour costs must be kept as low as possible
Division of labour: the specialisation of labour where the production process is broken down into
separate tasks
Adam Smith ­ 18th century- the production of pins was more efficient when the process was broken
down into separate tasks.…read more

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There are two reasons why shifts occur:
1. More resources or economic growth ­ change in productive potential of an economy
2.…read more

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Like the market economy, the command economy only exists in theory
Command economy: an economic system in which most resources are state owned and also
allocated centrally
In this economy, the government has a central role in all decisions
Decision making is by planning boards and organisations- also all production is controlled by the state
Whatever is available to consumers or manufacturing organisations is all determined by centralisation
The main key features of the command economy is that it…read more

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China has had phenomenal sustained growth over the past 15 years based on the control
management of the economy
China still gives opportunities to foreign investors as well as domestic investors
To a degree most economies seem to fit in with the definition of a mixed economy…read more


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