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Nature of economics
Positive / Normative statements
Positive= facts, scientific approach
Normative= value judgements, should,ought,better,fair etc.
Opportunity cost
Value of the next best alternative forgone
Types of economies
Free market- decided by the price mechanisms
Centrally planned- government makes all decisions
Mixed- decisions are made partly by the private sector
Division of labour
Form of specialisation= inviduals concentrate on production of a particular good
Advantages
Highly skilled in that area
No time wasted
Less time is required to train worker
More choice of jobs for workers
Higher output per worker
Reduces cost of output
Disadvantages
Repetition=boredom= high turnover of staff
Structural employment as easy to replace workers with robots
Specialization creates interpendence
Production possibility frontiers
Maximum potential level of output for 2 goods/services that an economy can
achieve when all resources are fully employed
Shift outwards (increase): quality/ quantity of resources, education/grants, new
technology
Shift inward (decrease): war /natural disasters

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Elasticity
PES
Price elasticity of supply: % change in quantity supplied/ % change in price
Determinants: level of spare capacity, state of economy, ease of entry into market
PED
Price elasticity of demand: % change in quantity demanded/% change in price
Determinants: availability of substitutes, luxury/necessity, addictive good, time
period( short run doesn't really affect but in the long run it does)
YED
Income elasticity of demand: % change in quantity demanded/ % change in income
Normal good: when income increases, demand increases
Inferior good:…read more

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Subsidy is often paid to directly to producers, but also reaches consumers as output
has increased
What determines wge
rate?
Supply for labour
Quality, quantity of labour hours offered for work over a given period of time
Determinants
Net migration = boosts economy
Wage rate= increase= encourage people to work
Y tax= reduction= more disposable Y= more incentive to work
Trade unions= make work conditions & wage better= encourage to work
Government regulations= national minimum wage etc.…read more

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What determines the
price of a good in a
market?
Consumer +producer surplus
Consumer surplus: extra amount of money consumers are willing to pay above what
they actually pay
Producer surplus: extra amount of money paid to producers above what they are
willing to accept
Equilibrium
Balance in market , with no tendency for output or price to change
Price mechanism
RATIONING DEVICE: allocates scarce resources to those who are willing to pay
Incentive device: rising prices = encourage firms to produce more
Signalling device:…read more

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Occurs when government intervention to overcome market failure fails itself
Poor information: politicians may have poor info about type of service to provide
Political interference: politicians may take the short term view rather than long term
view
Lack of incentives: there is no profit motive working in the public sector= inefficiency
Under provision of public goods
Public goods: non excludable, non rivalry, once supplied the cost of supplying to
others is 0
Free rider problem: it is not possible for firms to withhold the good…read more

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Market failures
Imperfect Market Knowledge
Symmetric information: perfect & equal market info= efficient allocation of resources
Asymmetric information: imperfect & unequal knowledge= inefficient allocation of
resources
Labour immobility
Frictional unemployment: while people search for jobs to fill them
Structural unemployment: mismatch of skills and location
Geographical: obstacles which prevent labour from moving e.g. family, finance,
knowledge
Occupational immobility: prevent labour from changing type of occupation
How to correct a
market failure?
Government regulation
ADVANTAGES
Simple to understand e.g.…read more

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Buffer stock schemes
Reduce price fluctuations of a commodity
ADVANTAGES
Reduce price fluctuations
Stabilises incomes
Greater certainty in marker= more investment
Ensure provision of commodities at all times
DISADVANTAGES
In years of good harvests= expensive to stock
Perishable goods= harder to store
Bad harvest= low stock= price would drastically increase
Subsidies
Grant provided by the government to encourage production & consumption
Tends to happen with good that have high external benefits
ADVANTAGES
Reduces air pollution as encourages the use of renewable energy to promote
sustained…read more

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Taxes levied on expenditure of goods
Government imposes tax on goods with big external costs
Advantages
Both producers & consumers pay= internal external costs whilst maintaining
consumer choice
Pollution decreases as output decreases because of high prices
Tax raised= clean up environment…read more

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