As Economics Unit 1: Basic Concepts and Techniques


1.1 The Basic Economic Problem

The basic economic problem: Exists because resources have to be allocated between competing uses as there is infinite wants whilst resources are scarce.

Oportunity Cost: The next best alternative foregone.

PPF (Production Possibility Frontier): The maximum potential level of output of one good given a level of output of another good, given all resources are allocated efficiently.


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1.2 The Function Of An Economy

An economy: Decides about what, how and for whom produce are made.

Factors of production: Land, labour, capital and entrepreneurship.

Specialisation: Individuals, firms or economies concentrate on producing the goods and services that they have an advantage in producing. Benefits include:

  • Highly skilled workers in their specific tasks
  • Division of labour makes it cost effective to provide specialist tools
  • Time is saved as workers do not have to move to change tasks
  • Workers can specialise to tasks they are best suited to

Cons include:

  • Job roles become monotonous and boring leading to poorer quality of work and less output per person
  • Size of market can limit extent of specialisation
  • Over-reliancy on those part of the production process
  • Overspecialisation of economies can lead to unemployment if there is a decline in industry
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1.2 The Function Of An Economy

Division of labour: Specialisation of workers into the different productive processes into many separate tasks.

Sectors of an economy: Primary sector (raw materials are extracted or grown), Secondary sector (raw materials are tranformed into goods), Tertiary sector (produces services such as transport, leisure, distribution).

Markets: Exiss for buyers and sellers to exchange goods and services using barter or money.

Economic Actors/Agents: Consumers (want to maximise their own economic welfare or satisfaction when this equals opportunity cost), Workers (wants to maximise earnings in a job), firms (want to maximise profits), governments (want to maximise welfare of citizens).

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1.3 Economic Data & 1.4 Positive And Normative Eco

Nominal Values: Unadjusted for the effects of inflation.

Real Values: Values adjusted for inflation.

Normative Economics: Based on value judgements which cannot be supported or refuted as this is not based on fact so is open to debate.

Positive Economics: A statement that is not based on value judgement and can be supported or refuted by evidence, so is not open to debate.

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1.5 Free Market And Mixed Economies

Free Market Economy: An economy which resolves the basic economic problem and allocates its resources by the market mechanism. Benefits of a free market economy:

  • Motivation - Out of self interest to maximise profits, wages etc.
  • Private ownership
  • Free Enterprise - No limitations of factors of production or how goods and services are produced and sold.
  • Compeition - As economic agents can allocate their resources as they wish.
  • Decentralised deision making (More choice)

Evaluative Points:

  • Choice - Those on high incomes have more choice than those that do not.
  • Higher levels of quality and innovation
  • More economic growth
  • Distribution of income and wealth
  • Risk
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1.5 Free Market And Mixed Economies

Command or planned economies: An economic system where government, through a planning process, allocates resources in society.

Mixed Economy: An economy where both the free market mechanism and the governemtn planning process allocate significant proportions of total resources.

- Enables governement to intervene in market when there is market failure or to prevent market failure in the market mechanism.

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