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Summary Edexcel Economics A - Theme 1 - Topic 1.1 - Nature of Money
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1.1 Notes - Nature of Economics - Micro Basics, PPFs, Specialisation and the Division of Labour, Functions of Money
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Microeconomics – 1.1- Nature of EconomicsCeteris Paribus:
‘All other things being equal’
Thinking Like an Economist:
Economics is a social science because it’s a study of human behaviour and organisation of recourses.
Economists:
Develop theories and create models using scientific method to explain phenomena
Test theories against known facts using stats
Simplify assumptions to test variables in an investigation
Evaluate different views and prioritise factors
Positive Statements:
Can be tested empirically
Can be found to be true or false
More scientific
Often contain statistics or facts
Normative Statements:
Contains subjective statements (‘value judgments’)
Often contains the words ‘should’, ‘could’ or ‘ought to’
Aren’t fact based/science based
Could be debated/disputed
The Basic Economic Problem:
Unlimited Wants but Scarce Resources
Opportunity Cost:
The benefit forgone of the next best alternative (the benefit you give up).
The 4 Factor Inputs/Factors of Production:
1. Land – and resources below the ground eg. oil/non-renewable
2. Labour – workers
3. Capital – machines/factories
4. Enterprise – the brains behind the business
Factors of Production and their Rewards:
1. Land Rent
2. Labour Wages
3. Capital Interest
4. Enterprise Profit
, Production Possibility Frontiers:
Shows the maximum combinations of 2 goods/services that can be produced when all resources are fully and
efficiently employed
PPF’s illustrate OC as they show the trade off between 2 goods/services
Line on the PPF represents productive potential/maximum output of an economy
The opportunity cost is always expressed in terms of the other good which is lost/forgone eg. the OC
of an extra 30 units of good B is 40 units forgone of good A
When operating on a PPF an economy is productively efficient
Consumer Goods - goods which cannot be used to produce other goods, such as clothing.
Capital Goods - goods which can be used to produce other goods, such as machinery.
Linear VS Curved PPF’s:
Linear:
- The marginal OC is constant
- Perfect factor substitutability of resources
Curved
- Law of Diminishing Marginal Returns - employing an additional factor of production causes a
relatively smaller increase in output OC isn’t constant and the graph curves downwards
Positions on the PPF:
A + B + C – efficient output combinations – movement along these 3
points can occur
D + E – inefficient combinations - production is not at maximum
efficiency – FOP’s are unemployed/not fully utilised. If moving from
D E, an increase in unemployment
F unobtainable combination given current resources/tech
Movement on the PPF:
Movement from one point to another results in OC.
If moving from A B : rate of economic growth increases as an increase in capital
goods will increase future living standards. But a fall in consumer goods will mean
current living standards fall to enable future standards to rise at a quicker rate.
B A : short run economic growth
A B : long run economic growth
Outwards Shift of PPF: Inwards Shift of the PPF:
Increases productive potential of the economy A decrease in the productive potential of
Leads to economic growth the economy, due to:
This is due to increases in the quality/quantity of: Emigration
- Technology Decline in investment
- The factor inputs Disease
- Education Natural disaster
- Innovation Anything that reduces quality/quantity
of factors of production eg. war
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