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Economics Revision Chapter 1 - 12

Economics Revision Chapter 1 - 12

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Published by: punte77 on May 07, 2012
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07/10/2013

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Chapter 1
 –
The basic economic problem
Summary
 
Nearly all resources are scarce;
 
Human wants are infinite
 
Scarce resources and infinite wants give rise to the basic economic problem
 –
 resources have to be allocated between competing uses.
 
Allocation involves choice and each choice has an opportunity cost.
 
The production possibility frontier (PPF) shows the maximum potential output of aneconomy.
 
Production at a point inside the PPF indicates an inefficient use of resources-
 
Growth in the economy will shift the PPF outwards.
Key definitions
Scarce resources - Resources which are limited in supply so that choices have to be madeabout their use.Basic economic problem
 –
Resources have to be allocated between competing uses becausewants are infinite whilst resources are scarce.Choice
 –
Economic choices involve the alternative uses of scarce resources.Economic goods
 –
Goods which are scarce because their use has an opportunity cost.Opportunity cost
 –
the benefits forgone of the next best alternative.Production Possibility Frontier
 –
(A.K.A the production possibility curve or the productionpossibility boundary or the transformation curve) a curve that shows the maximum potentiallevel of one good given a level of output for all other goods in the economy.
Notes
The production possibility frontier illustrates the principle of opportunity cost
 
The curve shown in the diagram isthe production possibility frontier. Inpoint B there is 120 units of gunsproduced while 50 units of butter areproduced. At point A there are 100units of butter and 30 units of guns.Point C would only be possible if there is an injection of resources intothe economy, for example thenumber of workers may increase. Itcan also become point C if the qualityof resources at an economy isincreased, for example there is aninvestment in technology whichmakes the manufacturing of goodsmore efficient.Point D occurs when there is an inefficient use of resources in aneconomy. The Production possibility frontier is the maximum aneconomy can produce and therefore it would only decrease if something tragic would happen, for example a war. It woulddecrease the labour in that economy.
 
Chapter 2
 –
The function of an economy
Summary
 
An economy is a social organization through which decisions about, how and for whomto produce are made.
 
The factors of production
 –
land, labour, capital and entrepreneurship
 –
are combinedtogether to create goods and services for consumption.
 
Specialisation and the division of labour give rise to large gains in productivity.
 
The economy is divided into three sectors, primary, secondary and tertiary.
 
Markets exist for buyers and sellers to exchange goods and services using barter ormoney.
 
The main actors in the economy, consumers, firms and government, have differentobjectives. Consumes, for instance, wish to maximise their welfare whilst firms mightwish to maximise profit.
Key definitions
Capital productivity
 –
Output per unit of capital employed.Division of labour
 –
specialisation by workers.Factors of production
 –
CELL Capital Entrepreneurship land and labour. These factors makeproduction possible.Fixed capital
 –
economic resources such as factories and hospitals which are used to transformworking capital into goods and services.Human capital
 –
the value of the productive potential of an individual or group of workers. It ismade up of the skills, talents, education and training of an individual or group and representsthe value of future earnings and production.Labour productivity
 –
output per worker.Market
 –
any convenient set of arrangements by which buyers and sellers communicate toexchange goods and services.Non-renewable resources
 –
resources, such as coal or oil, which once exploited be replaced.Non -sustainable resources
 –
resource which is being economically exploited cannot bereplaced.Primary Sector
 –
extractive and agricultural industries.Productivity
 –
output per unit of input employed.Profits
 –
the reward to the owners of a bu
siness. It is the difference between a firm’s revenues
and its costs.Renewable resources
 –
resources such as fish stocks or forests, which can be exploited overand over again because they have the potential to renew themselves.Secondary sector
 –
production of manufactured goods.Specialisation
 –
a system of organisation where economic units such as households or nationsare not self-sufficient but concentrate on producing certain goods and services and trading thesurplus with others.
 
 The objective of economic actorsThere are four main types of economic actors in a market economy
 –
consumers, workers,firms and governments. It is important to understand what are the economic objectives of each of these sets of actors.
Consumers
 –
 
In economics, consumers are assumed to want to maximise their own economicwelfare, sometimes referred to utility or satisfaction. They are faced with the problem scarcity.They do not have enough income to be able to purchase all the goods or services that theywould like. So they have to allocate their resources to achieve their objective. To do this, theyconsider the utility to be gained from consuming an extra unit of a product with its opportunitycost.
Workers
 –
 
Workers are assumed in economics to want to maximise their own welfare at work.Evidence suggests that the most important factor in determining welfare is the level of pay. Soworkers are assumed to want to maximise their earning in a job.
Firms
 –
The objectives of firms are often mixed. However, in the UK and the USA, the usualassumption is that firms are in business to maximise their profits. This is because firms areowned by private individuals who want to maximise their return on ownership. This is usuallyachieved if the firm is making the highest level of profit possible. In Japan and continentalCapital
 –
the manufacturedstock of tools, machines,factories, offices, roads andother resources which isused in the production of goods and services. Thereare two types of capital:working capital, stocks of raw materials, semimanufactured goods andfinished goods which arewaiting to be sold; fixedcapital is the stock of factories, offices, plant andmachinery. Fixed capital isfixed in the sense that itwill not be transformedinto a final product.Entrepreneurship
 –
 Entrepreneurs areindividuals who: organizeproduction: organize allfactors to production in theproduction of goods andservices.
Factors of Production
Land- All naturalresources thatprocess of production requiresto be complete.Labour
 –
Theworkforce of aneconomy,everybody from ahouse person to adoctor. The value of a worker is called hisor her humancapital.

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