STUDY NOTES - Nature of Economics - Introductory Concepts

Here is a selection of key introductory concepts covering the nature of economics

What is meant by?
ASSUMPTION - Simplifying assumption used in analysis e.g. assumed behaviour of consumers and
businesses
CETERIS PARIBUS ASSUMPTION - All other factors held constant – helps to isolate the impact of
one factor e.g. a change in either price or income on demand
ECONOMIC AGENTS - Consumers, producers, the government – anyone engaged in some form of
economic activity
ECONOMIC MODEL - Theoretical construct – building a hypothesis about behaviour that can be
tested, supported, amended, rejected
ECONOMIC PROBLEM - Arises from the scarcity of resources – e.g. limited inputs available to
satisfy unlimited needs and wants
ECONOMICS - The study of the allocation of scarce resources among competing uses in a way that
achieves an inclusive and sustainable progress in human development
OPPORTUNITY COST - The value of a choice measured in terms of the next best alternative option
that is given up (sacrificed)
SOCIAL SCIENCE - The study of human society, relationships and behaviours
VALUE JUDGEMENT - A value judgement contains a normative statement concerning what ought /
should happen in a given situation

What is the difference between?

SOCIAL SCIENCE AND NATURAL SCIENCE
• Social science: Studies of human behaviour, dynamic inter-relationships
• Natural science: Studies of the natural world, quantitative, blind, controlled experiments
POSITIVE AND NORMATIVE STATEMENTS
• Positive statements: Objective, testable, empirical
• Normative statements: Contain subjective arguments, value judgements
RENEWABLE AND NON-RENEWABLE RESOURCES
• Renewable resources: Can be replenished, solar power, fish stocks, forestry
• Non-renewable: Finite resources, cannot be renewed, e.g. crude oil and gas
MEAN INCOME AND MEDIAN INCOME
• Mean income: Income per head of population
• Median income: Middle part of an income distribution – 50% are below and 50% are above

What is meant by?

CAPITAL GOODS - Tangible assets, such as buildings, machinery, equipment, vehicles and tools that
are then used to produce other goods and services
CONSUMER GOODS - Bought and consumed by households to satisfy current wants or needs.
ECONOMIC DECLINE - A contraction in the value of national output shown by a negative rate of
real GDP growth in a recession
ECONOMIC GROWTH - A long-run increase in a country’s productive capacity and capabilities
shown by growing real national output
EFFICIENT ALLOCATION OF RESOURCES - Combination of scarce inputs and outputs such that any
change in the economy can make someone better off only by making someone worse off (pareto
efficiency)
INFRASTRUCTURE - Includes physical capital such as transport networks, energy, power and water
supply and also telecommunications networks
PRODUCTION POSSIBILITY FRONTIER - Combinations of two or more products that can be supplied
using all available inputs efficiently
PRODUCTIVE POTENTIAL - Shows the maximum limits to output. Capacity can be defined as: the
maximum output that a business can produce in a given period with the available resources
TRADE-OFF - A trade-off arises where having more of one thing potentially results in having less of
another. The balance between two desirable outcomes, where both are not achievable
UNEMPLOYMENT - People of working age who are willing, able and available to take paid work but
who do not currently have a job.

Give Me Three
Advantages from competition between suppliers in a free-market economic system:
1. Competition drives prices down for consumers leading to higher real income
2. It stimulates innovation which improves product range & quality
3. Competition will ensure that firms move towards productive efficiency.
Ways in which markets may fail to achieve an efficient allocation of scarce resources:
1. When one or more firms have monopoly power and charge higher prices
4. When consumers have imperfect information when making choices
5. When production and/or consumption leads to external costs & benefits
Key features of a command (planned) economic system:
1. Resources are largely state-owned i.e. through nationalised industries
6. The government determines which products are to be supplied
7. Market prices play little or no part in informing resource allocation decisions
Problems with centrally planning the allocation of resources:
1. Government agencies usually have poor information about what to produce or rely too
heavily on political priorities rather than using market forces
8. Inefficient firms (state-owned enterprises) are protected and kept going; making it hard for
scarce resources to move to dynamic and efficient firms.
9. Price controls invariably lead to shortages and surpluses – central planners are
unable/unwilling to respond quickly to changing needs and wants
Key roles for the state (government) in a mixed economy:
1. Providing public goods that private sector supplies might be able to
10. Use taxes and subsidies to change market prices and redistribute income and wealth
11. Regulate industries when there is a need for consumer protection e.g. to counter-balance
the monopoly power of large-scale businesses
Functions of money:
1. Medium of exchange
12. Store of value
13. Standard of deferred payment