I Io T0 QPM TKSQ 1 Ye E

Head to savemyexams.
com for more awesome resources
YOUR NOTES
A Level Economics A Edexcel 
1.1 Nature of Economics
CONTENTS
1.1.1 Economics as a Social Science
1.1.2 Positive & Normative Economic Statements
1.1.3 The Economic Problem
1.1.4 Production Possibility Frontiers
1.1.5 Specialisation & the Division of Labour
1.1.6 Free Market Economies, Mixed Economy and Command Economy
Page 1 of 19
© 2015-2023 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to savemyexams.com for more awesome resources
1.1.1 Economics as a Social Science YOUR NOTES


The Process of Developing Models
Economics is a social science
It studies societies and the human interactions within those societies
Human interactions are complex and are influenced by many variables
Social sciences also include subjects such as Psychology, Politics, Geography and
Business Studies
Due to the complexities within societies, economists build models so as to better

understand certain interactions
A model is a simplified version of reality
Some models are more complex than others. For example, the Circular Flow of
Income model seeks to demonstrate the interactions of all economic agents (firms,
households, government, banks, international trade) within an entire economy
All models make a range of assumptions. These are often generalisations about
behaviour, choices and likely outcomes
These assumptions are necessary so as to account for complex human behaviour and
constantly changing variables
When evaluating different models, the underlying assumptions should always be
considered
To think like an economist involves identifying which variables will be studied and which
ones will be excluded
It considers the type of relationship between variables (causal or correlation). For
example, data shows that when ice cream sales increase, so do car thefts. Correlation,
yes. Causation, no
Some economists will build an argument to include certain variables in a study and
others will argue to exclude them. They will each provide a justification for their
decision
Two economists analysing the same data may end up with vastly different
interpretations. This is often due to the different variables that each economist
chooses to focus on. This is the complexity found within social sciences
Page 2 of 19
The Use of Ceteris Paribus YOUR NOTES

Due to the large number of variables that can influence any particular economic 
interaction in society, economists create models using the principle of ceteris paribus
Translated from Latin, ceteris paribus means 'all other variables remain constant'
It allows economists to simplify and explain causes and effects, even if the
explanation is somewhat limited by the assumptions
For example, there are many factors that affect the level of unemployment in an
economy (interest rates, consumer confidence, firms investment, government
policies etc.). However, using ceteris paribus, economists can simplify the economic
model to analyse just two variables (unemployment and interest rates). The analysis
is conducted ceteris paribus. The analysis is conducted ceteris paribus. All the other
variables remain constant, even when they are highly likely to have changed
Page 3 of 19
The Inability to Make Scientific Experiments YOUR NOTES

The natural sciences use the scientific method to prove a relationship between two 
variables
Briefly explained, the scientific method includes the following steps
Define a question to investigate
Develop a hypothesis (make a prediction)
Conduct a test
Gather data
Analyse the data
Report the conclusions
If the relationship between two variables is proven, then as long as the test conditions
are replicated, the conclusions to that experiment should be the same anywhere in the
world.
The social sciences use a variation of this method called the social scientific method as
there is an inability to make scientific experiments the results of which can be proven time
and time again
This is due to the complexity of human nature and the significant number of social
interactions that are taking place in any economy at any given point in time
The steps in the social scientific method are similar but there is a key difference
Define a question to investigate
Develop a hypothesis using ceteris paribus (make a prediction)
Conduct empirical research
Gather data
Analyse the data
Report the conclusions
Empirical research is collected through observations, surveys, opinion polls etc.
The results of the same hypothesis can vary significantly when conducted by
different researchers at different time periods and between different places and
cultures
Economic models are developed by economists once a hypothesis has been repeatedly
proven or rejected in different circumstances.
Page 4 of 19
1.1.2 Positive & Normative Economic Statements YOUR NOTES


Positive & Normative Statements
Positive economics is concerned with objective statements of how a market or an
economy works
These positive economic statements are based on empirical evidence and tend to be
statements of fact
They can be proven to be true or false
These are examples of positive economic statements
The UK unemployment rate has fallen from 4% to 3.7% in the past three months
Increasing the minimum wage last year in the UK resulted in improvements to
wage inequality
Prices in the UK have risen dramatically, partly due to the 20% increase in the
price of oil
Normative economics focuses on value judgements. These judgements are built around
opinions and beliefs as to what the best economic policies or solutions may be
These judgements are called normative economic statements
Normative economic statements are what separate political parties and the different
economic agendas they put forward
These are examples of normative economic statements
Every economy should aim to provide free healthcare for its citizens
Corporation taxes in an economy should be higher than personal income taxes
The best way to deal with a rise in crime is to employ more police
 Exam Tip
Examiners will often assess your understanding of positive and normative economic
statements in the MCQ questions. They do this by asking you to identify either the
positive or negative statement in the list.
Normative statements often have the word 'should' in them (but not always).
Positive statements usually include data that is hard to challenge. Any use of
concrete data points towards the statement being a positive statement.
Page 5 of 19
The Role of Value Judgements YOUR NOTES

Value judgements influence individuals choices in the economic decisions they make 
These decisions can be related to any part of their lives, from what they eat, to where
they work, to how they maintain their health
For example, deciding not to eat meat is often a value judgement based around
unethical methods of food production. By providing statistics on the harmful impact
that meat production has on the environment, environmental campaigners are
attempting to demonstrate that this is no longer a normative issue
Another example is the way that many individuals choose to smoke nicotine based
products. The value judgement they make is that the benefits they get from smoking
outweighs any risk of cancer.
Value judgements influence governments choices with regards to the economic policies
they choose to adopt and spend money on
The USA spends more money on imprisoning drug users than rehabilitating them
In the UK, the Government has recently increased its spending on rehabilitation
To say the UK approach is better would be a normative statement
To say that the UK government spends more per head on rehabilitation would be a
positive statement
Page 6 of 19
1.1.3 The Economic Problem YOUR NOTES


The Basic Economic Problem: Scarcity
The basic economic problem is that resources are scarce
There are finite resources available in relation to the infinite wants and needs that
humans have
In economics, these resources are called the factors of production
Due to the problem of scarcity, choices have to be made by producers, consumers
and governments about the best (most efficient) use of these resources
Economics is the study of scarcity and its implications for resource allocation in society
In a free market, scarcity has a direct influence on prices
The scarcer a resource, the higher the price for it will be
The less scarce a resource, the lower the price for it will be
Resources can either be renewable or non-renewable
Renewable resources can be used repeatedly and naturally replenished, for
example wind generated electricity
Non-renewable resources cannot be naturally replenished at a pace that keeps up
with consumption. For example, oil and coal
Opportunity Costs
Opportunity cost is the loss of the next best alternative when making a decision
Due to the problem of scarcity, choices have to be made about how to best allocate
limited resources amongst competing wants and needs
There is an opportunity cost in the allocation of resources

When a consumer chooses to purchase a new phone, they may be unable to
purchase new jeans. The jeans represent the loss of the next best alternative (the
opportunity cost)
When a producer decides to allocate all of their resources to producing electric
vehicles, they may be unable to produce petrol vehicles. The petrol vehicles
represent the loss of the next best alternative (the opportunity cost)
When a government decides to provide free school meals to all primary students in
the country, they may be unable to fund some rural libraries which may have to close.
The libraries represent the loss of the next best alternative (the opportunity cost)
Page 7 of 19
1.1.4 Production Possibility Frontiers YOUR NOTES


Production Possibility Frontiers
The Production Possibility Frontiers (PPF) model is an economic model that considers the
maximum possible production (output) that a country can generate if it uses all of its
factors of production to produce only two goods/services
Any two goods/services can be used to demonstrate this model
Many PPF diagrams show capital goods and consumer goods on the axes
Capital goods are assets that help a firm or nation to produce output
(manufacturing). For example, a robotic arm in a car manufacturing company is a
capital good
Consumer goods are end products and have no future productive use. For example,
a watch
A PPF for an economy demonstrating the use of its resources to produce capital or
consumer goods
Diagram Explanation
The use of PPF to depict the maximum productive potential of an economy
The curve demonstrates the possible combinations of the maximum output this
economy can produce using all of its resources (factors of production)
At A, its resources are used to produce only consumer goods (300)
At B, its resources are used to produce only capital goods (200)
Points C & D both represent full (efficient) use of an economy's resources as these
points fall on the curve. At C, 150 capital goods and 120 consumer goods are
produced
The use of PPF to depict opportunity cost using marginal analysis

To produce one more unit of capital goods, this economy must give up production of
some units of consumer goods (limited resources)
Page 8 of 19
If this economy moves from point C (120, 150) to D (225, 100), the opportunity cost of YOUR NOTES
producing an additional 105 units of consumer goods is 50 capital goods 
A movement in the PPF occurs when there is any change in the allocation of existing
resources within an economy such as the movement from point C to D
The use of PPF to depict efficiency, inefficiency, attainable and unattainable

production
Producing at any point on the curve represents productive efficiency
Any point inside the curve represents inefficiency (point E)
Using the current level of resources available, attainable production is any point on or
inside the curve and any point outside the curve is unattainable (point F)
Page 9 of 19
Shifts in the PPF YOUR NOTES

As opposed to a movement in the PPF described above, the entire PPF of an economy can 
shift inwards or outwards
Outward shifts of a PPF show economic growth & inward shifts show economic decline
Diagram Explanation
Economic growth occurs when there is an increase in the productive potential of an
economy
This is demonstrated by an outward shift of the entire curve. More consumer goods
and more capital goods can now be produced using all of the available resources
This shift is caused by an increase in the quality or quantity of the available factors of
production
One example of how the quality of a factor of production can be improved is
through the impact of training and education on labour. An educated workforce
is a more productive workforce and the production possibilities increase
One example of how the quantity of a factor of production can be increased is
through a change in migration policies. If an economy allows more foreign
workers to work productively in the economy, then the production possibilities
increase
Economic decline occurs when there is any impact on an economy that reduces the
quantity or quality of the available factors of production
One example of how this may happen is to consider how the Japanese tsunami of 2011
devastated the production possibilities of Japan for many years. It shifted their PPF
inwards and resulted in economic decline
Page 10 of 19
1.1.5 Specialisation & the Division of Labour YOUR NOTES


Specialisation & The Division of Labour
Scotsman Adam Smith is often referred to as the 'father of Economics'
He published 'The Wealth of Nations' in March 1776 and explained many fundamental
economic principles that we still use today
The premise of the book was to discuss how to increase productivity and wealth
Based on observations made during a visit to a pin factory, he developed the ideas of
specialisation and the division of labour
He noted that a single worker could not make more than 20 pins a day as it involved
around 18 different processes, such as cutting the wire, sharpening the end, stamping
the head etc.
However, if the labour was divided up into different tasks and workers specialised in
just that one task, Adam Smith estimated that just 10 workers could produce 48,000
pins per day
The division of labour is when a task is broken up into several component tasks
This allows workers to specialise by focusing on one (or a few) of the components that
make up the production process and thereby gain significant skill in doing it
This results in higher output per worker and so increases productivity
Specialisation occurs on several different levels

On an individual level
On a business level. For example, one firm may only specialise in manufacturing drill
bits for concrete work
On a regional level. For example, Silicon Valley has specialised in the tech industry
On a global level as countries seek to trade. For example, Bangladesh specialises in
textiles and exports them to the world
Page 11 of 19
Advantages & Disadvantages of the Division of Labour & Specialisation YOUR NOTES
Pros & Cons of the Division of Labour & Specialisation in Production 
Pros Cons
Higher labour productivity lowers cost/unit for Task repetition often leads to boredom and a
firms decrease in worker motivation
A decrease in motivation may lead to less

Lower costs can be passed on to consumers in
productivity and/or poorer manufacturing
the form of lower prices
quality
Lower costs can mean higher profits for the It may increase worker turnover rates as
firms. This may lead to higher wages for workers look to move on to a role that is more
workers stimulating
Increased productivity allows some firms to sell

Mass produced products often lack variety
beyond their local market into international
and do not take different consumer
markets
preferences into account
If workers lose their jobs, then it may be hard

It creates many low skilled jobs for them to find work as they are only trained in
one skill
Page 12 of 19
Pros & Cons of the Division of Labour & Specialisation in Trade YOUR NOTES
Pros & Cons of the Division of Labour & Specialisation in Trade 
Pros Cons
Higher labour productivity lowers cost / unit International trade is beneficial for the firms
for firms, which makes their goods more that can compete globally. However, some
competitive internationally (exports) industries will be unable to compete and will go
out of business
Increased exports can result in economic Many firms in an entire industry may close
growth for the nation leading to structural unemployment
Specialisation may create over-dependency

on other countries' resources. This may cause
Economic growth usually leads to higher
problems if conflict arises (For example,
income and a better standard of living
Europe's reliance on Russian natural gas during
the Ukraine crisis)
Income gained from exports can be used to Specialisation using a country's own resources
purchase other goods from around the world will lead to resource depletion over time.
(imports). This increases the variety of goods Specialisation will increase the rate of resource
available in a country depletion
Page 13 of 19
The Functions of Money YOUR NOTES

As individuals and firms trade with each other in order to acquire goods or raw materials, 
they require a means of exchange that is acceptable and easy to use
Modern currency fulfils this purpose and money functions as a medium of exchange, a
measure of value, a store of value, and a method of deferred payment
The Four Functions of Money

A Medium of A Method of Deferred
A Measure of Value A Store of Value
Exchange Payment
Without money, it Money provides a Money holds its Money is an
becomes means of value over time (of acceptable way to
necessary for ascribing value to course inflation arrange terms of
buyers and sellers different goods means that is not credit (loans) and
to barter and services always true!) to settle any
(exchange Knowing the price This means that future debts
goods) of a good in terms money can be This allows
Bartering is of money allows saved producers and
problematic as it both consumers It remains consumers to
requires two and producers to valuable in acquire goods in
people to want make decisions in exchange over the present and
each other's good their best interests long periods of pay for them in the
(double co- Without this time future
incidence of measure it is
wants) difficult for buyers
Money easily and sellers to
facilitates the arrange an
exchange of agreeable
goods as no exchange
double co-
incidence of
wants is
necessary
Page 14 of 19
1.1.6 Free Market Economies, Mixed Economy and Command Economy YOUR NOTES

Free Market, Mixed & Command Economies
In order to solve the basic economic problem of scarcity, economic systems emerge or are
created by different economic agents within the economy
These agents include consumers, producers, the government, and special interest
groups (e.g. environmental or trade unions)
The economic system aims to allocate the scarce factors of production
Any economic system needs to decide how to answer the three fundamental economic
questions
What to produce? More weapons for the military or more schools to educate the
children?
Who to produce for? Only those who can afford to pay for it? Or for everyone in
society?
How to produce it? Should more labour be used or should the economy focus on
using technology instead?
Adam Smith, Karl Marx and Friedrich Hayek had very different ideas about how these
questions should be answered
The Distinction Between Free Markets, Mixed and Command Economies

Free Markets Mixed Economies Command Economies
Friedrich Hayek Adam Smith Karl Marx
Page 15 of 19
YOUR NOTES
Friedrich Hayek believed Adam Smith advocated Karl Marx believed that free
that free markets with no for free markets with markets lead to 
government intervention some government capitalism in which the
provided the most intervention owners of the factors of
efficient allocation of He recognised that there production (Capitalists)
resources and that was a role for exploited the workers
command economies governments to ensure This creates inequality
were flawed efficiency in the allocation which will lead to a
He identified information of resources and provide breakdown between the
gaps between what the public and merit goods classes
economies actually However, he believed The role of the State is
required and what the economies function best therefore to share the
central planners in when private individuals means of production and
command economies work in their own self- ownership with all of the
were saying it required interest. workers in society
These gaps led to Famous quote: "It is not This required the abolition
shortages or surpluses of from the benevolence of of private property
goods/services in the butcher, the brewer, or This required the State to
command economies the baker, that we expect become the central
He felt that the threat to our dinner, but from their planner, deciding how
efficiency and economic regard to their own each of the three
growth is government interest" economic questions will
intervention be answered
A free-market economy is an economy that has no government intervention in the

allocation of resources and distribution of goods/services
A command economy is an economy in which all of the resources are owned by the state
and the government controls the distribution of goods/service
A mixed economy is a blend of the free market and planned economy as individuals, firms
and the government own factors of production and distribute goods/services
Page 16 of 19
Pros & Cons of Free Market & Command Economies YOUR NOTES
Each economic system has numerous advantages and disadvantages. Understanding the 
strengths and weakness of each system helps policy makers to tackle the disadvantages
head on while building on its strengths
The Advantages and Disadvantages of Free Market Economies and Command Economies
Type of Economy Advantages Disadvantages
Profit incentive motivates Wealth gets concentrated in

people to work or develop the hands of the few as they
entrepreneurial ideas are able to keep buying up
Greater variety of the scarce factors of
goods/services production
Competition leads to better This increases inequality
quality of goods/services such that the gap between
Competition leads to lower the rich and the poor
prices of goods/services continues to grow
Competition encourages Sometimes product quality
innovation and product falls as firms lower quality
Free Market Economy development standards in order to increase
Profits, income and wealth profits
are unlimited resulting in Workers get exploited
better standards of living Resource depletion and
More efficient use of scarce environmental degradation
resources are often ignored
Monopolies develop as firms
increase market power
through mergers and
acquisitions
This leads to exploitation of
consumers and supply chains
Page 17 of 19
Social equality is the goal of Receiving the same wage

YOUR NOTES
the system as opposed to disincentives people from 
profit maximisation, so there gaining difficult skills (e.g.
is less inequality doctor) as 8 years of study
All workers receive the same results in the same wage as
wage irrespective of role or no study
career. This helps create A lack of competition means
social equality that there is less innovation
Less unemployment and product development
Resources of the nation can There is a continual lack of
be directed towards urgent efficiency as central planning
Command Economy
priorities quickly always results in surpluses or
The government owns shortages of goods/services
monopoly businesses so Black markets multiply as the
consumer exploitation population seeks to address
through high prices can be shortages
avoided Access to higher standards
of living is. limited for most of
the population
Personal freedoms are
restricted
 Exam Tip
Multiple choice questions often explore your understanding of the different
characteristics of free market, mixed and planned economic systems.
When answering structured questions that ask you to discuss/explain the
difference between two systems, ensure that the disadvantages of one system are
not always just the opposite points to the advantages of the other system.
Develop some unique points for each system.
Role of the State in a Mixed Economy

Some mixed economies have a higher level of government intervention than others
Government intervention occurs mainly through taxation (to raise revenue) and then
spending that revenue to redistribute income and provide essential goods/services
There are many different type of tax intervention including personal income tax,
corporation tax, value added tax, tariff on imports, inheritance tax etc.
Income is redistributed through the creation of a welfare system which often includes
unemployment benefits, healthcare, and pension provision
Government spending is often focused on infrastructure, merit goods (e.g. schools)
and public goods (e.g. national defense)
Page 18 of 19
Page 19 of 19

I Io T0 QPM TKSQ 1 Ye E

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

I Io T0 QPM TKSQ 1 Ye E

Uploaded by

Copyright:

Available Formats

Head to savemyexams.

com for more awesome resources

1.1 Nature of Economics

1.1.1 Economics as a Social Science YOUR NOTES

Due to the complexities within societies, economists build models so as to better

The Use of Ceteris Paribus YOUR NOTES

The Inability to Make Scientific Experiments YOUR NOTES

1.1.2 Positive & Normative Economic Statements YOUR NOTES

The Role of Value Judgements YOUR NOTES

1.1.3 The Economic Problem YOUR NOTES

There is an opportunity cost in the allocation of resources

1.1.4 Production Possibility Frontiers YOUR NOTES

Any two goods/services can be used to demonstrate this model

The use of PPF to depict opportunity cost using marginal analysis

The use of PPF to depict efficiency, inefficiency, attainable and unattainable

Shifts in the PPF YOUR NOTES

1.1.5 Specialisation & the Division of Labour YOUR NOTES

Specialisation occurs on several different levels

A decrease in motivation may lead to less

Increased productivity allows some firms to sell

If workers lose their jobs, then it may be hard

Specialisation may create over-dependency

The Functions of Money YOUR NOTES

The Four Functions of Money

The Distinction Between Free Markets, Mixed and Command Economies

A free-market economy is an economy that has no government intervention in the

Profit incentive motivates Wealth gets concentrated in

Social equality is the goal of Receiving the same wage

Role of the State in a Mixed Economy

You might also like