Unit 1 - Introduction to markets and market failure
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Theme 1
, Introductory concepts
WANTS AND NEEDS = UNLIMITED
RESOURCES = LIMITED
RATIONAL - logical and rational by analysing all options → bounded rationality as we are limited - heuristics
MAXIMISING - option with the best outcome e.g. firms maximise profits, households maximise utility SUSTAINABILITY - the ability
of the current generation to
POSITIVE ECONOMICS - measured by data and can be proved or disproved meet the current wants and
needs without compromising
NORMATIVE ECONOMICS - subjective, value judgements, and cannot be tested true or false the future generations ability
to meet their own wants and
MARGIN - where small incremental changes take place
needs
CETERIS PARIBUS - assumption that if one variable changes, the rest remain unchanged allowing us see cause and BIG ECONOMIC QUESTION
effect to make predictions
How to allocate scarce resources
OPPORTUNITY COST - the value of the next best alternative foregone when an economic decision is made between competing uses to meet
wants and needs?
MODEL OF PRODUCTION FACTOR PAYMENTS
Allocative efficiency - what to
L Land - naturally occurring FOP Land - rent produce?
L G +S Productive efficiency - how to
C
produce?
Labour - human FOP Labour - wages
Distributive efficiency - who to
produce for?
Capital - manmade FOP Capital - interest
Resources are scarce but choices need
Enterprise - entrepreneurial and risk Enterprise - profit to be made by economic agents
Inputs Outputs taking FOP
Economics is a social science and builds models (Simplified) to build relationships between independent and dependent variables - explain and
predict → use to make assumptions e.g. ceteris paribus and policies
Observe and create theories on possible relationships on cause and effect → construct models → collect data for and test hypotheses. However in
the real world variables cannot be kept constant
, NOT IN AI
Production Possibility Frontier
Shows the maximum possible output of 2 competing uses, using all resources fully and
efficiently, with a fixed state of technology in a given period of time
Using all resources fully and efficiently = movement along the PPF
A point on the PPF = max possible output with all resources being used fully and efficiently
A point inside the PPF = there is unemployed resources
A point outside the PPF = not possible
Technological Progress
WHY IS IT CURVED?
Resources are not mobile between uses Improves capital productivity = increases
Consumer Vs. Capital Goods Usually shifts outwards max output = PPF shifts outwards
CAPITAL GOODS - Used to produce other products Movement towards PPF = increase in quality
More capital goods = increases future consumer goods and quantity of fop = economic growth
CONSUMER GOODS - Used to meet the wants and needs of consumers = increases SOL
Trade off between consumer and capital
Land - quality - Fertilisers, using brownfield
goods = economic growth
quantity - Land reclamation, natural resources
Labour - quality - education and training = increases productivity and skills
quantity - population growth
SOL INCREASES with consumer
Capital - quality - technical progress goods now but increases in the
future with more capital goods
quantity - investment (firms on cap goods)
Enterprise - MBA programmes, training
, NOT IN AI
Economic Systems
Market economy (capitalism) Command economy (communism)
- Products rationed by price - Resource use is set by planners
- Production is organised by individuals in - State owns FOP on behalf of people (collective
pursuit of profit ownership)
- FOP are owned privately and are hired in return - Products are rationed by various means e.g.
for payment coupons, queues, prives
- Resources are allocated the to production of - Prices don’t convey info
products which is determined by market
processes
Mixed economy: Free markets and government involvement
Specialisation and Money
- Doing what you are good at (skills/FOP) - Required dual coincidence of wants
- Promotes efficiency (static and dynamic) - Exchange price
- Allows greater output - Product of exchange relies on existence of money
Properties of money Functions of money
Recognisable, durable, divisible, portable and controllable in supply Medium of exchange, unit of account, store of value, standard of
deferred payment
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