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Summary Edexcel Economics A - Theme 1 - Topic 1.1 - Nature of Money $7.16   Add to cart

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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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  • February 8, 2021
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Microeconomics – 1.1- Nature of Economics
Ceteris 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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