Alevel Economic Revision Basic Economic ideas and resource allocation
Revision Material
Edition: 22 March 2020
Chapter 1 Basic economic ideas and resource allocation
Learning outcomes
Candidates should be able to:
(a) Scarcity, choice and - the fundamental economic problem
opportunity cost - the meaning of scarcity and the inevitability of choices at all levels (individual, firms,
governments)
- the basic questions of what will be produced, how and for whom
- the meaning of the term, ‘ceteris paribus’
- the margin and decision making at the margin
- short run, long run, very long run
(b) positive and - the distinction between facts and value judgements
normative statements
(c) factors of production - the rewards to the factors of production: land, labour, capital and enterprise
- specialisation and division of labour
(d) Resource allocation in - decision making in market, planned and mixed economies
different economic - the role of the factor enterprise in a modern economy
systems and issues of
transition
(e) Production possibility - shape and shifts of the curve
curves - constant and increasing opportunity costs
(f) money - functions and characteristics in a modern economy
- barter, cash and bank deposits, cheques, near money, liquidity
(g) Classification of - free goods, private goods (economic goods) and public goods
goods and services - merit goods and demerit goods as the outcome of imperfect information by consumers.
,(a) Scarcity, choice and opportunity cost
1. the fundamental economic problem
scare resources relative to unlimited wants with factors of production are finite.
the situation of the relative scarcity of resources in relation to the unlimited wants and needs of people
The fundamental problemin economics is that resources are scarce and wants are unlimited, so there is always a choice required between
competing uses for the resources.
2. the meaning of scarcity and the inevitability of choices at all levels (individual, firms, governments)
scarcity means a situation in which wants and needs are in excess of the resources available OR a condition where there
are insufficient resources to satisfy all the needs and wants of people.
Human nature will make the solution of scarcity impossible
Scarcity forces individuals to make the choice, a product has an opportunity cost then the scarcity exists
When less certain weather patterns and a fashion for greater consumption, the level of scarcity increases
More efficient in resources management, the problem of scarcity will decrease, when by political decision, the more equal distribution of goods
inevitability of choices means underpins the concept that resources are scare so choices have to be made by consumers,
firms and governments.
Given the existence of limited resources and unlimited wants and needs, a choice is inevitable
Scare resources → inevitability of choices → opportunity cost
Opportunity cost – the cost expressed in terms of the best alternative that is forgone. When choosing the goods, it
indicated the benefits that could have be obtained by choosing the next best alternative.
Link between opportunity cost and basic economic problem.
Limited resources and unlimited wants mean that scarcity will always exist. Scarcity involves choice which means the
sacrifice of the next best alternative where opportunity cost comes in.
3. the basic questions of what will be produced, how and for whom
These are the result of scare resources and unlimited wants. Scarcity exists and makes choices necessary and this is
found in all type of economy
What to produce - because we can not produce everything, we need to decide what to produce and in what quantities
How to produce - This question rises since resources are scarce in relation to unlimited wants; we need to consider how
resources are used so that the best outcome arises. We need to consider how we can get the maximum use out of the
resources available to us.
For whom to produce - Because we can not satisfy all the wants of all the population, decisions have to be taken
concerning how many of each person’s wants are to be satisfied.
4. the meaning of the term, ‘ceteris paribus’
refer to a situation where ‘other things remain equal’
To simplify an actual situation by assuming that apart from a single change of circumstances, everything else is
unchanged. For example, a change in the price of a good is analyzed on the assumption that all other things that affect
the quantity demanded remain the same.
The other factors which could influence a relationship between two variables are assumed to remain constant
Isolate the effect of one variable on another variable, the effect of a change of one variable is being considered in isolation
i.e. Factors affecting demand other than price are held constant
, 5. the margin and decision making at the margin
margin – the point at which the last unit of a product is consumed or produced
‘at the margin’ means that a small change in one economic variable will lead to further small changed in other variables.
The discussion of constant and increasing opportunity costs pointed out that where increasing opportunity costs applied,
the marginal cost of production would increase
Example
Marginal cost refer to the additional cost of producing one more unit of a product
Marginal utility refers to the additional satisfaction gained from the consumption of one more unit of a product
Marginal efficiency of capital is the additional output produced by the last unit of capital investment that has been
employed in the process of production
‘at the margin’ means they are concerned with the effect of adding a further action to the current level of activity.
Decision-making by individuals, firms and governments is based on choices at the margin
The margin and change
Decision making by individuals, firms and governments is based on choices at the margin; that is, once behaviour has
been optimised, any change will be detrimental as long as conditions remain the same.
6. short run, long run, very long run
short run – time period when a firm can only change some and not all factor inputs, at least one factor is fixed
ü when labour, a variable factor of production can be increased or decreased to change output. So with all the other factors of production
remaining the same (ceteris paribus), a firm taking on more workers may be able to increase its output
long run – time period when all factors of production are variable, all factors can be varied
very long run – time period when all key inputs into production are variable
ü key inputs can include technology, government regulations and social consideration
(b) positive and normative statements
1. positive statements is one that is based on empirical or actual evidence, it is an objective statement that can be tested
using factual evidence. Can be shown to be correct or incorrect by testing its validity and it is kind of outcomes of an
economic ation.
2. normative statements is one that is subjective about what should happen, involves making a value judgement. An
opinion that is based upon a belief rather than on factual evidence and expresses an opinion
(c) factors of production
anything that is useful in the production of goods and services
1. land – natural resources of an economy, renewable and non-renewable. e.g. earth, lakes, rivers and forests and mineral
deposits below the earth and the climate above. The reward of owning land is the income / rent that is generated.
2. Labour – is concerned with the workforce of an economy in terms of both the physical and mental effort involved in
production, human resources, determinant of nation’s population and training and education. Not all population is
available, as it is above or below the working population age and some choose not to work. The reward of labour is the
wage or salary that is paid.
