Microeconomics notes covering topics encountered at A Level. Perfect for exam preparation, filled with unique points to give you that edge against other students.
Economics is concerned with how societies organise scarce productive resources in order to
satisfy people’s wants. Models are used to develop theories of behaviour, which are based
on assumptions from which deductions can be made. When building models, economists
work on the basis that all other variables are equal - ceteris paribus - to analyse the impact
of a single change.
Economists can’t conduct laboratory experiments since economics concerns society, which
means economic policies may work better in some countries/time periods etc than others.
POSITIVE AND NORMATIVE ECONOMICS
Positive statements are objective statements which are based on facts, so therefore can be
proved or disproved. They may use official data such as GDP or the rate of unemployment or
the exchange rate.
Normative statements are subjective statements which are based on value judgements, so
therefore cannot be proved or disproved. They relate to what might/should/would happen
in the economy.
THE ECONOMIC PROBLEM
Scarcity exists because resources are finite whereas wants are infinite.
Societies must question:
1. What to produce and how much to produce.
2. How should goods and services be produced.
3. How should the goods produced be allocated.
Resources are referred to as factors of production, which include:
1. Land: natural resources, raw materials, soil fertility...
2. Labour: those using man made effort (physical and mental) in the production of
goods.
3. Capital: man-made aid to production such as factory buildings, offices, machinery, IT
equipment, and are used to make other goods and services.
4. Enterprise: the entrepreneur brings together the other factors of production in order
for goods to be produced, and takes risks involved in production.
Renewable resources are those whose stock levels can be maintained at a certain level.
Non-renewable resources are those which will eventually be completely depleted.
Scarcity implies choices must be made, but each choice comes with an opportunity cost.
This is the next best alternative forgone when a choice is made.
, Economic goods are created from resources that are limited in supply and so are scarce, and
so command a price.
Free goods are unlimited in supply such as sunlight, because consumption by one person
does not limit consumption by another. The opportunity cost of consuming a free good is 0.
PRODUCTION POSSIBILITY FRONTIERS
Opportunity cost = total lost/total gained
A boundary that shows the combined maximum productive potential of two goods if all
resources are fully and efficiently employed, in a specified time.
Any point on the PPF indicates the maximum productive potential of the economy and that
resources are being used efficiently.
Any point inside or on the PPF represent combinations of the two products which are
obtainable, but aren’t currently since resources aren’t fully employed. Any point outside the
PPF would be currently obtainable, but would be obtainable if there was economic growth.
The PPF is concave to the origin, explained by the concept of marginal analysis. Marginal
analysis is concerned with the impact of additions to or subtractions from the current
situation. The rational decision-maker decides on an option only if the marginal benefit
(extra capital goods) exceeds the marginal cost (extra consumer goods). The opportunity
cost is not constant (PPF not a straight line) because some resources are better suited to the
production of some goods, while others are better suited to the production of capital goods:
imperfect factor substitutability.
Economic growth is an increase in the productive potential of the economy indicating an
increase in real output, causing a rightward shift in the PPF.
Factors causing an outward shift:
1. Discovery of new natural resources.
2. Development of new methods of production which increases productivity.
3. Technological advancements.
4. Improved education and training which increase the productivity of the workforce.
5. Factors which lead to an increase in the size of the workforce, e.g immigration,
increased retirement age, better childcare to enable women to join the workforce.
Economic decline is a decrease in the productive potential of the economy indicating a
decrease in real output, causing a leftward shift in the PPF.
Factors causing an inward shift:
1. Natural disasters, since they destroy productive capacity.
2. Depletion of natural resources.
3. Factors which lead to a decrease in the size of the workforce, e.g less immigration
and more emigration, an increase in the number of years in education.
4. A deep recession that results in a loss of productive capacity with factories closing
permanently.
In the short run, choosing capital goods over consumer goods causes a fall in short term
living standards, but economic growth in the long run since these extra capital goods causes
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