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Summary A Level Edexcel Economics Theme 1 Notes
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- Theme 1
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A Level Edexcel Economics Theme 1 Notes
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Ilya KorzinkinSection One: The Nature of Economics
1. What are the four resources or factors of production?
LAND: includes all natural physical resources, like fertile farm land, the benefits from a warmer
climate and geographical position, harnessing of any renewable energy.
LABOUR: is the human input into production, such as the supply of workers available and their
labour productivity.
Is one of the factors that helps a country achieve its productive potential is the increase in the
quality or quantity of the Labour force. Can be affected greatly by labour migration.
CAPITAL:
Capital Goods: are used to produce other consumer goods and services in the future
Fixed Capital: includes machinery, equipment, buildings and factories, and new technology
Working Capital: is the stocks of finished and semi- finished goods or components that will be
either consumed in the near future or will be made into consumer goods.
Infrastructure: essential pillar for economic growth, includes road and rail networks airports and
telecoms
New or improved capital factors of production may be used to boost productivity of labor.
ENTREPRENEURSHIP: is regarded as a specialised form of labour input, often brought to the
markets by entrepreneurs, who invest their own financial capital in a business and take on risks,
thus their main rewards is profit for supplying products to a market.
2. Outline the basic economic problem regarding scarcity and choice?
The basic economic problem is scarcity - as while the resources are limited, we are a society with
unlimited wants , therefore we have to choose how best to efficiently allocate the limited resources,
making trade- offs. Therefore we have to investigate and decide what goods to produce, how best
to produce those goods, and who to produce the goods for.
3. What are renewable resources and non- renewable resources?
RENEWABLE RESOURCES: are commodities such as solar energy, oxygen, biomass, fish stocks
or forestry that are replaceable over time, providing that the rate of extraction is less than the
natural rate at which the resource renews itself
FINITE RESOURCES: cannot be renewed, like plastics, crude oil, coal, natural gas, other items
produced from fossil fuels
4. What are Capital and Consumer goods?
CAPITAL GOODS- are goods that are used to make consumer goods
CONSUMER GOODS AND SERVICES- are products which satisfy our needs and wants directly
‘
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, Ilya Korzinkin
5. Outline the concept of opportunity cost.
Opportunity cost measures the cost of any choice in terms of the next best alternative forgone.
6. What is the law of diminishing marginal returns?
The law of diminishing returns is the decrease in the marginal (incremental) output of a production
process as the amount of a single factor of production is incrementally increased, while the
amounts of all other factors of production stay constant.
Diminishing returns occur in the short run when one factor of production is fixed, like capital
If the variable factor of production is increased, like labour, there comes a point where it will
become less productive, and therefore there will eventually be a decreasing marginal and then
average product.
This happens because if capital is fixed, extra workers will eventually get in each-other’s way as
they attempt to increase production
7. Outline the concept of PPF’s.
- A PPF shows the maximum possible output combinations of two goods or services an economy
can achieve when all resources are fully and efficiently employed.
resources
- Relocating scarce resources involves an opportunity cost, i.e if we increase our output of
consumer goods, then fewer resources would be available to produce capital goods, if we want
to increase output of good X, we move along the PPF, which results in output of goods Y falling.
- We draw the PPF as concave to the
origin, as not all factors are equally
suited to producing items that are being
compared on the PPF.
- Combinations of goods lying inside the
PPF happen when there are
unemployed resources, or the resources
in an economy are not being used
efficiently.
- Combinations that lie beyond the PPF
are unattainable, a country would have
to have an increase in quantity or quality
of the factors of production, productivity
or new technology to attain those
combinations.
- Exchange rates and trade between countries allows nations to consume beyond their PPF.
- If there is an increase in the production of both goods, that means that there has been an
improvement in allocative efficiency.
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, Ilya Korzinkin
DIMINISHING RETURNS AND THE PPF
- The law of diminishing returns holds true that the opportunity cost of expanding output of X
measured in terms of lost units of Y is increasing, as not all machinery is equally suited the
output of both goods.
CONSTANT RETURNS TO THE FACTOR AND THE PPF
- If the opportunity cost for two products is constant, then they have perfect factor substitutability of
resources, thus marginal opportunity cost is constant, therefore there are constant returns to the
factor.
8. What causes shifts of the PPF both in and out?
OUT:
- When there are improvements in technology, quantity (due to investment or labor migration) or
quality of the factors of production (like labor
productivity)
- There is an improvement in allocative
efficiency or new factor inputs discovered
- There are technological advances leading to
increased efficiency
- A rise in productive potential brought about by
innovation and growth in entrepreneurial
activity (animal spirits) leading to more
businesses surviving and being created
- It can also shift out to showcase economic
growth: which is defined as a sustained
increase in a country’s productive capacity
- ALTHOUGH a short- term rise in capital investment may contribute to reduction in short- term
living standards, as more resources are allocated
to capital accumulation rather than to
consumption of goods and services.
IN:
- When the productive potential of a country has
suffered, perhaps due to a war or natural
disasters
- There is a net labor migration out of the country
- Long term fall in the productivity of labor
THERE COULD BE A LOPSIDED SHIFT IN A PPF,
if the factors of production only improve/get worse
for one of the two products
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, Ilya Korzinkin
9. Define Free goods and Economic goods.
FREE GOODS do not use up any factor inputs when supplied, they have a zero opportunity cost,
thus a marginal cost of supplying an extra unit of a free is 0.
ECONOMIC GOODS goods that are scarce because their use requires an opportunity cost.
10. Outline the main microeconomic concepts of Specialisation and Trade.
SPECIALISATION is the practice of an entity’s concentration on a specific task to improve
efficiency. Can be practiced by:
- Businesses, like specialist buyers employed by supermarkets
- Amongst countries- some specialising in Oil export, coffee, textiles etc.
- Regionally, ie coal regions
GAINS from specialisation may be:
- Higher output
- Greater variety of higher quality products for the customer
- A bigger market, such as global trade specialisation allowing the economies of scale to be
implemented, leading to lower unit costs and lower prices for the consumers
THE DIVISION OF LABOUR: occurs when production is broken down into many separate tasks.
GAINS from division of labour may be:
- Gain in productivity
- Lower cost per unit
- Reduce the price for consumers
LIMITATIONS of division of labor might be
- There may be a loss of motivation, due to the tasks at hand being unrewarding, thus may
actually decrease productivity, workers take pride in their work less, and absenteeism flourishes.
- This massively increases the worker turnover rate
- Some workers receive very little training, most of it hands- on, therefore have a limited skillset
which prevents them from moving to other jobs harder.
- Mass- produced, standardised goods, lack a variety for consumers
TRADE Comparative advantage exists between countries, only when one country has a
margin of superiority, decreased costs of production.
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, Ilya Korzinkin
11. What is Barter?
Barter is the practice of exchanging one good or service for another, without using money.
12. What is the double coincidence of wants?
In a barter economy, there has to be a double coincidence of wants for the changes of goods to be
successful, requiring each party of the transaction wanting what the other has to trade, thus without
the double coincidence of wants, the whole concept of the barter economy falls apart, as
exchanges are impossible.
13a. What are the four functions of Money?
A MEDIUM OF EXCHANGE
A worker accepts a payment in money, only being sure that he can exchange the money for goods
or services an economy has to offer. Money separates two sides of the barter transaction.
A MEASURE OF VALUE
Money acts as a unit of account, to which and with which different goods or services in an
economy may be comparable. Inflation destroys the ability of money to perform this function.
A STORE OF VALUE
The money links the present and the future, and workers can store money as a medium of
exchange for the purpose of spending it later and not now.
A METHOD OF DEFERRED PAYMENT
People lend money in the present only based on the assumption that the money lent would be able
to have the same purchasing power when paid back, same with companies accepting a payment
at a fixed price and for that outstanding sum to be seated in a year’s time for example, so again,
money acts as a link between different time periods. When money ceases to have this function,
credit borrowing collapses.
13b. Explain the term non-divisibility.
Indivisible goods, discrete items that can be traded only as a whole., such as in a barter economy,
when there is a double coincidence of wants, however one person does not have the sufficient
goods to trade with another, thus trade can not go through, as some items are indivisible, you can
not divide a cow in half.
14 Define and explain the key features of productive efficiency.
Productive efficiency- is concerned with producing goods
and services with the optimal combination of inputs to
produce maximum outputs for the minimum cost. To be
productively efficient, an economy has to produce on its PPF.
Points that lie outside the PPF are thought be productively
inefficient.
A firm is said to be productively efficient when it is producing
at the lowest point of the short run average cost curve (srac),
where marginal cost meets average cost.
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, Ilya Korzinkin
An economy can be productively efficient but have very poor allocative efficiency.
Allocative efficiency is concerned with the optimal distribution of resources. For example, if you
devoted 90% of GDP to defence, you could be productively efficient, but, this would be a very
unbalanced economy.
Technical efficiency is said to be achieved when it combines the optimal combination of labour
and capital to produce a good.
15. What is the key distinction between positive and normative economic statements?
Positive economic statements can be tested amended or rejected why referring to the available
evidence, Positive Economics deals with explanation, testing or rejecting of theories.
Normative economic statements carry value judgments and are subjunctive statements, that
carry an opinion rather than a fact and could be tested by looking at the available evidence. it is an
example of facts- focused, empirical approach.
16. What are the disadvantages and advantages of a traditional, free market, command and
mixed economies?
Type of economy Advantages Disadvantages
Traditional - All community members have - Discourages new ideas of living
certain economic roles life
- Stable, predictable and - Stagnation and lack of
continuous life progress may occur
- Everyone is provided for - Standards of living tend to be
lower
Command - Change is dramatic and in a - Consumer needs and wants
short amount of time not met
- Basic education, health care, - No effective incentive to get
and other public services are people working
available at little to no cost
- Large bureaucracy required,
consuming resources
- Not flexible to deal with day- to-
day changes
- Workers strive for quantity over
quality
- Individuals lack room for
initiative
Free Market - There is individual freedom for - Rewards only productive
everyone resources, not counting for the
poor or sick or young
- No government market failure
- There is not enough public
- Can gradually adjust to change goods produced, like defence
and healthcare
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, Ilya Korzinkin
- There is decentralised decision - Workers and businesses face
making uncertainty as a result of
competition and change
- Incredible variety of goods and
services
- High degree of consumer
satisfaction
Mixed - Assistance provided for those - High taxes might have an
who might have been left out adverse effect on the business
- If democratic, can elect and - Services are usually biased,
answer questions to the basic and the quality deteriorates
economic problem over time
- Ideally, the benefits of the - Sometimes inefficient
economy are shred
- More public services are
provided
TRADITIONAL ECONOMY- Traditional economy is an original economic system in which
traditions, customs, and beliefs help shape the goods and the services the economy produces, as
well as the rules and manner of their distribution. Countries adopting these systems are usually
rural and primary- sector based
COMMAND ECONOMY- is an economy in which production, investment, prices, and incomes are
determined centrally by the government.
FREE MARKET ECONOMY- is an economy where the government imposes few or no restrictions
and regulations on buyers and sellers. In a free market, participants determine what products are
produced, how, when and where they are made, to whom they are offered, and at what price—all
based on supply and demand.
MIXED ECONOMY- is an economic system protects private property and allows a level of
economic freedom in the use of capital, but also allows for governments to interfere in economic
activities in order to achieve social aims.
17. Why is Economics regarded as a Social Science?
Economics is regarded as a social science because it uses scientific methods to build theories that
can help explain the behaviour of individuals, groups and organisations.
18. What is the Ceteris Paribus assumption?
Ceteris Paribus translated from Latin is ‘all other things being unchanged or constant’. It is used to
rule out the possibility of other factors changing, when a specific relation between two variables is
investigated.
Is a polar opposite to ‘
mutandis’
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, Ilya Korzinkin
19. Outline the economic ideas of Adam Smith
Adam Smith introduced the idea of GDP measuring the wealth of a nation and that countries GDP
could be increased by specialisation Countries should specialise in a narrow range of activities and
trade these with what other countries were good at producing. Imports were therefore desirable as
it allowed for specialisation to occur. The Global GDP could also be increased (not fixed) by
specialisation and trade between countries. At a micro level the Pin factory example showed how
productivity could be increased and National Output (GDP) increased.by the Division of Labour His
ideas led to the UK being a free trade nation in 1848 making the UK the richest country in the
world. He also saw a role for the State beyond what occurred at the time as he saw the social
injustices of a free market on inequality. He wrote about the principles of a good tax that are still
used today. Adam Smith laid the foundations for modern Economics.
20. Outline the economic ideas of Karl Marx.
Disliked Capitalism as he saw it as an unfair system that would eventually self-destruct and be
replaced by a State controlled society that was led by the Proletariat or working In this society
everyone would be employed. Workers wanted high wages owners wanted low wages to boost
profit; the two would cause irreconcilable differences eventually leading to revolution and the
evolvement of a Socialist society run by the State. Lenin and Stalin used Marx's ideas to support a
Planned economy. Adam Smith and Marx would not have got on. He would have got on with
Charles Dickens.
21. Outline the economic ideas of Hayek.
Around in In the 20th century wrote "the road to serfdom". He saw the increasing role of the State
in Mixed economies and in Planned economies as denying freedom. Very much in favour of as
little State involvement in the economy as possible. Thatcher was a big fan.
Section Two: How the Markets Work
1. What is a market? Outline the key features.
A market is a medium that allows buyers and sellers of a specific good or service to interact in
order to facilitate an exchange.
Markets establish the going rates for goods and other services, which sellers determine by creating
supply and which buyers determine by creating demand.
2. What is the demand in a market?
Demand in the market is the amount of good that consumers are willing and able to buy at a
given price at a given time period.
The law of demand states that the quantity demanded for a good is investor related to its price.
3. What is the role of rationality in the market?
The role of rationality in any economic market analysis would be that we act rationally, logically in
our own self interest. The self- interest is fulfilled in a market transaction between two parties, as
they satisfy their needs, the interaction being actually born out of rational self interest.
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