This document has detailed revision notes for International A level Economics Unit 1 - Markets in Action. These notes helped me achieve an A in Unit 1.
I have included exam-style notes for topics such as externalities, government intervention, government failure, moral hazard, price/income/cross...
Answer: They are objective statements. They are based on facts that can be tested as true or false by investigating the evidence
2.
Normative statements
Answer: They are subjective statements. They are based on value judgements that cannot be tested as true or false by investigating the evidence
3.
Opportunity cost
Answer: It is the next best alternative forgone
4.
Renewable/ sustainable resources
Answer: Resources which replenish naturally after use and can be used again and again
5.
Non-renewable resources
Answer: Resources which will eventually be exhausted upon continued consumption. They are finite resources.
6.
Sustainability
Answer: The consumption of resources at a rate that will ensure its availability for the future generations
7.
Economic goods
Answer: Goods that use up scarce resources in their production and their consumption has an opportunity cost
8.
Free goods
Answer: Resources which are so abundant that their availability is not a constraint on economic activity. Their consumption has no opportunity cost
9.
Production possibility frontier
Answer: Shows the maximum output combinations of two goods that an economy can produce when all its resources are fully and efficiently employed
10.
Consumer goods
Answer: They directly provide satisfaction (utility) to consumers
Content preview
TOPIC 1 – INTRODUCTORY CONCEPTS
What is economics?
Economics is the concerned with the ways by which societies organise scarce resources in
order to satisfy wants.
Economics as a social science
Economics is a social science which concerns the study of human behaviour
As a result, economists cannot conduct scientific laboratory experiments like in natural
sciences
They typically examine what has already occurred in order to test their theories
Theories and models
Economists develop models or theories, which are simplified representations of the world
The use of assumptions in building models
When building models, economists use the “ceteris paribus” assumption which means “other
things being equal”
Positive and normative statements
Positive statements are objective statements
They are based on facts that can be tested as true or false by investigating the evidence
Example: EU farm subsidies increase the supply of agricultural commodities
Normative statements are subjective statements
They are based on value judgements that cannot be tested as true or false by investigating the
evidence
Example: Subsidies paid to farmers in the EU are unfair to farmers in Ghana
These may include key words such as should, fair, unfair, too high, too low etc.
TOPIC 2 – THE ECONOMIC PROBLEM
Scarcity
Scarcity exists because resources are finite whereas human wants are infinite
The basic economic problem is that human wants are unlimited but resources are scarce
(limited)
Scarcity required economic agents to make choices about how to allocate our limited
resources to provide for our material wants
, This involves 3 fundamental economic questions:
What to produce?
How to produce?
For whom to produce?
Opportunity cost
It is the next best alternative forgone
Factors of production
Land: It includes all natural resources (gifts of nature) such as minerals, fertile land, resources
found in the sea.
Labour: It refers to the physical and mental effort by workers in the production process
Capital: It refers to man-made resources which aid in the production process. Capital helps to
generate further output e.g. machines
Enterprise/entrepreneurship: Entrepreneurs are individuals who take a business risk in
organising the other factors of production in order to produce a good or service. They enjoy all
the profit or bear all the loss
Renewable and non-renewable resources
Renewable/sustainable resources: Resources which replenish naturally after use and can be
used again and again. For example, solar energy, wind power, forestry, hydro.
Non-renewable resources: Resources which will eventually be exhausted upon continued
consumption. They are finite resources. For example, coal, oil, natural gas (fossil fuels)
Sustainability
It refers to the consumption of resources at a rate that will ensure their availability for the future
generations
Types of goods
Economic goods: Goods that use up scarce resources in their production and their
consumption has an opportunity cost
Free goods: Resources which are so abundant that their availability is not a constraint on
economic activity. Their consumption have no opportunity cost. For example, sunlight or air
TOPIC 3 – PRODUCTION POSSIBILITY
FRONTIER (PPF)
PPF
PPF shows the maximum output combinations of two goods that an economy can produce
when all its resources are fully and efficiently employed
, Any point on the PPF shows that resources are fully employed (efficient) e.g. point M
Any point inside the PPF shows that unemployed resources (inefficient) e.g. point X
A movement from X to M shows reduction in unemployed resources
Point Z is currently unattainable with the given amount of resources and the current state of
technology
Point Z can only become obtainable in the long run if there was economic growth
PPF and opportunity cost
What is the opportunity cost of moving from M to N? Answer: 100 capital goods
, What is the opportunity cost of increasing production of capital goods from 700 to 800?
Answer: 500 consumer goods
What is the opportunity cost of producing 800 cars? Answer: 200 computers
What is the opportunity cost of producing 1000 computers? Answer: 200 cars
Shape of the PPF
Concave shaped PPF:
The PPF is concave in shape because as more of one good is produced an increasing
amount of other is forgone i.e. opportunity cost increases
Straight line PPF:
A straight line PPF represents constant opportunity cost
,Distinction between capital goods and consumer goods
Consumer goods: They directly provide satisfaction (utility) to consumers e.g. chocolate bar
Capital goods: Those goods which produce other goods and services. They provide
satisfaction to consumers indirectly e.g. machinery, factory buildings
Significance of capital goods for productivity and economic growth
The movement from W to Z increases the production of capital goods which will cause an
increase in the productive capacity of the economy resulting in an outward shift of the PPF and
economic growth
However, the loss of consumer goods means that current living standards will fall
Factors causing an outward shift in the PPF (economic growth)
An outward shift of the PPF represents an increase in the productive potential of an economy
and thus economic growth
PPF will shift outward due to:
Discovery of new natural resource e.g. oil and gas
Technology advancements that lead to increased productivity of capital equipment
Factors which lead to an increase in the size of the workforce e.g. immigration, increase
in the retirement age
Improvements in education and training which increases the productivity of the
workforce
, Factors causing an inward shift in the PPF (economic decline)
PPF will shift inward due to:
Natural disasters e.g. earthquakes, floods which cause a destruction of productive
resources
Depletion of natural resources
Wars
Global warming/climate change which may lead to a loss of farmland, rising sea levels
and more extreme weather
Emigration of skilled workers
TOPIC 4 – DEMAND
Demand
Demand refers to the willingness and ability of consumers to buy goods and services at given
prices over a given time period
Law of demand
Ceteris paribus:
If price decreases, quantity demanded increases
If price increases, quantity demanded decreases
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