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Microeconomics edexel theme 1 ADV and DISADV
- Module
- Microeconomics - Theme 1+ 4
- Institution
- PEARSON (PEARSON)
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Economics Micro Theme 1Topic Advantages & Disadvantages
Analysis – Evaluations
Positive & Normative Economic Statements
Advantages Disadvantages
Positive statements: provide an
∙ Positive statements: Objective
objective view of what is happening
analysis based on empirical evidence e.g. the rise in unemployment will lead
∙ Not prone to political bias to a fall in real wages without
determining causes or solutions
∙ More effective at making predictive Ceteris paribus positive economic
statements ab3out the economy statements lack context of why
the economic conditions occur.
∙ Avoid bias and value judgements
Positive statements are data based so
∙ Normative statements: policies are many lack evidence to determine true
relationships.
subjective and can be aligned with
Normative statements:
desired outcome e.g. the
Can have bias and value judgements
unemployment rate
that are not objective
should decrease to improve welfare
Over-reliance on personal opinions can
∙ They encourage innovation and trial lead to difficulties in measuring effects
of economic models and success
May conflict with economic efficiency
∙ Promote a political agenda or values such as maximizing profits or meeting
government macro objectives
Evaluation
∙ Depends on the amount of information available to make positive statements how
valid they are
∙ Normative statements can be biased but this may be essential to promote a policy
view e.g. the Lib Dem view on tuition fees ought to increase funding and
, competitiveness of UK universities
1
Scarcity The Economic Problem
Advantages Disadvantages
∙ Scarcity means prices are attributed ∙ Limited growth if resources
to resources to reflect their are scarce and finite
wealth/value
∙ Leads to higher prices and
∙ Scarcity indicates an opportunity cost shortages which can lead to market
of using one resource over another failure
∙ Firms will seek cheaper factors that ∙ Price is the only way to allocate
are less finite so putting less pressure on scarce resources in the free market
scarce resources and forces firms into price mechanism, which leads to
renewables and sustainable materials market failure, as the poorer cannot
∙ Scarcity requires the combination of afford essential goods and services. ∙
resources to be developed to Short-run profit motives leads to
maximize efficiency failure to seek renewables or to
stock pile or buy up as speculation
∙ Scarce resources may be released
scarce resources.
with more capital e.g. oil exploration
∙ Richer monopoly firms may only
have access to scarce resource or
be able to R&D finding more.
Evaluation
∙ Depends on the resource – free good like sea water and air are not scarce ∙ Scarce
resources can be made more elastic in supply with more economic development and
research
∙ In the long run all factors are variable in supply but there are finite resources such
as freshwater
∙ Depends on the competing joint demand for scarce resources e.g. water for drinking
and washing
∙ Firms may not be able to compute the opportunity cost of using scarce resources in
the LR
Production Possibility Frontier
,Diagram
Advantages Disadvantages
∙ The PPF shows the efficient allocation of ∙ The PPF is a simplistic view of the
scarce resources and how they should be economy as it only assumes
there
allocated given the available technology ∙
are two goods or services
Shows the way two resources can produced e.g. consumer and
produce an output of two goods with capital goods.
2
considerations of opportunity cost –
∙ The PPF may show productive
shows Pareto efficiency
efficiency whether the resources
∙ Demonstrates how efficiency or are utilized but doesn’t show
improvements in capital can lead to whether
an increase in growth or shift the resources are allocative
outwards of the PPF of one or more efficient and meet consumer
goods preference. E.g. we can be
productive making shoes but the
∙ Shows the way underused or
wrong size, colour and only left
underutilized factors lead to reduced feet shoes.
potential output inside the PPF
∙ Shows comparative advantage and ∙ PPF does not show the extent of
the opportunity cost of production growth and whether the productive
of one potential of the economy is fully
country against another realized e.g. there is a small
degree of unemployment at 4%
though this is the level of full
employment.
∙ Factors can be fully utilized
producing negative externality
demerit goods that can harm
, consumer welfare
Evaluation
∙ The curved shape of the PPF shows diminishing marginal returns as resources are
fully employed producing more of one good.
∙ It is difficult to measure the trade off and opportunity cost of different goods e.g. capital
and consumer goods.
∙ The productive frontier of the economy and what level of productivity is
unobtainable outside the frontier is difficult to measure nationally where growth
has regional differences
∙ The PPF doesn’t account for why the movements along or outwards of the PPF occur
Specialization & Division of Labour
Advantages Disadvantages
∙ Increased productivity due to ∙ Dependency on one method or
more efficiency and less wastage manufacturing unit of output –
leads to a less diverse economy
∙ Training costs are less as workers
which is
operate in one area unable to cope with economic
∙ Export markets increase as shocks
firms/countries incur less opportunity ∙ Less chance of cross-subsidisation
cost in output and this can lead to of a declining or loss-making industry
comparative trade advantages e.g. UK car industry in 1970s or
∙ Firms have fewer marginal Nigerian oil industry today.
costs/average costs per unit and reach ∙ Work is repetitive and
diseconomies of scale at a later level demotivating for workers and leads
of output to inability to change employment
∙ Can lead to higher quality and and lower
wages as trained workers in same
customer satisfaction of niche
markets. industry are price elastic in supply.
∙ Can promote brand awareness e.g. ∙ In high skilled trades those with
Nike specialism in sportswear specialization can have higher
wages
3
and lead to inequality in wage
distribution in an economy e.g.
premier league and non-league
football
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