Summary Cambridge International AS & A Level Eco, ISBN: 9781107679511 Topic 1:Basic Economic ideas
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Topic 1:Basic Economic ideas (9708)
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CIE
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Cambridge International AS and A Level Economics Coursebook with CD-ROM
These documents are a summary of Topic 1 of Economics (CIE).
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Summary Cambridge International AS & A Level Eco, ISBN: 9781107679511 Unit 3 - Government intervention in the price system (9708)
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Topic 1:Basic Economic ideas (9708)
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Economics notes
Topic 1:
Basic Economic ideas and resource allocation
Scarcity, choice & opportunity cost
The fundamental economic problem
➔ Unlimited wants and needs and limited resources leads to scarcity which leads to
making choices.
➔ Resources have to be used and distributed
◆ Eg: you have only $1 and you go to a shop, you can buy either the chocolate bar
or the packet of crisps.
● The scarcity of the resource (the money) means a choice has to be
made between the chocolate and the crisps
Opportunity cost
➔ The value of the next best alternative forgone (important to economic agents)
◆ Eg: the opportunity cost of choosing the crisps is the chocolate bar
➔ When producing goods, consider:
◆ What to produce
◆ How to produce
◆ For whom to produce
Ceteris Paribus
➔ Assumes that all other things are held constant or are equal when one variable is
changed
◆ Eg: if the price of Coca-cola falls, its demand will increase
1
, The margin and decision making at the margin
➔ Has to think about what the next step or action means for the consumer
➔ Law of diminishing marginal returns: theory that predicts that after some optimal
level of capacity is reached, adding an additional factor of production will result in
smaller increase in output
◆ Eg: a worker may produce 100 units per hour for 40 hours. In the 41st hour, the
output of the worker may drop to 90 units per hour
Time dimensions
1. Short run: time period when a firm can only change some and not all factor inputs,
at least 1 factor must be fixed.
a. This means, there is a limit to the extent it can respond to price changes
2. Long run: time period when all factors of production are variable, all factors can be
varied
a. This means firms can increase their capacity by increasing their factors of
production
3. Very long run: time period when all key inputs into production are variable
a. Eg: technology, government regulations and social consideration
Positive & Normative statements
● Positive statements: based on empirical or actual evidence.
○ Objective statement - can be tested using factual evidence - can be rejected
or accepted after being examined
○ Look for words such as:
■ “will”
■ “is”
2
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