International A level Edexcel Economics Unit 1
Notes
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 – PRODUC TION 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:
Notes
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 – PRODUC TION 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:
