AS REVISION: Chapter One

Economics is the study of how to allocate scarce resources in the most effective way.

The so-called economic problem of scarcity and choice is central to economics as a subject. The economic problem is how to allocate scarce resources among alternative uses. The resources are scarce in relationship to wants that are unlimited, leading to choices having to be made.

Household is a group of people whose spending decisions are connected.

We roughly divide the economy into two fields. The first field is microeconomics: the study of how households and firms make decisions in markets. The second field is macroeconomics: the study of issues that affect economies as a whole.

Model is a simplified view of reality that is used by economists as a means of explaining economic relationships.

Available resources in an economy are known by economists as factors of production. These are used to produce the goods (tangible products) and services (intangible products) to meet the need of the population. There are four different factors of production:

1. Land: natural resources in an economy.
2. Labour : the quantity and quality of human resources.
3. Capital: man-made aids to production.
4. Entrepreneurship: the willingness to take risks and organize production.
(Entrepreneur: someone who bears the risks of a business and who organizes production.)

Factor endowment is the stock of factors of production.

Production is the output of goods and services.

A want is anything you want, irrespective of whether you have the resources to purchase it.

Three fundamental economic concepts are scarcity, choice and opportunity cost.

Scarcity is a situation where there are insufficient resources to meet all wants.
Choice is the selection of appropriate alternatives.
Opportunity cost is the cost of the next best alternative foregone.

Specialisation is the concentration by a worker or workers, firm, region or whole economy on a narrow range of goods and services.

Exchange is the process by which goods and services are traded.

Subsidy is a payment by a governing body to encourage the production or consumption of a product.

Division of labour is the specialisation of labour where the production process is broken down into separate tasks.

Productivity is the output, or production of a good or service, per worker.

The production possibility curve shows the maximum quantities of different combinations of output of two products, given current resources and the state of technology.

Developed economy is an economy with a high level of income per head.

Developing economy is an economy with a relatively low level of income per head.

Trade-off is the calculation involved in deciding on whether to give up one good for another.

Economic growth is a change in the productive potential of an economy.

Productive potential is the maximum output that an economy is capable of producing.

Economic system is the way in which production is organised in a country or group of

countries. There are three main kinds of economic systems

1. Free market economy: an economic system whereby resources are allocated through the market forces of demand and supply.
2. Command or centrally planned economy: an economic system in which most resources are state owned and also allocated centrally.
3. Mixed economy: an economic system in which resources are allocated through a mixture of the market and direct public sector involvement.

In a free market economy you will meet the following definitions:

Price system is a method of allocating resources by the free movement of prices.

Supply is the quantity of a product that producers are willing and able to provide at different market prices over a period of time.

Demand is the quantity of a product that consumers are able and willing to purchase at various prices over a period of time.