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Cambridge University Press
978-1-316-63809-5 — Cambridge International AS plus A Level Economics Revision Guide
Susan Grant
Excerpt
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Basic economic ideas and resource
allocation
pter 1
Learning summary
Cha After you have studied this chapter, you should be
able to:
deine the fundamental economic problem explain the role of the factor enterprise in a
explain the meaning of scarcity, opportunity modern economy
cost and the basic economic questions draw and interpret production possibility
deine ceteris paribus curves
recognise the importance of decision making at explain how constant and increasing
the margin opportunity cost determine the shape of the
production possibility curve
distinguish between positive and normative
statements explain the functions and characteristics
of money
outline the characteristics of factors
of production distinguish between money and barter
distinguish between the rewards and the deine liquidity
factors of production explain free goods, economic goods, private
deine specialisation goods and public goods
assess the advantages and disadvantages of distinguish between merit goods and
division of labour demerit goods
compare different economic systems
1.01 The fundamental 1.02 Meaning of scarcity and
economic problem the inevitability of choices at
The fundamental economic problem is that there are all levels
never enough resources to produce all the products
people would like to have. As there is scarcity of resources, choices have to
be made. Consumers have to decide what to buy,
Resources are limited in supply (inite) whilst wants are workers – which jobs to do, irms – what to produce,
unlimited (ininite). governments – what to spend tax revenue on.
Progress check A
Will the economic problem ever be solved?
2
© in this web service Cambridge University Press www.cambridge.org
Cambridge University Press
978-1-316-63809-5 — Cambridge International AS plus A Level Economics Revision Guide
Susan Grant
Excerpt
More Information
1.03 Opportunity cost 1.05 Decision making at Cha
Having to select one option involves an opportunity cost. the margin pter 1 Basic economic ideas and r
Opportunity cost is the best alternative forgone.
Individuals, households, i rms and governments often
Due to the economic problem of wants exceeding have to make marginal decisions. These involve
resources, economies have to decide what to considering whether to make slight changes. For
produce, how to produce it and who will receive instance, whether to buy one more apple, produce
what is produced. one more car or to reduce the number of teachers
What to produce, how to produce and who will employed in state schools.
receive what is produced are sometimes referred to
as the three basic questions which all economies have 1.06 Positive and normative
to answer. esour
statements
TERM ce allocation
A positive statement is a statement of fact. It can be
Opportunity cost: the best alternative sacrii ced tested to assess whether it is right or wrong.
when an option is selected. A normative statement is a statement based on
opinion. It is a value judgement and, as such, cannot be
proved right or wrong.
Opportunity cost is a concept that you There are both positive and normative statements in
can use in analysing and evaluating a economics. ‘The unemployment rate in a country is 6%’
TIP is a positive statement. In contrast, ‘the government’s
signii cant number of topics, e.g. whether key priority should be reducing unemployment’ is a
a government should spend more on normative statement.
healthcare.
Much of what you write will be based
TIP on positive statements. In coming to a
1.04 Ceteris paribus conclusion in an answer you may, however,
be making a value judgement e.g. on
Ceteris paribus means other things being equal. what might be the most appropriate
government policy measure to reduce
Economists often make use of ceteris paribus to unemployment. The conclusion should be
consider the possible effects of a change in one variable based on economic analysis and not on
on another variable. For instance, an increase in real uninformed opinion.
disposable income would be expected to lead to an
increase in demand for gold watches, on the assumption
that the other infl uences on demand for gold watches
are not changing. TERMS
TERM Marginal decision: whether to make slight changes.
Ceteris paribus: other things being equal. Positive statement: a fact that can be tested.
Normative statement: a value judgement based
on opinion that cannot be tested.
3
© in this web service Cambridge University Press www.cambridge.org
Cambridge University Press
978-1-316-63809-5 — Cambridge International AS plus A Level Economics Revision Guide
Susan Grant
Excerpt
More Information
Section 1:1.07 Characteristics of TERMS
factors of production and
AS Le their rewards Factors of production: resources used to produce
goods and services.
v
el Factors of production are resources used to produce Land: natural resources both on the surface and
goods and services: beneath the earth.
• Land covers all natural resources – for example, the Labour: human effort used in production.
surface of the earth, the sea, rivers, minerals below Capital: goods used to produce other goods.
the earth. Most land is geographically immobile but
occupationally mobile. The reward to land is rent. Enterprise: organising the factors of production
• Labour is human effort, mental or physical, used and bearing the risks of producing a product.
in the production of goods and services. Labour
may be geographically immobile due to differences
in housing costs and because of family ties. It
may be occupationally immobile if workers lack Revision activity A
education and training. Spending on education and a Identify an example of each factor of
training increases human capital. Wages are the production that is employed in the i lm industry.
reward to labour.
• Capital is human made goods used to produce other b Give an example of a capital intensive industry
goods and services. Investment is spending on capital and a labour intensive industry.
goods. Net investment occurs when i rms purchase c What factors infl uence the supply of labour to
more capital goods than are needed to replace a particular occupation?
those capital goods which have become obsolete d Explain the link between enterprise and
– gross investment exceeds depreciation. Capital opportunity cost.
varies in its occupational and geographical mobility.
A photocopier, for instance, can be used in most e Why is the rent on land in city centres usually
types of industries and can be moved from one part higher than that on land in rural areas?
of the country to another. In contrast, an operating
theatre is likely to be occupationally immobile and a
gold mine is geographically immobile. The reward for
capital is interest. The two factors of production that
TIP students most commonly get confused
• Enterprise is the willingness and initiative to about are land and capital. Remember land
organise the other factors of production and, is any natural resource and not just land as
crucially, to bear the uncertain risks of producing a soil, and capital refers to capital goods i.e.
product. Entrepreneurs are the people who have human-made goods and not money.
the willingness and initiative to make decisions and
to take the risks involved in production. In a public
limited company, the role of the entrepreneur is
divided between the managers (who make the 1.08 Specialisation
business decisions) and shareholders (who bear
the risks). Entrepreneurs tend to be relatively,
occupationally and geographically mobile. The reward Specialisation involves concentrating on particular tasks
for enterprise is proi t. or products. Workers, i rms, regions and countries can
concentrate on producing one product.
Specialisation can increase output but there are risks
attached. For instance, if a i rm makes only one product
and demand for that product falls, the i rm would be
in difi culty.
4
© in this web service Cambridge University Press www.cambridge.org
Cambridge University Press
978-1-316-63809-5 — Cambridge International AS plus A Level Economics Revision Guide
Susan Grant
Excerpt
More Information
TERM 1.10 Different economic Cha
systems pter 1 Basic economic ideas and r
Specialisation: concentration on a particular task An economic system is a way of allocating resources
or product. to answer the three fundamental questions of what to
produce, how to produce it and for whom.
There are three main types of economic systems:
1.09 Division of labour • a market economy
Division of labour involves breaking down the • a planned economy
production into separate tasks and having each worker • a mixed economy
concentrate on a particular task. esour
One of the i rst economists to describe division of
labour was Adam Smith. In his book An Enquiry into TERMS ce allocation
the Nature and Causes of the Wealth of Nations (often Market economy: resources are allocated by the
shortened to The Wealth of Nations), he described the price consumers are willing to pay for products.
18 separate processes involved in producing a pin.
Advocates of division of labour claim that it increases Planned economy: government decides how
output and reduces the average cost of production. resources are allocated.
This is because it enables workers to concentrate on
what they are best at, increases their skill (‘practice
makes perfect’), reduces the time it takes to train them, Market economies
reduces the equipment needed, cuts back on the time
involved in moving from one activity to another and A market economy is one in which resources are
makes it easier to mechanise the process. allocated by means of the price mechanism. Consumers
indicate what they are willing and able to buy through
Critics of division of labour, in contrast, argue that it the prices they are prepared to pay. Private sector i rms
may reduce output and increase the average cost of respond to changes in consumer tastes by altering what
production. They claim that workers can get bored, they produce. Property is privately owned and the
doing the same task time after time. Boredom can lead government’s role in the economy is minimal.
to workers making mistakes and leaving the i rm after
a short time. In addition, division of labour may mean Among the advantages claimed for a market
that a i rm does not i nd out what task a worker is best economy are consumer sovereignty, incentives for
at and may mean that a i rm will i nd it difi cult to cover workers and i rms to be efi cient and innovative, and a
for workers who are absent from work due to illness or lack of bureaucracy.
because they are undergoing training. The possible disadvantages of a market economy
include an inequitable distribution of income, a risk of
Progress check B unemployment of resources, under-consumption of
merit goods, over-consumption of demerit goods, lack
In what way do schools engage in division of labour? of provision of public goods, information failure, and
abuse of market power.
TERM
TERM
Public good: a product that people cannot be
Division of labour: breaking down production stopped from consuming even if they are not
into separate tasks to be carried out by separate willing to pay for it and once used can still be used
workers. by others.
5
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