1 Managing Scarce Resources
1.1.1 How are wants and
needs satisfied?
Humans have many different types of wants and needs eg: economic, social and psychological. In economics the focus is on studying
how material wants and needs are satisfied:
• A need is something essential for survival eg food satisfies hungry people
• A want is something desirable but not essential to survival eg cola quenches thirst.
Household (consumer) wants and needs are satisfied (met) by consuming (using) products ie goods or services
1.1.2 Consumption is?
Consumption is the use of a good or a service by consumers (households) to satisfy a want or a need
1.1.3 Products, goods
and services mean?
A product is an item that satisfies a want or a need and is classified as either a good or a service. A good is physical items such as food
or a car that satisfies a need or a want. A service is a non-physical item such as education or a cinema trip that meets a need or a want.
1.1.4 Why are human
wants and needs infinite?
Infinite means unlimited. There are three reasons why even in rich countries such as the UK our wants and needs remain unlimited:
• Goods eventually wear out and need to be replaced
• New or improved products become available
• People get tired with what they already own and want something new
1.1.5 consumer &
producer goods are?
Consumer goods satisfy wants and needs now. Producer or capital goods such as plant (factories) and machinery are useful not in
themselves but for the goods and services they can help produce in the future. Producer goods are ‘consumed’ later, in future years.
1.1.6 Investment is
Investment is spending by firms on new producer goods ie buying physical capital that produce other goods in the future
1.1.7 Resources are?
Resources are items used to produce goods & services (products) and are often referred to as factors of production.
1.1.8 How are resources
classified?
1.1.9 Renewable & non
renewable resources
Factor
Description
Reward
Land
all natural resources (gifts of nature) including fields,
mineral wealth, and fishing stocks
the reward for landlords for allowing firms to use their
property is rent
Labour
The physical and mental work of people whether by hand, by
brain, skilled or unskilled
the reward for workers giving up time to help create
products is wages or salaries
Capital
Man made goods used to produce more goods including
factories (plant), machines and roads.
the reward for creditors lending money to firms to invest in
buildings and capital equipment is interest
Enterprise
An entrepreneur risks financial capital and organises land
labour & capital to produce output in the hope of profit
the reward for individuals risking funds and offering
products for sale is profit. Unsuccessful firms make losses.
In economics, buying
financial assets eg property
is saving not investment
Resources are scarce.
In market economics
resources are owned by
individuals and sold to
firms for use in the
production in return for a
monetary payment
Gifts of nature, or land, can be classified as a renewable or non renewable resource. Renewable resources are quickly replenished
(replaced) by natural processes eg timber and fish and are not depleted over time. Non- renewable resources are not replaced
naturally eg reserves of fossil fuels oil, coal & natural gas are depleted when used.
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1.1.10 The quantity &
quality of labour
The quantity of labour can be increased through immigration, raising retirement age or encouraging people of working age without a
job to take up employment. The quality of labour is improved through education and training ie improvements in human capital
1.1.11 Identify different
types of capital
Physical capital is producer goods. Capital increases productive capacity significantly eg a fisherman can catch 10 fish a day by hand
but a 100 with a simple fishing net. Financial capital refers to financial assets such as savings & shares. Social capital is society's
productive assets eg schools & hospitals. Human capital is the skill & knowledge of workers acquired through education and training.
In economics capital
usually means physical
capital
1.1.12 What is
infrastructure?
Infrastructure is the stock of capital used to support the economic system. An economy needs an underlying stock of capital items
(infrastructure) to enable economic activity eg
• Transport road & rail networks; airports & docks; telecommunications eg cables and satellites to enable web access
• Social capital in Education eg primary & secondary schools, universities and health eg doctors’ surgeries and hospitals
Infrastructure enables
growth
1.1.13 Explain enterprise
A firm is an organisation that arranges production. Active owners are called entrepreneurs In market economies, entrepreneurs risk
their own financial capital (money) hiring and organising land labour & capital, to produce goods or services to offer for sale. If revenue
earned from sales exceeds the costs of production a profit is earned. If items fail to sell in sufficient quantities a loss is incurred.
Profit is the reward for risk
taking. Tastes change &
rivals react
1.1.14 What is the
mobility of resources?
Economies are dynamic (ever changing). New products, production methods and changing consumer tastes mean at any one time some
industries are expanding while others are in decline. Factor mobility refers to the ease with which resources, especially labour, can
switch to new industries (occupational mobility) or regions (geographical mobility) Low skills & family ties can make labour immobile
Land is occupationally
mobile geographically
immobile
1.1.15 What does scarce
resources mean?
Scarce means limited. Resources are limited ie a country does not have enough land labour capital & enterprise to produce all the items its
citizens desire. Therefore society faces an economic problem: wants exceed resources and so has to make difficult choices.
1.1.16 What are economic
choices?
Choice involves deciding between alternatives. Individuals, firms and governments have to make economic choices eg:
• Consumers decide what products to buy with limited income: do I buy a computer or a foreign holiday
• Workers decide how to use leisure time: do I work an extra hour overtime or enjoy more leisure time
• Firms: decide what items to produce with given resources: does a factory make DVDs or videos?
1.1.17 Explain trade offs
Scarcity means everyone is not be able to have all they want. Economic choices almost always involve deciding between more of one
item for less of another. A trade off is the sacrifice of one item for another. Eg govt might trade off more hospitals for fewer schools
1.1.18 Opportunity cost is
Opportunity cost measures the cost of an economic activity in terms of the best forgone alternative
The cost of making a choice
1.1.19 Explain
opportunity cost
Production or consumption involves giving up an alternative. The opportunity cost of an economic choice is measured in terms of the
best item forgone using identical resources, income or time. Opportunity cost measures the real or true cost of a decision.
Choices involve
alternatives.
1.1.20 Give examples of
opportunity cost
The opportunity cost of more leisure time is the lost wages foregone. Producing wheat means land cannot be used in that production
period to harvest potatoes. An economy investing its resources in new capital goods sacrifices current production of consumer goods
1.1.21 Free good?
Free goods that do not require scarce resources in their production, eg air, have no foregone alternative & so have no opportunity cost
1.1.22 Economic goods
Products supplied free of charge, eg NHS, are still economic goods using up limited resources – they still have an opportunity cost
1.1.23 Resource allocation
Resource allocation refers to a given use of land, labour, capital & enterprise producing given amounts of goods and services
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Limited resources act as a
constraint.
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1.1.24 A reallocation of
resources means?
A reallocation of resources means some factors of production are switched from one use to another ie into different industries and
occupations resulting in different amounts of goods and services produced.
1.1.25 What is the
economic Problem?
The economic problem is about scarcity and choice: there are only a limited amount of resources available to produce the unlimited
amount of goods and services we desire. All societies face the economic problem of having to decide:
• What goods and services to produce: does the economy uses its resources to operate hospitals or hotels
• How best to produce goods and services: what is the best use of scare resources of land labour and capital
• Who is to receive goods and services: what is the best method of distributing (sharing) products to ensure the highest level
of wants and needs are met? Who will get expensive hospital treatment - and who not?
How societies decide what
how and for whom to
produce is the essence of
economics.
1.2.2 How can a
production possibility
boundary be used to
illustrate opportunity
cost?
1.2.3 What assumptions
are made in a PPB?
A production possibility boundary (PPB) shows the combination of
two products an economy, region, firm or individual can make in a
given time period with current resources and technology.
In the diagram opposite, LM is a production possibility curve
• Points inside the PPB (eg A) imply unemployed or
inefficiently used resources – or
• Points along the PPB (eg B or D) indicate a full employment
of resources.
• Points outside the PPC (eg C) are beyond the current
productive capacity of the economy.
Good Y
1.2.1 What is a
production possibility
boundary (PPB)?
Opportunity cost is the cost of an economic choice in terms of the
best alternative foregone
• The opportunity cost of producing OE amount of good X is LF
- the amount of good Y that could have been produced
instead.
• The opportunity cost of reallocating resources from B to D
to gain EG of good X is FH - the amount of good Y that could
have been produced instead.
Good Y
1.2 Production possibility boundaries (PPBs)
A PPB is drawn assuming a country has a fixed quantity & quality of
resources and a constant state of technology.
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Production Possibility Boundary
L
C
B
A
D
0
A production possibility
boundary is sometimes
called a production
possibility curve,
production possibility
frontier, opportunity cost
curve or transformation
curve. Each is equally
correct.
M Good X
Production Possibility Boundary
PPBs illustrate the limits of
current productive capacity
L
F
B
D
H
0
© Richard Young
E
G M Good X
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1.2.4 Why are PPBs
sometimes curved and
sometimes linear (a
straight line)?
A concave (bowed outwards) production possibility curve indicates
increasing opportunity cost. Some resources are better suited to
making one item. As more of good X is produced increasing amounts
of good Y have to be foregone to produce an extra unit of good X.
1.2.5 Why do PPBs shift?
An increase in the quantity and/or quality of resources increases an economy's productive potential and shift the PPB curve to the right
1.2.6 What is the link
between PPBs and
economic growth?
Economic growth refers to an increase in the amount of goods and
services produced by a country. PPBs can illustrate
• The process of economic growth: how a reallocation of
resources from consumer to producer goods increases
productive potential in the next time period
The government of a developing country just meeting its
essential needs may chose to reallocate resources from the
production of consumer gods to investment goods. The
economy moves from A to B.
The short run opportunity cost of HG extra investment is ED
lost consumer goods – possibly essentials.
• The outcome of growth: additional productive resources
shift the PPB outwards from LM to TV, in the next time
period.
Capital Goods
A straight line PPB indicates constant opportunity cost.
Resources are equally efficient in the production of both items.
As production of good X changes the amount of good Y which
has to be foregone to gain an extra unit of good X does not
change
T
Process of Growth using
PPBs
L
H
B
A
G
D
E
V
M
Consumer Products
1.2.7 Actual and potential
economic growth
Assume unemployment. The economy is operating at a point inside the PPB. Reducing unemployment causes actual economic growth ie
an increase in output but does not shift the PPB. Better use is being made of current resources. Potential economic growth requires an
increase in productive capacity from new capital or technology. Only extra resources shift the PPB out to the right.
1.2.8 What are economic
systems?
An economic system is the network of organisations used by a society to resolve the economic problem of what how and for whom to
produce. There are three main categories of economic system.
• Free market economy: households own resources and markets allocate resources through the price mechanism. An increase
in demand raises price and encourages firms to switch additional resources into the production of that product. The amount of
goods and services consumed by households depends on their income. Household income depends on the market value of an
individual’s work.
• Planned or command economy: Resources are owned by the state. The state allocates resources, and sets production targets
and growth rates according to its own view of people's wants. Income distribution is decided by the state. Prices play little or
no part in informing resource allocation decisions and queuing rations scarce goods.
• Mixed economy: Some resources are owned by the public sector (government) and some resources are owned by the private
sector (households). The public sector typically supplies public, quasi-public and merit goods and intervenes in markets to
correct perceived market failure.
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Efficiency means making
best use of resources.
The long run gains of
economic growth are
increased output allowing
more wants and needs to be
met.
The short run opportunity
cost of internally financed
investment for the poorest
nations can be costly.
Essential consumer goods
are sacrificed - people may
starve.
An increase in the quality of
resources also shifts the PPB
outwards
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1.3 Specialisation & Trade
Specialisation & trade are desirable because they allow a greater quantity, quality and variety of products – even given the risks of mutual interdependence.
1.3.1 Self sufficiency
Self sufficiency is where individuals regions or countries rely solely on their own output to meet all their wants and needs. There is no trade.
1.3.2 Specialisation?
Specialisation is when individuals, regions or countries concentrate on a particular product or task. Surplus products are traded.
1.3.3 What is trade
Trade is the voluntary exchange of products either for money or for other goods & services (barter). Exchange means trading or swapping.
1.3.4 State the types of
trade
Internal or domestic trade is the exchange of products within a country. External or international trade is the exchange of goods and
services across national borders. Products bought from abroad are called imports. Products sold by one country to another are called exports
1.3.5 Why trade?
Individuals have different skills. Regions or countries have different factor endowments eg varied climate, labour force skills, and natural
resources. This means some individuals, firms, etc are better at making certain products than others. The ability to trade allows countries to
concentrate on making only those products they are best at making. Surpluses are then traded for items from other more efficient specialists
1.3.6 How does transport
aid specialisation?
Transport overcomes the effect of distance and means production and consumption can take place in different locations. The transport
system must be extensive enough to reach a large number of consumers (mass market)
1.3.7 What are the
benefits of specialisation
By concentrating on what they do best rather than relying on self sufficiency:
• Total output is raised and quality improved. Higher output at lower costs means more wants and needs can be satisfied.
• Consumers have improved access to a greater variety of higher quality products ie more and better choice
• Specialisation and trade increase the size of the market offering opportunities for economies of scale
• Increased competition for domestic producers acts as an incentive to minimise costs and innovate to remain competitive
Specialisation & trade
means all parties gain.
1.3.8 What are the risks
of specialisation
Specialisation and trade benefits all parties but carries risks
• Interdependence. Specialisation makes individuals, firms, regions & countries reliant on others for certain products. Countries do
not want to become totally reliant on imports of essentials from other nations. Eg a gas dispute in Russia can halt exports to Europe
resulting in wide scale industrial chaos and homes without heating.
• Concentrating on a narrow range of products makes countries vulnerable to changes in taste or new competitors. Eg Brazil is a
specialist coffee producer adjusting to a fall in the world demand for coffee, new competition from Vietnam and the effects of poor
weather destroying coffee trees.
• Transport costs, especially of bulky products, may be so high as to cancel out any gains form trade
Specialisation & trade
makes individuals,
firms, regions &
countries
interdependent –each
relies on the other for
essential products
1.3.9 Absolute &
Comparative advantage?
Absolute advantage occurs when a country or region can create more of a product with the same factor inputs. Comparative advantage
exists when a country has lower opportunity cost, ie, it gives up less of one product to obtain more of another product. Economists argue
countries benefit if they specialise in a product in which they have a comparative advantage and trade.
Worked example are
not needed for AS
1.3.10 What is the
Division of Labour? Give
an example.
The division of labour is a particular type of specialisation where the production of a good is broken up into many separate tasks each
performed by one person. An early economist, Adam Smith, suggested one worker alone can produce only ten pins in one day. However, in a
pin factory where each worker performs one task, ten workers using the division of labour principle, produce a daily total of 48 000 pins.
Output per person (productivity) rises from 10 to 4800 with the division of labour. Unit costs fall.
The division of labour
is specialisation by
process
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Eg the UK can
exchange insurance
for Japanese cars.
Page 12
1.3.11 Why does division of
labour raise productivity?
The division of labour raises output per person, thereby reducing costs per unit because low skill workers are easily trained and quickly
become proficient through constant repetition of a task – ‘practice makes perfect’. Low unit costs allow firms to remain competitive.
1.3.12 Given an example
of intensive division of
labour, mass production
Henry Ford broke down the manufacture of a complex product, a car, into simple, separate, tasks each to be completed by one unskilled
worker using custom-made tools. The mass production of cars moving along a conveyor belt in large factories employing thousands of
workers, dramatically lowered unit costs. Mass production techniques meant low income families could now afford to buy their own car.
Assembly lines
dominated 20th
century production.
1.3.13 What are the risks
of the division of labour?
Eventually the division of labour may reduce productivity and increase unit costs because unrewarding, repetitive work lowers motivation and
productivity. Workers begin to take less pride in their work and quality suffers. The division of labour also runs the risk that if one machine
breaks down then the entire factory stops. Some workers receive a very narrow training and may not be able to find alternative jobs. Massproduced standardised goods lack variety.
Unrewarding repetitive
work lowers motivation
& productivity
1.3.14 Do firms still use
the division of labour?
Far East car companies like Toyota avoid e intensive use of the division of labour. Instead production is organised around teams of highly
skilled flexible staff doing enriched tasks. Quality assurance is the responsibility of all staff. Productivity & unit costs using lean production
methods are lower than rival US firms like GM employing state-of-the-art equipment but using traditional mass production approaches
Lean production
methods dominate 21st
century production
1.3.15 What is the main
disadvantage of
specialisation?
Interdependence. Extensive specialisation means any stoppage halts production eg a failure of a strategic service such as transport or power
can bring an economy to a rapid standstill, as demonstrated by the oil refinery blockades of Autumn 2000 when failure to deliver petrol
meant road transport of components, goods and workers become difficult if not impossible.
1.3.16 Define economic
integration
Healey defines economic integration as the merging together of national economies and the blurring of boundaries that separate economic
activity in one nation state from another.
1.3.17 What is
globalisation?
Globalisation refers to the increasing integration of national economies in terms of trade, financial flows, ideas, information and
technology. The world is developing into one market place based on specialisation & trade – with ever increasing interdependence
1.3.18 What are economic
sectors?
For the purposes of analysis the production of goods and services can be classified or categorised into four groupings
• Primary sector involving extraction of natural resources eg agriculture, forestry, fishing, quarrying, and mining.
• Secondary sector involving the production of goods in the economy, ie transforming materials produced by the primary sector eg
energy manufacturing and construction
• Tertiary sector providing services such as banking, finance, insurance, retail, education and transport.
• Quaternary sector involving information processing eg education, research and development, administration, and financial
services such as accountancy
1.3.19 Define the private
& public sectors?
The economy is made up of the private & public sectors. The private sector is made up of members of the general public and firms owned by
the general public. The public sector is made up of the central government in London, various local councils, and firms owned by the
government (nationalised industries) such as the Post Office.
1.3.20 What is the link
between specialisation,
integration and
globalisation?
The application of just in time (JIT) techniques means firms do not hold stocks of components but rely on daily delivers to sustain
production. Supermarkets receive JIT deliveries of fresh bread four times a day.
Integration means economies are interdependent and if production of a component stops in country A then production which relies on that
component will also halt in country B.
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Ever increasing world
wide specialisation is
leading to more trade,
integration,
globalisation and
interdependence
Mass production
requires mass demand
Page 13
1.4 Money
1.4.1 What is the
importance of money in
an economy?
Money is any asset (item) widely accepted as payment for products. Specialisation creates surpluses that can be traded. Money is something
that people generally accept in exchange for a good or a service. Money performs four main functions:
•
•
a medium of exchange for buying goods and
services;
a unit of account for placing a value on products
•
•
a store of value when saving;
a standard for deferred payment when calculating loans.
•
•
•
Stable and able to keep its value
Divisible without any loss of value
Portable and not too heavy to carry
1.4.2 The properties or
characteristics of money
are?
Any item which is going to serve as money must be:
• Acceptable to people as payment;
• Scarce and in controlled supply
1.4.3 Is there an
alternative to money as a
medium of exchange?
The earliest method of exchange was barter where goods were exchanged directly for other goods. Problems occur when:
• someone did not want what was being offered in exchange (ie no double coincidence of wants), or
• if no agreement could be reached over how much one good was worth in terms of the other.
Transaction costs refer
to resources eg time &
travel used in making
an exchange.
Barter has much
higher transactions
costs than using
money as a medium of
exchange.
1.5 Economic Methodology
1.5.1 What is economic
methodology?
Economics is a social science and uses scientific methodology:
• A hypothesis (prediction) is constructed about economic behaviour which may be right or wrong.
• A model is build describing the behaviour of economic variables (influencing factors) involved in the initial hypothesis.
• The hypothesis is tested against empirical (real world) evidence by use of the model.
• If the hypothesis cannot be disproved, it becomes an accepted theory
1.5.2 What is Ceteris
paribus?
Ceteris paribus means all other things being equal. Economists recognise that many factors affect an economic variable. Eg demand is
influenced by the price of the good, income, taste, etc. To simplify and enable analysis, economists isolate the relationship between two
variables by assuming ceteris paribus - ie that all other influencing factors are held constant. In analysing markets, we assume all factors
influencing demand are being held constant except price.
1.5.3 Explain positive &
normative economics
Positive economics deals with statements of fact that can be proved or disproved, and shows how the economy actually works. Normative
economics deals with statements of opinion which cannot be proved or disproved, and suggests what should be done to solve economic
problems. Some commentators argue that in seeking to be positive economists are being normative!
1.5.4 What is
microeconomics?
Microeconomics considers the behaviour of an individual consumer, firm and industry, and is mainly interested in resource allocation and
relative prices.
1.5.5 What is
macroeconomics?
Macroeconomics considers the behaviour of the economy as a whole, and is mainly interested in national output, employment, the balance
of payments and the general price level.
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Ceteris paribus
reasoning underpins
all microeconomic
analysis.
Page 14
agriculture
Primary
manufacturing
Secondary
services
Tertiary
knowledge
services
Quaternary
barter
by division of
labour
Creates surpluses
for trade
needs transport
infrastrucutre
method of
exchange
functions
money
characterisitics
Economic
Sectors
Specialistion
Market
Mixed
Econ Growth
Economic
Systems
Opp Cost
Economic
Problem
Planned
land paid rent
Production Possibility
Curve
Used to
illustrate
Unemployment
& Inefficiency
Reallocation of
resources
Unlimited
wants
Comparative
advantage (A2)
labour paid
wages
capital paid
limited
resources
Types of
product
Economic
Problem
interest
Methodology
enterprise
paid profits
so decide what how & for
whom to produce
Scarcity &
Goods
Choice
next best
alternative forgone
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Opportunity
Cost
Physical
product
Services
Free goods
Economic
goods
intangible product
No opp cost
Opp cost
© Richard Young
normative
economics
positive
economics
opinions that cannot
facts that can
be (dis)proved
be (dis)proved
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