1. Microeconomics Topic 1: The Economic Problem

2. Microeconomics Topic 1: The Economic Problem
1.1 Unit content
Six topics:
1.1.1 Economics as a social science
1.1.2 Positive and normative economic statements
1.1.3 The economic problem
1.1.4 Production possibility frontiers
1.1.5 Specialisation and the division of labour
1.1.6 Free market economies, mixed economy and command economy

3. 1.1.1 Economics as a social science - syllabus
Microeconomics Topic 1: The Economic Problem
1.1.1 Economics as a social science - syllabus
Students should be able to:
Explain the process of thinking like an economist: the process of developing models in economics, including the need to make assumptions
Define ‘ceteris paribus’ and explain its use in building models
Explain why economists are unable to carry out scientific experiments

4. 1.1.1 Introduction
What is economics?
Economics is usually divided into two parts: microeconomics and macroeconomics.
What is the difference?

5. 1.1.1 Models and assumptions
Microeconomics Topic 1: The Economic Problem
1.1.1 Models and assumptions
Economics is a social science:
Economists develop models.
What is a model?
But models require assumptions.

6. 1.1.1 What are the assumptions?
Microeconomics Topic 1: The Economic Problem
1.1.1 What are the assumptions?
“Free school meals for children at infant school will reduce the cost in the future for the NHS”
Assumptions:

7. Microeconomics Topic 1: The Economic Problem
1.1.1 Ceteris paribus
Ceteris paribus is a _______ phrase meaning “other things being equal”.
It is used in economics when we focus on changes in one variable while holding other influences constant

8. 1.1.1 Why can’t economists use scientific experiments?
Microeconomics Topic 1: The Economic Problem
1.1.1 Why can’t economists use scientific experiments?

9. 1.1.2 Positive and normative economic statements - syllabus
Microeconomics Topic 1: The Economic Problem
1.1.2 Positive and normative economic statements - syllabus
Students should be able to:
Distinguish between positive and normative economic statements
Assess the role of value judgements in influencing economic decision making and policy

10. 1.1.2 Value judgements
Value judgements are statements or opinions that are not testable (cannot be verified) and depend on the views of the individual and the values they hold.
E.g.

11. Microeconomics Topic 1: The Economic Problem
1.1.2 Normative statements
Normative statements are based on value judgements which cannot be proven or tested as true or false.
E.g.
So normative statements depend on ___________________________
Value judgements influence economic decision making and policy.

12. 1.1.2 Positive statements
Positive statements are statements that can be tested against real data. Positive statements are more objective and scientific.
E.g.
Note: positive statements can be tested and possibly found to be _________

13. 1.1.2 Positive and normative statements
Microeconomics Topic 1: The Economic Problem
1.1.2 Positive and normative statements
_______ statements are assertions of a fact
They can be tested and proved or disproved.
They are value free and are scientific or objective.
________ statements are value judgements
They cannot be tested as true or false. They often contain words such as fair or unfair.
Remember to read the news – look for examples!

14. 1.1.3 The economic problem - syllabus
Microeconomics Topic 1: The Economic Problem
1.1.3 The economic problem - syllabus
Students should be able to:
Explain the problem of scarcity – where there are unlimited wants and finite resources
Distinguish between renewable and non-renewable resources
Evaluate the importance of opportunity costs to economic agents (consumers, producers and government)

15. What do you need? What do you want?
1.1.3 Needs and wants
What do you need?
What do you want?

16. 1.1.3 The Economic Problem and opportunity cost
Microeconomics Topic 1: The Economic Problem
1.1.3 The Economic Problem and opportunity cost
The basic economic problem is that there are __________ wants and ____________ resources.
Who does this problem affect?
___________________________________
Resources are scarce (finite or limited).
If resources (e.g. money) are used for one thing (e.g. buying a ___________) then they cannot be used for something else (e.g. buying a ___________).
This is called opportunity cost.

17. 1.1.3 Definition and example of opportunity cost
Microeconomics Topic 1: The Economic Problem
1.1.3 Definition and example of opportunity cost
So opportunity cost is the next best alternative foregone (given up) when an economic decision is made.
Note: it is only the next best alternative not a range of alternatives.
E.g. if the government builds a new toll road for £Xmillion pounds the opportunity cost could be ____________________________
Drivers will have to pay £10 to use the road and their opportunity cost could be _______ ______________________________

18. 1.1.3 Opportunity cost questions 2013-14 costs
Microeconomics Topic 1: The Economic Problem
1.1.3 Opportunity cost questions costs
Bone marrow transplant
Cochlear transplant
Gastric (stomach) by-pass
Hip replacement
Liver transplant
Natural birth in NHS hospital
One round of IVF treatment
Planned caesarean in NHS hospital
£70,000 £70,000 £17,000 £8,900
£6,000 £5,000 £2,400 £1,800

19. Microeconomics Topic 1: The Economic Problem
1.1.3 Economics agents
In economics we tend to talk about three groups of economic agents.
Which are the three key groups of economic agents?
If is often a good idea to evaluate how these three will be affected.

20. Microeconomics Topic 1b: The Economic Problem - economic resources, objectives and choice
1.1.3 Factors of production
Factors of production are the economic resources used for producing goods and services. What do you need to produce goods?

21. 1.1.3 Examples of factors of production
Land includes
Labour includes
Capital:
Enterprise:
NOTE capital has different meanings but in Economics capital can be used to generate income. So cash or a bank loan would not count as capital (in economic terms); it is what the money is used for which is the factor of production.

22. Microeconomics Topic 1: The Economic Problem
1.1.3 Resources
A resource is a factor of production used to produce goods and services.
There is a wide range of resources ranging from renewable resources (things which can be replenished e.g. ______________) to non-renewable resources (e.g. _______ ___________).
This is an exam definition from June 2014, what is it defining? “resources that can be replenished or sustained for future generations”

23. 1.1.3 Renewable versus non-renewable resources
Microeconomics Topic 1: The Economic Problem
1.1.3 Renewable versus non-renewable resources
Renewable resources are also called sustainable resources.
What is a sustainable resource? E.g.?
Non-renewable resources are also known as finite resources (or finite economic resources).
E.g.

24. 1.1.3 Free goods versus economic goods
Microeconomics Topic 1: The Economic Problem
1.1.3 Free goods versus economic goods
Free goods are those which are not scarce and they have no opportunity cost.
E.g.
Economic good are goods which are scarce and have an ______________ cost

25. 1.1.4 Production possibility frontiers - syllabus
Microeconomics Topic 1: The Economic Problem
1.1.4 Production possibility frontiers - syllabus
Students should be able to:
Use PPFs to depict: the maximum productive potential of an economy; opportunity cost (through marginal analysis), economic growth or decline; the efficient (or inefficient) allocation of resources; possible and unobtainable production
Distinguish between movements along and shifts in PPFs and assess possible causes of such changes
Distinguish between capital and consumer goods

26. 1.1.4 The production possibility frontier
A production possibility frontier shows the different combination of economic goods which an economy is able to produce if all resources are used.
For example consider an island which can only produce wine or grain. In a given period of time islanders can choose to produce only wine, only grain or a combination of the two according to the table on the next slide:

27. 1.1.4 Example of PPF: plot this data
Wine (thousands of bottles)
Grain (thousands of bushels) 15 5 14 9 12

28. Microeconomics Topic 1: The Economic Problem
1.1.4 PPF questions
The PPF shows the different combinations of output for this island if all resources are used to their full potential.
What would happen at point a?
What would happen at point b?

29. 1.1.4 PPF and productive efficiency
Points on the PPF occur when the country is using its resources efficiently. This is called productive efficiency. It is producing as much as physically and technologically possible given the technology at the time.
Points on the PPF do not necessarily maximise economic welfare but they do show that resources are not being _______

30. Microeconomics Topic 1: The Economic Problem What does a PPF show?
1.1.4 PPF summary
What does a PPF show?

31. 1.1.4 PPF and opportunity cost
Microeconomics Topic 1: The Economic Problem
1.1.4 PPF and opportunity cost
The PPF also illustrates the idea of choice and opportunity cost. What does a movement along the PPF show?
The PPF is curved and so moving along does not show a constant opportunity cost – opportunity cost is ____________

32. 1.1.4 PPF and opportunity cost examples
Microeconomics Topic 1: The Economic Problem
1.1.4 PPF and opportunity cost examples
If we were producing bushels of grain and then changed to produce bushels of grain what is the opportunity cost?
12,000 bushels grain -> _________ bottles wine ,000 bushels grain -> _________ bottles wine
Opportunity cost = ________ bottles of wine
What is the opportunity cost of bottles of wine?
It is ______ bushels of grain
June 2010

33. 1.1.4 Straight line PPF
Sometimes PPFs are shown as straight lines. If they spent half their time on each what would A produce? What would B produce? What would the total production be? When would output be maximised?

34. 1.1.4 PPF and economic growth
Microeconomics Topic 1: The Economic Problem
1.1.4 PPF and economic growth
Why might the economy be able to shift to the right of its PPF in the future?
What is economic growth?

35. 1.1.4 Reasons for economic growth
Microeconomics Topic 1: The Economic Problem
1.1.4 Reasons for economic growth
How can an economy grow?

36. 1.1.4 Economic growth – new or more resources
How could an economy ‘find’ new resources?
How could an economy improve the quantity of resources?
How could an economy improve the quality of existing resources?

37. Microeconomics Topic 1: The Economic Problem
1.1.4 PPF and inward shifts
When might an economy shift to the left of its PPF? Sketch this.

38. 1.1.4 PPF – change in shape
If efficiency and productivity increases in the production of one good rather than all goods then the PPF can change shape.
E.g. technological improvements can mean that one good can be produced more easily without impacting on the other. Sketch this

39. 1.1.4 Consumer and capital goods
Often a PPF is used to show the different combinations of consumer goods and capital goods that the whole economy can produce.
Consumer goods are items used by consumers to meet their needs or wants (e.g. ___________). They are also known as final goods.
They can be divided into consumer durable goods and non-durable consumer goods.

40. 1.1.4 Capital goods and economic growth
Microeconomics Topic 1: The Economic Problem
1.1.4 Capital goods and economic growth
Capital goods are goods used to produce other goods (e.g. ____________________). They are also known as producer goods or intermediate goods.
Capital goods are very important for economic growth as they are used to increase the future capacity of the economy.
Why is education a capital good?

41. 1.1.4 Investment and consumption
Microeconomics Topic 1: The Economic Problem
1.1.4 Investment and consumption
The purchase of capital goods (by firms) is known as investment.
The purchase of consumer goods (by individuals or households) is called consumption.
In general, if an economy decides to produce capital goods rather than consumer goods, will the economy grow at a faster or slower rate?

42. Microeconomics Topic 1: The Economic Problem
1.1.4 Marginal cost
The marginal cost of a good is the opportunity cost of producing one more unit of it.
This is not the same as the total opportunity cost.

43. 1.1.5 Specialisation and the division of labour - syllabus
Microeconomics Topic 1: The Economic Problem
1.1.5 Specialisation and the division of labour - syllabus
Students should be able to:
Define specialisation and the division of labour (with reference to Adam Smith)
Assess the advantages and disadvantages of specialisation and the division of labour
Analyze the advantages and disadvantages of specialising in production
Evaluate the functions of money (as a: medium of exchange, measure of value, store of value, method of deferred payment)

44. Microeconomics Topic 1: The Economic Problem
1.1.5 Productivity
Productivity is defined as
Increasing productivity means that a firm can
E.g. if a firm makes 100 cakes with 4 workers, it could use specialisation so that each worker only does one part of the process (e.g. one worker could mix ingredients, one could prepare the cake tins etc.). This would mean that the firm might produce 200 cakes with the same 4 workers (they are more productive now).

45. 1.1.5 Division of labour and specialisation
Microeconomics Topic 1: The Economic Problem
1.1.5 Division of labour and specialisation
What is division of labour?
What is specialisation?

46. Microeconomics Topic 1: The Economic Problem
1.1.5 What are the advantages of division of labour and specialisation?

47. Microeconomics Topic 1: The Economic Problem
1.1.5 What are the disadvantages of division of labour and specialisation?

48. Microeconomics Topic 1: The Economic Problem
1.1.5 exam hints
To ____________ from specialisation it is necessary to have an ____________ means of exchanging goods and ____________.
Specialisation should ____________ labour ____________ but it can occur even when production is low e.g. for very _____________ jobs.
benefit, complicated, efficient, increase, productivity, services
June 2011

49. 1.1.5 What are the functions of money?
Microeconomics Topic 1: The Economic Problem
1.1.5 What are the functions of money?
A medium of exchange –
A measure of value –
A store of value –
A method of deferred payment – e.g.

50. 1.1.6 Free market, mixed and command economy - syllabus
Microeconomics Topic 1: The Economic Problem
1.1.6 Free market, mixed and command economy - syllabus
Students should be able to:
Distinguish between free market, mixed and command economies (with reference to Adam Smith, Friedrich Hayek and Karl Marx)
Assess the advantages and disadvantages of a free market economy and a command economy
Evaluate the role of the state in a mixed economy

51. economic, increase, needs, produced, system, whom
1.1.6 Economic systems
An economic system tries to answer three questions:
What should be _____________?
How should it be produced?
For _______ should it be produced?
If we could organise a ____________ that would meet wants and __________ more effectively then overall __________ welfare would __________.
economic, increase, needs, produced, system, whom

52. 1.1.6 Free market and mixed economies
Microeconomics Topic 1: The Economic Problem
1.1.6 Free market and mixed economies
Free market economies are where resources are allocated by market forces (demand and supply and the price mechanism).
Command economies are where resources are allocated by the state.
Mixed economies are where resources are partly allocated by the market (price mechanism) and partly by the government

53. 1.1.6 Free market and mixed economies
Microeconomics Topic 1: The Economic Problem
1.1.6 Free market and mixed economies
What are the advantages and disadvantages of free market, command and mixed economies?
Why are there mixed economies?