A LEVEL ECONOMICSSECTION 1

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Scarcity Scarcity

A situation when a choice is to be A situation when a choice is to be mademade

Everyone in this world has to face Everyone in this world has to face this situation of scarcitythis situation of scarcity

It gives rise to the basic economic It gives rise to the basic economic problemproblem– Scarce/limited resources and unlimited Scarce/limited resources and unlimited

wantswants

Choices at all levelsChoices at all levels

IndividualsIndividuals FirmsFirms GovernmentsGovernments

Individuals Individuals

The individuals are forced to make a The individuals are forced to make a choicechoice

ExampleExample An individual may have to chose An individual may have to chose

whether to buy a shirt or a pant whether to buy a shirt or a pant

Firms Firms

Firms are also forced to make Firms are also forced to make choiceschoices

ExampleExample A firm may have to chose whether to A firm may have to chose whether to

spend the money or marketing spend the money or marketing department or research and department or research and development departmentdevelopment department

Governments Governments

Governments which are considered Governments which are considered all powerful too have to make all powerful too have to make choiceschoices

Eg.Eg. Government has to make a choice Government has to make a choice

whether to spend the public money whether to spend the public money on defense or healthcare on defense or healthcare

Opportunity costOpportunity cost

The next best alternative foregone The next best alternative foregone when a choice is madewhen a choice is made

Opportunity cost is never in money Opportunity cost is never in money valuevalue

The benefits which could have been The benefits which could have been received by taking an alternative received by taking an alternative action.action.

3 Basic Questions 3 Basic Questions

What to produceWhat to produce How to produceHow to produce For whom to produceFor whom to produce

Different Allocative Different Allocative MechanismsMechanisms

Market economiesMarket economies Planned economiesPlanned economies Mixed economiesMixed economies

Market economiesMarket economies

Market economy is an economy Market economy is an economy where resources are allocated by the where resources are allocated by the price mechanism, the consumers price mechanism, the consumers determine what is produced.determine what is produced.

Very less role of the governmentVery less role of the government Eg. United states Eg. United states

Planned economiesPlanned economies

Planned system is an economic Planned system is an economic system where resources are system where resources are allocated by the, the state allocated by the, the state determines what is going to be determines what is going to be produced.produced.

No consideration given to market No consideration given to market forces or the businessesforces or the businesses

Eg. USSREg. USSR

Mixed economiesMixed economies

A form of economy which combines A form of economy which combines the good features or advantages of the good features or advantages of market and planned economymarket and planned economy

Business activity controlled by market Business activity controlled by market forcesforces

The government provides the The government provides the essentials: education, health and essentials: education, health and securitysecurity

Eg. Eg.

Production Possibility Production Possibility Curve(PPC)Curve(PPC)

It is a graph that shows the different It is a graph that shows the different rates of production of two goods rates of production of two goods and/or services that an economy can and/or services that an economy can produce produce efficientlyefficiently during a specified during a specified period of time with a limited quantity period of time with a limited quantity of productive resources of productive resources

The margin: decision making at The margin: decision making at the marginthe margin

Positive statements Positive statements

Actual facts and figures which are Actual facts and figures which are both measurable and comparableboth measurable and comparable

Normative statements Normative statements

Opinions or suggestionsOpinions or suggestions Often called judgementsOften called judgements

Ceteris paribusCeteris paribus

Factors of productionFactors of production

LandLand LabourLabour CapitalCapital Enterprise Enterprise

Land Land

Natural occurring resources used for Natural occurring resources used for production purposeproduction purpose

Eg.Eg. Earth on which mills are builtEarth on which mills are built Water in which fish is foundWater in which fish is found raw materials used to produce raw materials used to produce

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Labour Labour

Manual and mental effort to produce Manual and mental effort to produce or deliver goods and servicesor deliver goods and services

People who are willing or able to People who are willing or able to work are known as labour work force.work are known as labour work force.

Eg. ClerksEg. Clerks Computer technicianComputer technician O level economics teacherO level economics teacher

Capital Capital

Manmade goods to produce other Manmade goods to produce other goods and servicesgoods and services

Capital is classified into capital goods Capital is classified into capital goods and consumer goods and consumer goods

Eg.Eg. MachinesMachines FactoriesFactories Roads Roads

Enterprise Enterprise

The people who bring the other 3 The people who bring the other 3 factors of production together to factors of production together to produce goods and services.produce goods and services.

In this process they do the decision In this process they do the decision making and risktakingmaking and risktaking

EgEg BusinessmenBusinessmen

Division of labour Division of labour

Money Money

Characteristics of MoneyCharacteristics of Money

Functions of MoneyFunctions of Money

Efficient resource allocationEfficient resource allocation

Economic efficiencyEconomic efficiency

Productive efficiencyProductive efficiency

Allocative efficiency Allocative efficiency