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IGCSE AND GCSE Economics Units 1 and 2 Notes - markets and the allocation of resources.

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Introduction

´╗┐UNIT 1 ? Basic Economic Problem: choice and the allocation of resources 1 ? Define the nature of the economic problem (finite resources and unlimited wants) * The resources we have (land, labour, capital and enterprise) are in limited quantities * However, the needs and wants we have are unlimited in nature * This leads to a scarcity of resources * So, all goods and services demanded cannot be produced, so there arises the need for choice since resources can be used in alternative ways 2 ? Define the factors of production (land, labour, capital and enterprise) * Land ? all the natural resources used in the production process, such as soil, farmland, coal, oil etc. * Labour ? all human contribution, both mental and physical, to the production process, such as miner, mason, carpenter, clerk, accountant etc. * Capital ? all the man-made resources that go into the production process, such as machinery, tools, vehicles etc. * Enterprise ? the risk-taking ability of an entrepreneur who brings al the other factors of production together to produce goods and services 3 ? Define opportunity cost and analyse particular circumstances to illustrate the concept * Opportunity cost is the next-best alternative foregone when a choice is made * If one chooses to do ABC with a resource (s)he cannot do DEF with it * Time/money is scarce in day-to-day life * Buying an expensive pen may be your decision, but you, in the process, might have sacrificed the opportunity to buy the MP3 player you always wanted, because money is a scarce resource, and we need to make a choice about how we need to spend it * Opportunity cost is always there whenever an economic decision/choice is made 4 ? Demonstrate how production possibility curves can be used to illustrate choice and resource allocation * A, B and C are points on the PPC which show the different possible combinations in which Product A and product B can be produced simultaneously by the ...read more.

Middle

A rise in the cost of production will cause the profit margins of the business to decrease, causing a decrease in profits for the company. For example, the labourers could demand a higher wage, or the raw materials could become more expensive. Producers in such a situation will tend to cut back their spending on labour and raw materials, and thus will be less willing to supply as much of the particular product as they did previously. Taxes and subsidies by the government can also increase or decrease the cost of production, and thus affect supply. * 2. Changes in the price of other goods and services ? Price acts as a signal for producers to move their factors of production to and from production of different goods and services. In a free market, resources will be allocated to the production of those goods and services which are the most profitable to produce. So, if the price of a product falls, profits reduce, and producers move their resources from producing this good (thus, causing a fall in supply) to other, more profitable goods (thus, causing an increase in supply). * 3. Technological advancements ? This could mean improvement in the performance of machines, labour force or better production methods, better management, quality control etc. Technological advancements, generally, reduce the cost of production of goods and services, and thus producers become more willing to produce larger quantities of such goods and services. Moreover, with technological advancements, efficiency increases, and thus the output increases, increasing supply of the good. * 4. Business optimism and expectations ? If producers fear that an economic downturn might be around the bend, they will move their resources to the production of those goods and services which they believe are going to be least affected by the recession. For example, expensive cars and holidays often fare badly during recessions whereas necessities such as bread and butter do not get affected by much. ...read more.

Conclusion

Monopolies, due to the lack of competition, have no incentive to be efficient, and thus, allocatie and productive ineffiency will exist in a monopoly, another big sign of a market failure. * 8. Information asymmetry ? This occurs when one party in a transaction has more or better information than the other. Such a situation can create an imbalance in power between the parties in a transaction causing transactions to go awry, a market failure in its worst form. 8 ? Define private and social costs and benefits, and discuss conflicts of interest in relation to these costs and benefits in the short term and long term through studies of the following issues: conserving resources versus using resources; public expenditure versus private expenditure * Private Costs ? The costs of setting up and running a business as well as the costs to the consumers of purchasing goods and services to satisfy wants * Private Benefits ? The monetary benefits (such as profits) for firms when they sell their products, and the benefits a consumer gets from purchasing goods and services * External Costs ? The costs that the external stakeholders (society, in general) have to bear due to the firm?s activity * External Benefits ? The benefits to the external stakeholders (society, in general) due to the activity of firm * Social Costs ? The total cost paid for by the society due to the activities of a firm * Social Benefits ? The total benefit arising due to the production of goods and services by a firm * Social Costs = Private Costs + Social Costs * Social Benefits = Private Benefits + Social Benefits * If the social costs of an economic activity are greater than the social benefits, then the activity is harming society more than benefiting it. On the other hand, if the social benefits are greater than the social costs, the economic activity is benefiting society, and should go on to do so. ...read more.

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