Notesale: Turn your study into money

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1 Introduction to markets and market failure
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1 Positive economics
→ Concerned with facts and is value-free
→ Positive statements are true or false according to their reference to the facts
→ A positive statement must be verifiable either in the present or in the future
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3 Role of value judgments in economic decision making and policy
→ Personal preference, belief, and subjective assessment underpins normative economics
→ An individual’s propensity to take risks affects much of their behaviour, such as whether they would
choose to spend all of this month’s pay check on an expensive holiday, or instead save those funds
→ Value judgments also have a major effect on government policy making, for example when a
government is choosing to cut taxes rather than increase government spending on healthcare or
education

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3 The economic problem
→ The economic problem is based on scarcity, which arises because there are finite physical resources
to meet infinite human wants
→ We have to make choices over the use of our limited resources to provide for our unlimited wants
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2 Renewable and non-renewable resources
→ Resources, or factors of production, are inputs used in the production of goods and services, and
take the form of land, labour, capital and enterprise

→ A renewable resource is one whose stock level can be replenished naturally, i
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solar energy, wind
power, tidal power, fish, timber and soil
→ A non-renewable resource is one whose stock level decreases over time and cannot be naturally
replenished, i
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fossil fuels, steel, copper and aluminium

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4 Production possibility frontiers
→ A production possibility frontier shows the maximum potential level of output for two goods and
services that an economy can achieve when all of its factors of production are fully and efficiently
employed
→ It can be used to illustrate scarcity and opportunity cost
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2 Opportunity cost shown on the production possibility frontier
→ According to the production possibility frontier above, the opportunity cost of increasing output of
capital by 20 units is 30 units of consumer goods
→ It is therefore possible to work out the opportunity cost of each unit of output of capital goods
→ 30 ÷ 20 = 1
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5 units of
consumer goods
→ Inversely, increasing consumer goods output by 30 units carries the opportunity cost of 20 units of
capital goods output
→ 20 ÷ 30 = 2⁄3, and so the opportunity cost of each unit of consumer goods output is 2⁄3 of a unit
of capital goods output

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As land that is better suited to farming wheat is used to produce livestock, the
marginal opportunity cost rises dramatically, creating a convex production possibility frontier
→ A straight production possibility frontier is possible where all factors of production are equally good
at producing both goods – the opportunity cost of each good is the same across all factors of
production
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These goods have more inelastic demand than
manufactured goods, and so when world GDP rises, the price of manufactured goods will
increase more than the price of primary products, causing the gap between developing and
developed countries to increase
→ The division of labour is one form of specialisation where individuals focus on the production of one
particular element of the production process of a good or service

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A production process is broken down into a series of simpler tasks which are conducted by
different workers, e
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house construction required specialised architects, surveyors,
bricklayers, carpenters and electricians
Adam Smith

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