Economics AS Level Notes
Basic economy ideas and resource allocation
Basic economic ideas
The fundamental economic problem is there are scarce resources (inputs available for
production) to satisfy unlimited wants. There are four factors of production: land, labor,
capital, and enterprise. Some countries have high quality factors of production and they
are said to have good factor endowment.
The process of creating goods is called production and consumers satisfy their needs is
called consumption. Humans have unlimited wants and they keep increasing and changing.
Scarce resources give rise to choice and the concept of opportunity cost arises.
Ceteris paribus is an economic concept meaning “other things being equal”. The margin
means a change in one variable leads to many small changes in other variables.
The short run is when firms can change only one factor input. The long run is when all
factors of production are variable. The very long run is when all key inputs are variable.
Positive statements are based on empirical evidence and normative statements are
subjective about what should happen.
Specialization is the process by which firms and economies concentrate on producing
those goods and services where they have an advantage over others. Market is any place
where buyers and sellers communicate and sell goods. Division of labor is when the
manufacturing process is split into a sequence of individual tasks.
Resource allocation
Economic Structure is the means by which choices are made in an economy. There are
primary, secondary, tertiary, and quaternary (knowledge-based part of the economy)
sectors.
, ● Market economy: one where market forces decide what, how, and for whom to
produce
● Command economy: one where a central body takes all the decisions
● Mixed economy: where both market forces and a central body play a part.
Issues of transition: rising unemployment and inflation/ corruption/ lack of
entrepreneurship and skills and legal system and infrastructure/ moral hazard/
inequality.
Production possibility curve: representation of the maximum level of output that an
economy can achieve using its existing resources in full.
Money is something that is generally accepted as means of payment. Functions: measure
of value/ medium of exchange/ standard for deferred payment/ store of wealth.
Classification of goods and services
Private goods: private goods have two characteristics: excludability (it is possible to
exclude some people from using a product by charging higher prices and once it has been
consumed it cannot be consumed by another). Rivalry (consumption reduces the
availability for others.
Public good: they have two characteristics: non-excludable ( once a good is provided for
one it cannot be held back for others). Non-rival (as more consume, the benefits to
those who haven’t will not reduce). These cause the free rider issue. Scarce resources
are not used in a way which is desirable.
Quasi-public: have some but not all characteristics of a public good. E.g tourist stops
Merit good: these have positive side effects when consumed. Government tend to
provide them
Demerit goods: these have negative side effects associated with them. It's sometimes
addictive. Harm not fully recognized
Information failure: where consumers don’t have complete information
, ● Moral hazard: when we visit doctors and they advise us what to do and it may be
wrong and we may seek treatment for it. This could result in misallocation of
resources
● Adverse selection: when we take health insurance and withheld information or take
unnecessary risks where the insurer has to pay more and result in increasing
premiums and some people may not take insurance because of it being too
expensive.
The Price Market and the Microeconomy
Demand and Supply
Demand: Quantity of product that purchasers are willing and able to buy at various
prices per period of time. Notional demand is speculative and not backed up by ability to
pay but effective demand is backed up by the ability to pay. The demand curve is
downward sloping because of the inverse relationship. There is a linear and a continuous
relationship and it is time based. Factors that affect demand are income/ price and
availability of substitutes and complements/ fashion, tastes and attitudes.
Supply: The quantity of a product that producers are willing and able to sell at different
prices per period of time. The supply curve is upward sloping because of the direct
relationship. A linear, continuous, and itmebased relationship. Factors that affect supply
are costs/ size and nature of the industry/ changes in prices of other goods/
government policy/ other factors.
Elasticity
Elasticity is a numerical measure of responsiveness of one variable following a change in
another variable.
Price elasticity of demand (PED): numerical measure of the responsiveness of the
quantity demanded to a change in the price of a product. % change in quantity
demanded/ % change in price. If it is less than 1, then inelastic and vice versa. If it is 1,
it is said to have unitary elasticity where the relative quantity change is equal to relative
price change. If it is 0, it is said to be perfectly inelastic, price changes will have no
change in demand. Perfectly elastic have elasticity infinite and a slight price change can
reduce the demand to 0
Basic economy ideas and resource allocation
Basic economic ideas
The fundamental economic problem is there are scarce resources (inputs available for
production) to satisfy unlimited wants. There are four factors of production: land, labor,
capital, and enterprise. Some countries have high quality factors of production and they
are said to have good factor endowment.
The process of creating goods is called production and consumers satisfy their needs is
called consumption. Humans have unlimited wants and they keep increasing and changing.
Scarce resources give rise to choice and the concept of opportunity cost arises.
Ceteris paribus is an economic concept meaning “other things being equal”. The margin
means a change in one variable leads to many small changes in other variables.
The short run is when firms can change only one factor input. The long run is when all
factors of production are variable. The very long run is when all key inputs are variable.
Positive statements are based on empirical evidence and normative statements are
subjective about what should happen.
Specialization is the process by which firms and economies concentrate on producing
those goods and services where they have an advantage over others. Market is any place
where buyers and sellers communicate and sell goods. Division of labor is when the
manufacturing process is split into a sequence of individual tasks.
Resource allocation
Economic Structure is the means by which choices are made in an economy. There are
primary, secondary, tertiary, and quaternary (knowledge-based part of the economy)
sectors.
, ● Market economy: one where market forces decide what, how, and for whom to
produce
● Command economy: one where a central body takes all the decisions
● Mixed economy: where both market forces and a central body play a part.
Issues of transition: rising unemployment and inflation/ corruption/ lack of
entrepreneurship and skills and legal system and infrastructure/ moral hazard/
inequality.
Production possibility curve: representation of the maximum level of output that an
economy can achieve using its existing resources in full.
Money is something that is generally accepted as means of payment. Functions: measure
of value/ medium of exchange/ standard for deferred payment/ store of wealth.
Classification of goods and services
Private goods: private goods have two characteristics: excludability (it is possible to
exclude some people from using a product by charging higher prices and once it has been
consumed it cannot be consumed by another). Rivalry (consumption reduces the
availability for others.
Public good: they have two characteristics: non-excludable ( once a good is provided for
one it cannot be held back for others). Non-rival (as more consume, the benefits to
those who haven’t will not reduce). These cause the free rider issue. Scarce resources
are not used in a way which is desirable.
Quasi-public: have some but not all characteristics of a public good. E.g tourist stops
Merit good: these have positive side effects when consumed. Government tend to
provide them
Demerit goods: these have negative side effects associated with them. It's sometimes
addictive. Harm not fully recognized
Information failure: where consumers don’t have complete information
, ● Moral hazard: when we visit doctors and they advise us what to do and it may be
wrong and we may seek treatment for it. This could result in misallocation of
resources
● Adverse selection: when we take health insurance and withheld information or take
unnecessary risks where the insurer has to pay more and result in increasing
premiums and some people may not take insurance because of it being too
expensive.
The Price Market and the Microeconomy
Demand and Supply
Demand: Quantity of product that purchasers are willing and able to buy at various
prices per period of time. Notional demand is speculative and not backed up by ability to
pay but effective demand is backed up by the ability to pay. The demand curve is
downward sloping because of the inverse relationship. There is a linear and a continuous
relationship and it is time based. Factors that affect demand are income/ price and
availability of substitutes and complements/ fashion, tastes and attitudes.
Supply: The quantity of a product that producers are willing and able to sell at different
prices per period of time. The supply curve is upward sloping because of the direct
relationship. A linear, continuous, and itmebased relationship. Factors that affect supply
are costs/ size and nature of the industry/ changes in prices of other goods/
government policy/ other factors.
Elasticity
Elasticity is a numerical measure of responsiveness of one variable following a change in
another variable.
Price elasticity of demand (PED): numerical measure of the responsiveness of the
quantity demanded to a change in the price of a product. % change in quantity
demanded/ % change in price. If it is less than 1, then inelastic and vice versa. If it is 1,
it is said to have unitary elasticity where the relative quantity change is equal to relative
price change. If it is 0, it is said to be perfectly inelastic, price changes will have no
change in demand. Perfectly elastic have elasticity infinite and a slight price change can
reduce the demand to 0
