These are notes designed for Edexcel A Economics A Level.
1.1.1 Economics as a social science
What are economic models?
Economists make economic models. These are descriptions of reality. Economic models include assumptions on players, objectives, actions, interactions.
You will see many economic models in A-Level Economics. This includes everything from supply and demand.
One key assumption in economic models is “ceteris paribus”. This means “other things being held equal”. This is useful for isolating the impact of market changes or policy changes.
Can we conduct experiments in economics?
It is difficult to have scientific experiments in economics.
In the real world, ceteris paribus does not hold. Other factors change all the time. In the sciences for instance, we can create a “fair test” by keeping all other factors the same and only changing one input.
For the economy however, it will be difficult to work out the effect of increasing government spending on the level of unemployment, because other factors will be changing too.
1.1.2 Positive and normative statements
There are two types of statements.
Positive statements
1) Positive statements can be tested and verified.
For example, “a tax on petrol will increase the price of petrol”. This is a statement we can verify and test.
*Another example of a positive statement is “increasing the minimum wage leads to higher unemployment”.
Normative statements
2) Normative statements state what ought to be the case. These are not testable.
For example “the government should lower tax rates”.
Another example is “the government should pay for education for everyone”.
Note that just because the word “should” appears in a statement, this does not tell us whether the statement is positive or normative. Whether a statement is positive depends on whether the statement can be tested. Here is an example:
- “Higher government spending should lead to lower unemployment” is a testable statement and so it is positive.
Value judgements
Behind every normative statement is a value judgement. A value judgement is an assessment that something is right or wrong.
Value judgements can influence government policy.
Suppose that government officials think taxes should be lower based on their belief that it is the right thing. Then the government may impose tax cuts.
1.1.3 The economic problem
What is the basic economic problem?
The basic economic problem is scarcity.
Scarcity means that while there may be unlimited wants, there are only finite resources to satisfy these wants.
Scarcity raises three key questions:
- What to produce? Should we use our workers and machines to produce cars or trains?
- How to produce? Should we use workers or machines to produce goods and services?
- Who should receive the goods? Those who pay the most or those in most need?
What is the difference between renewable and non-renewable resources?
Renewable resources can be restored / replenished over time. For example, wind energy.
Non-renewable resources cannot be replenished as quickly as they are consumed. For example, fossil fuels.
What is opportunity cost?
Opportunity cost is the value of the next best alternative forgone (given up) when an economic decision is made.
When weighing up two options, an economic agent will face an opportunity cost.
Here are a few examples:
- Suppose a consumer is choosing whether to watch a film at the cinema or eating a meal at a restaurant. If the consumer watches the film, they give up the restaurant meal.
- Suppose the government can spend money either on healthcare or on education. If the government spends those funds on healthcare, it must forgo the benefits of spending on education.
- A producer could choose to use their factory to produce either cars or buses. Supposing the producer chooses to produce cars, then they must give up production of cars.
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