Resources allocated partly by markets and partly by government.
Economics is a social science: it studies how people behave, so its predictions are less certain than in natural sciences. Microeconomics studies individual markets; macroeconomics the whole economy.
Scarcity links to sustainability: using resources today can reduce what future generations have.
Every economy answers three basic questions: what to produce, how to produce it, and for whom.
Economic systems: a free market economy relies on prices; a planned economy relies on government decisions; most real economies are mixed. The debate is about how much to rely on markets versus intervention.
PPC assumptions: a fixed quantity and quality of resources, fixed technology, and only two goods.
Points on the PPC are productively efficient. Inside = unemployed or inefficiently used resources. Outside = unattainable with current resources.
A concave (bowed-out) PPC shows increasing opportunity cost because resources are not equally suited to both goods; a straight-line PPC shows constant opportunity cost.
Actual growth = moving from inside towards the PPC (using idle resources). Potential growth = the PPC shifting outward (more or better resources, better technology).
Circular flow of income: households supply factors to firms and receive income; they spend it on firms' output. Five decision-makers interact: households, firms, government, the financial sector and the foreign sector.
Leakages (saving, taxes, imports) take income out; injections (investment, government spending, exports) put it in. If injections exceed leakages, national income rises.
Exam tip: In a PPC answer, label both axes with the goods, label the curve, and mark the points you discuss. Say whether you mean a movement along the curve (actual growth or reallocation) or a shift (potential growth).
1.2How do economists approach the world?
Key terms
Ceteris paribus
Assuming all other factors stay the same, so one cause can be studied at a time.
Positive statement
A statement that can be tested against evidence.
Normative statement
A value judgment about what should be.
Equity vs equality
Equity is fairness; equality is everyone getting the same.
Positive economics: economists use logic to form hypotheses, build models and theories, assume ceteris paribus, then test them against empirical evidence; a theory that fails the evidence is refuted.
Normative economics: policy choices involve value judgments, e.g. how much equality is fair.
Models simplify reality, so always question their assumptions.
History of economic thought (in brief):
18th century: Adam Smith argued free markets and the “invisible hand” allocate resources well (laissez-faire).
19th century: classical economists developed utility and the marginal concept; Say's law claimed supply creates its own demand; Marx criticised capitalism for exploiting workers.
20th century: Keynes argued markets can stay in long recessions, so government should manage demand; monetarists and new classical economists (e.g. Friedman) later argued for limited intervention and controlling the money supply.
21st century: behavioural economics (how people really decide), complex interdependencies, and the circular economy (reusing and recycling to reduce waste).
The nine central concepts can structure evaluation in any answer.
Exam tip: Strong evaluation questions a model's assumptions (e.g. perfect information, rational behaviour) and asks what happens if they don't hold.