Economic Framework

Economics Is the study of how individuals, businesses and governments with limited resources make choices.

Resources Are things such as land, machinery, workers, materials, oil, crops, money. They are used in the production of goods and services.

The Factors of Production Are those scarce resources which we use to produce wealth.

4 Factors of Production Land Labour Capital Enterprise

Land All things supplied by nature. Eg. water, natural gas, oil, coal, minerals, trees…….. The payment/reward for land is rent.

Labour The human element in the production process. Eg. employees, builders, carpenters, factory workers….. The reward for labour is wages.

Capital All man-made things that help produce goods. Buildings, machinery… The reward for capital investment is interest.

Enterprise Taking the risk to sell new product/idea.. Eg. Bill Cullen, Richard Branson… The reward for enterprise is profit. The risk of enterprise is loss.

Example: Bread Land Wheat Labour Farmer, baker Capital Tractor, oven, bakery Enterprise Cuisine de France

Needs Are essentials required for survival. Basic needs. Food, shelter, clothing.

Wants Are anything in excess of our needs. Things we can live without. TV, holidays, i-pod………………

Opportunity Cost The opportunity cost is the sacrifice of the item you must do without when you have to make a choice between two items you want to produce or purchase.

Opportunity Cost (continued) Example I have €2.00. I can buy ice-cream or Pringles. I choose ice-cream. Financial cost = €2.00 Opportunity cost = Pringles.

Economic System Is how a country makes decisions about their factors of production. An Economic System is important to ensure the economy is controlled and run properly.

Centrally Planned Economy Communism All industries are owned & controlled by the government. Eg China

2. Free Enterprise Economy Capitalism All industries are owned by private entrepreneurs. Eg. USA (is the closest to Free market model)

3. Mixed Economy Some industries are controlled by the government & some are controlled by private entrepreneurs (business people). Eg. Ireland

Economic Growth Occurs where there is an increase in the amount of goods and services produced in a country from one year to the next.

Advantages of economic growth Increase in standard of living More employment will be create More money available for social welfare, health and education

Explain GNP Gross National Product GDP Gross Domestic Product The total amount produced in a country. + = Growth - = Recession

Formula Change X 100 Original

Example 1 2009 100 million produced in Ireland 5 million X 100 = -5% 100 million Recession

Example 2 2009 200 million produced in USA 20 million X 100 = + 10% 200 million Growth

Inflation Is an increase in the cost of living/prices from one year to the next. It is calculated by the Consumer Price Index (CPI).

Consumer Price Index Is the measure of inflation. The Central Statistics Office (CSO) conducts a survey of prices every few months. This tells us if prices are rising or not.

What causes inflation? Too much money in circulation. Interest rates too low. Increase in oil prices.

ECB The European Central Bank tries to control inflation. See Inflation Monster DVD

Formula for calculating rate of inflation Increase in price x 100% _______________ Original Price

Example Cost of living in 2007 is €9000 Rate of Inflation = €600 x100% ________ €9000 =6.6%

Benefits of low inflation Economic growth is aided Prices are stable Wage demands are lower

Deflation Is when prices are falling. While this may seem good it is not. Consumers will delay spending in case prices fall further. This may lead to unemployment.

Interest Rates Is the cost of borrowing. Irish rates are controlled by the European Central Bank

Benefits of low interest rates Mortgages and loans will be cheaper. Encourages new investment. Increased consumer spending.

Disadvantages of high interest rates Discourages new investment. Reduces consumer demand. Increases business costs.