1:1:1 (Green & White Book) - Nature of Economics Flashcards
What is meant by the term Ceteris Paribus?
All other things remaining the same.
What is meant by Positive Statements?
Are statements which can be proven to be true or false, they are supported by statements
Even if a statements cannot be proved immediately but can be proven in the future, are these statements positive ones?
YES
What is meant by the term Normative Statements?
Are opinions which cannot be supported or refuted.
What is the scientific method at its most basic level?
- Scientist puts forward a hypothesis with is capable of being disapproved
- Gathers evidence to support or refute the theory
- Accepts, modifies or refutes the theory
What is Economics the study of?
Is the scientific study of ownership, use, and exchange of scarce resources
Why is Economics regarded as a Social science?
Because it uses scientific methods to build theories that can help explain the behaviour of individuals.
What does Economics attempt to explain?
Explain economic behaviour, which arises when scarce resources are used
How do economists gather data to accept or refute a hypothesis?
Gather data in the ordinary everyday world where many variables are changing over any given time period.
Why can it be argued that economics is not a science?
Because it studies human behaviour and human behaviour cannot be reduced to scientific laws
Why is the study of groups better than the study of individuals?
Because the behaviour of groups is far more predictable than individuals
What is the difference between Economic Theories and Economic Models?
- Theories are expressed in words
- Models are often more precise as they are expressed in mathematical terms
Why are theories and models used in science?
- Because we want to know why something is as it is.
What is one criticism of economics?
Economic models and theories are unrealistic
What is meant by Simplification of models?
Implies that some factors have been included in the model and some have been omitted.
How does making assumptions help scientists?
Allows scientists to simplify a problem to make it manageable to solve
What is the link between Positive and Normative Statements ?
Economists usually start off with a Normative statement then use models and theories to build a positive statements from the Normative one.
What are some words which are usually included in Normative Statements?
- Should
- Ought
Is the statement ‘Inflation should be brought down’ a positive or Normative statement?
Normative
Is the statement ‘Inflation should reach 5% by the end of the year’ a positive or Normative statement?
Positive
What is meant by Normative Economics?
Determines what is desired in the economy (‘what ought to be?’)
What is meant by Positive Economics?
What is actually happening in the economy (‘what is’)
What does economics investigate?
How scarce resources are allocated to provide for unlimited human wants
Why is Ceteris Paribus needed?
Because economists cannot test models in scientifically controlled laboratory conditions
What word should you use instead of an opinion, in a Normative statement?
Value judgement
Which is a scientific approach, positive or Normative?
Positive
Which is Non-Scientific approach, Positive or Normative?
Normative
What is the role of Value Judgements in Economic decision making for consumers?
Cautious individuals may prefer to save more income in a savings account rather than spending on consumer goods
What is the role of Value Judgements in Economic decision making for producers?
- Producers are prone to taking high risks and may prefer to spend savings on developing new goods rather than having a safety net anticipating future events.
What is the role of Value Judgements in Economic decision making for Governments Policy making?
Preference in the free market rather than more government intervention in the economy.
What is the economic problem based on?
Scarcity
Why is there scarcity in the economy?
Because there are insufficient resources to provide for everyone’s wants
Does scarcity occur in all human economies?
Yes
Difference between scarcity in poor countries and wealthy countries.
- Poorer countries (face famine, drought, where there is insufficient food or water)
- Wealthy Countries (not all human wants can be satisfied)
What is meant by Scarcity?
There are finite resources compared to infinite human wants, so choices have to be made about how to use those resources.
What kind of crucial decisions have to be made regarding scarcity?
What, how and for whom to produce for
Who faces the decisions around scarcity?
- Consumers
- Producers
- Government
When a decisions has been made what to use a resource for what arises?
Opportunity Cost
What is meant by the term Opportunity Cost ?
The value of the next best alternative forgone (given up)
Who mainly experiences opportunity Cost?
- Consumers
- Producers
- Government
What is the opportunity cost when thinking about either buying a meal or a T-Shirt but you buy the meal?
The opportunity cost is the t shirt
What is meant by Resources?
- Factors of production
- Are inputs used in production of goods and services
What are the factors of production?
- Capital
- Enterprise
- Land
- Labour
C.E.L.L
What is meant by Renewable Resources?
Is whose stock level can be replenished over time.
Is it possible for renewable resources to decline over time? Is so why?
Renewable resources can decline over time if they are consumed at a faster rate than the environment can replenish them.
What is meant by Non-Renewable Resources?
Is one whose who’s stock level decreases over time as it is consumed.
What are some examples of non-renewable resources?
- Fossil Fuels (Coal, Oil & Gas)
How is it possible to reduce the rate of decline of non-renewable resources?
Through recycling and development of substitutes
How does the price rate reduce the consumption of non-renewable resources?
Via higher prices
What does PPF stand for?
Production Possibility Frontier
What does a Production Possibility Frontier (PPF) Curve show?
- how much an economy can produce given existing resources
- decisions that an economy faces
What cause the PPF curve to shift outwards?
An increase in:
- Capital
- Enterprise
- Land
- Labour
What is meant by Consumer goods?
Goods that directly provide satisfaction or utility to consumers
What is meant by Capital Goods?
Are used to produce more consumer goods and services.
How can Economic Growth be shown on a PPF Curve?
By an outward shift of the Production Possibility Frontier Curve
What does it mean of an economy is located at any point on its Production Possibility Frontier Curve?
There is an efficient allocation of resources, since none are being wasted.
What does it mean if the economy is located within its Production Possibility Frontier?
There is inefficient allocation of resources as not all are being used.
When you are inside the PPF Curve, inefficient allocation of resources, how do they increase both consumer and capital goods?
By utilising employed resources
What does the shape of the PPF Curve show?
As more of one good is produced, and increasing amount of the other good is forgone, the opportunity cost rises.
The shape of the PPF Curve , shows that the more of one good is produced, an increasing amount of the other is forgone, why is this?
Not all resources are efficient as other resources in the production of both goods. This effect is called DIMINISHING RETURNS
What does an outward shift of the PPF Curve show?
Shows economic growth
On a PPF Curve, what are the possible factors that could cause economic growth?
- Increase in the quality or quantity of resources
- expansion of education and government training schemes
- Increase In Investment
- Development of new technology
What does an inward shift of the PPF Curve show?
Indicates a decrease in the potential output of an economy
What are the factors which could cause an inward shift of the PPF Curve?
- War
- Natural Disaster
• Where many resources are destroyed
What is meant by Specialisation?
Occurs when an individual, a firm, a country concentrated on the production of a limited range of goods and services
What are the advantages of Specialisation?
- Increased productivity
- Increase living standards
Both on a global scale
What are the disadvantages of specialisation?
- If Demand falls for a good it will cause structural unemployment
- a country exporting raw materials will experience resource depletion
- Price at which goods are sold, eg, exchange rates mean that some countries buy raw materials really cheap from countries with a bad exchange rate
What is meant by the Division of Labour?
The specialisation of Workers on specific tasks in the production processes
Who was the first economist to explain the division of labour?
Adam Smith
Advantages of the Division of Labour?
- Increased Productivity (Higher output per worker per hour) •Which leads to.... - Higher living Standards - Reduce the Cost per unit output - Improves Efficiency of resources
What are the reasons for increased productivity?
- Worker becoming highly skilled in a task due to repetition
- No time is wasted in moving from one job to another
- Capital equipment can be used continuously in production
- Less time is required to train workers for specific task
- There is more choice for workers so they can specialise in the job they like the most
What will Specialisation do to total production costs for a firm?
Increase total production costs
Why does Specialisation increase total production costs for a firm?
It will increase total output, requiring more materials and machinery
What will Specialisation do to the cost per unit of output?
Reduces the cost per unit output because workers become more productive.
What are the Disadvantages of the Division of Labour?
- Repetition creates boredom, high staff turnover, increase in recruitment and selection costs
- Breaking tasks down into different ask makes it easier to replace workers with machinery leading to, structural unemployment.
- Specialisation creates interdependence in production (if one group of worker goes on strike it halts production across the whole industry)
What is meant by the term money?
Is anything that is generally acceptable in the payments of a good/service or debt
Why is it crucial that people confidence in the money used?
Because if they don’t then money will lose it’s general acceptability for making transactions, once this happens it is no longer money
What are the four functions of money?
- Medium of Exchange
- Measure of value
- Store of value
- Method of differed payment
What is meant by ‘Medium of Exchange’ being a function of money?
Enables the buying and selling of products making exchange easier.
What is meant by ‘Measure of Value’ being a function of Money?
- Enables a value to be placed on products, so they can be sold and bought with ease
- enables comparisons between values of products
What is meant by ‘Store of Value’ being a function of Money?
- Convenient way of storing wealth
Money tends to hold its value as long as inflation is low
What is meant by ‘Method is Deferred Payment’ being a Function of Money?
- Enables borrowing and lending
What are the 3 different types of economy?
- Free-Market Economy
- Mixed Economy
- Centrally Planned Economy
Is there government intervention in a free market economy?
No
What percentage of resources are allocated by the price mechanism In a free market economy?
100% all resources are allocated by price mechanism
What percentage of resources are allocated by the price mechanism in a Mixed Economy?
50% - some resources are allocated by the price mechanism and some by the government
What percentage of resources are allocated by the price mechanism in a Centrally Planned Economy?
0% - All resources are allocated by the government. No price mechanism
What does the majority of the economies comprise of?
Private enterprise (Private Sector) Public Enterprise (Public Sector)
What do mixed economies comprise of?
Private Enterprise (Private Sector) Public Enterprise (Public Sector)
What is meant by the term free market?
Is where decisions on what, how and for whom produce are left to the operation of the price mechanism
How much government intervention is in a free market economy?
Minimum government intervention
Advantages of a free market economy.
- Economic Efficiency and Lower Prices
- Quality of Products
- Greater Choice
- Financial Incentives
What is the process of competition between firms?
- Competition means that Firms try to keep production costs down in order to seek goods and services at competitive prices (Productive Efficiency)
- Competition also means that Firms try to produce goods and services that consumers demand (allocative efficiency)
- This means that the price mechanism will equate consumer demand with producer supply
Advantages of a Free Market Economy - What is meant by Economic Efficiency and Lower Prices’?
- Competition means that Firms try to keep production costs down in order to seek goods and services at competitive prices (Productive efficiency)
- Competition also means that Firms try to produce goods and services that consumers demand (allocative efficiency)
- Price mechanisms will equate consumer demand with producer supply.
Advantages of a Free Market Economy - What is meant by ‘Quality of Products’ ?
- Competition means that Firms continuously try to improve the quality of their products to gain an advantage over their rivals
- Lots of Consumer power in the market
Advantages of a Free Market Economy - What is meant by ‘Greater Choice’?
- Consumer can often choose to buy from a wide selection of goods and services.
- Workers often have a wide choice of employment opportunities
Advantages of a Free Market Economy - What is meant by ‘Financial Incentives’?
- Entrepreneurs have an incentive to invest and take risks in order to earn profit
- Labour has an incentive to earn more money and work
Disadvantages of a Free Market Economy?
- Monopolies May for as a result of competition in some markets (rival firms get taken over or pushed out the market)
- Distribution of Income is very unequal
- Lack of Welfare Payments causes absolute poverty
- External Costs and Benefits on Consumers are often ignored
- Information gaps (lack of regulations and taxation to protect consumers)
- Insifficient Supply of public and merit goods
- Erratic swings in the business cycle
What is meant by a Command Economy?
Government has control of resources and economic decision making.
Is there the role of the price mechanism in a Command Economy?
No
When does a command economy work well?
In a national crisis (used effectively in WW2)
What is jeopardised in a Command Economy?
Personal Freedom & Living Standards
Advantages of a Command Economy?
- Cooperation of firms can lead to high levels of out (leading to high levels of profits)
- Reduction In Inequality compared to Free Markets, because the government controls workers wages
- Government can limit the External costs of production and consumption.
- Government can fund the provision of public goods, also increase the provision of public goods that yield high External benefits to society
- Government has more control of the economy so there are smaller swings in the business cycle
Disadvantages of Command Economy?
- Price mechanism is unable to operate so Market May suffer from excess demand and excess supply, leading to an inefficient allocation of resources
- Lack of Competition between firms means that productivity is low
- Lack of Competition leads to poor quality products, goal for business is output not profits
- Less choice of goods and services for consumers to choose from
What is meant by a ‘Mixed Economy’?
On what, how and for whom to produce are made partly by the private sector and partly by the government.
What are some examples of a Mixed Economy?
UK, France, Germany
What is the reason for a Mixed Economy?
To gain the advantages of a market economy whilst avoiding its disadvantages through government intervention
In a Mixed Economy why is there government intervention?
Occurs to correct market failure
Examples of market failure?
- Under-provision of merit goods such as education and healthcare
- Non-provision is public goods such as defence
Why is there Government Intervention in Markets?
To help Markets work more effectively
As resources are 1-[………], there is an 2-[…………..] in producing a good or service, since the resources could have been used to produce alternative goods or services.
1-Finite
2-Opportunity Cost
[……….] Economic Statements are facts which can be tested as true or false.
Positive
[………] Economic Statements are valued judgements which cannot be tested as true or false
Normative
The production possibility frontier illustrates the concepts of 1-[…………] and 2-[………….]. It can also show unemployment and economic growth
1-Finite Resources
2-Opportunity Cost
1-[…………] and the 2-[…………….] have led to huge increases in productivity
1-Specialisation
2-Division of labour
A Money has four function what are they?
- A medium of exchange
- A measure of value
- A Store of Value
- Method is deferred payment
[…………] is anything that is generally acceptable in the Payment of goods and services, or debts.
Money
