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AS Level Microeconomics > 1. Basic Economic Ideas and Resource Allocation > Flashcards

1. Basic Economic Ideas and Resource Allocation Flashcards

1
Q

What is the economic problem?

A

The economic problem states that we as humans have unlimited wants, but scarce resources to satisfy our wants

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2
Q

What is the economic problem often called?

A

The problem of scarcity

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3
Q

What is scarcity?

A

Scarcity is a situation that arises because people have unlimited wants, but limited resources to satisfy them

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4
Q

What is opportunity cost?

A

The benefit of the next best alternative forgone, when making a choice

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5
Q

The economic problem forces economic agents to ask themselves 3 very important questions. What are they?

A
  1. What to produce
  2. How to produce
  3. For whom to produce for
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6
Q

Why are these 3 questions necessary?

A

Because they help economic agents allocate scarce resources efficiently/effectively, in order to satisfy as many wants as possible

(Helping to solve the economic problem)

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7
Q

Which famous economist proposed these three questions?

A

Paul Samuelson

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8
Q

Why do all economic agents, (consumers, firms and the government), have to make choices?

A

Because all economic agents experience opportunity cost

Ex: Consumer could purchase a pair of shoes from Adidas or Nike
A firm could use its resources to make burgers or hot dogs
The government could use their resources to build schools or hospitals

These examples show that all economic agents fall victim to the economic problem and therefore all have to make choices

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9
Q

What is a social science?

A

The scientific study of societies and social interaction

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10
Q

What is the difference between a natural science and a social science?

A

In natural sciences, it can be easier to test models and theories with precise experiments, in order to see if they are right or wrong

In social sciences, it is harder to test theories and models, as there are so many factors that may influence our independent variable

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11
Q

What is meant by the term ceteris paribus?

A

All other things remain equal

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12
Q

Why do economists use the ceteris paribus assumption?

A

Economists use ceteris paribus when making models and theories as there are so many factors that influence the economy, that it is impossible to take them all into account

The ceteris paribus assumption therefore allows economists to measure the impact of a specific independent variable, as they assume that everything else that may impact the IV is, “remaining equal’

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13
Q

What is a positive statement?

A

A statement that can be tested, to see if it is true or false

(These statements are objective and fact-based) - Facts

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14
Q

What is a normative statement?

A

A statement that cannot be tested and therefore requires a value judgement

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15
Q

What is a value judgement?

A

A statement based on your own views and beliefs rather than facts - (Includes bias)

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16
Q

What is the role of normative and positive statements in policymaking?

A

Policies introduced by the government will always be based on normative statements/value judgements made by the government

However, these value judgements may be based on looking at data, graphs as well as positive statements

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17
Q

What is the importance of time period in Economics?

*ASK FOR MORE INPUT ON THIS CARD, AS THE ANSWER SHOULD BE BETTER THAN THIS

A

Time period is important in Economics as firms may not be able to adjust their behaviour very much in the short run, but they might be more flexible in the long run

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18
Q

What are the 4 factors of production?

A
  • Capital
  • Entrepreneur / Enterprise
  • Land
  • Labour
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19
Q

What is meant by capital?

A

Man-made-aid to production

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20
Q

What is meant by enterprise?

A

A risk-taking individual who organises factors of production

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21
Q

What is meant by land?

A

Natural resources available to the wider economy

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22
Q

What is meant by labour?

A

Human resources available to the wider economy

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23
Q

What is physical capital?

A

Tangiable items that aid the production process

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24
Q

What is human capital?

A

The knowledge, skillset or ability that an individual or group has, that allows them to aid the production process

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25
Q

What is the difference between physical and human capital?

A
  • Firms can own physical capital, but they cannot own human capital
  • It is easy to assess the value of physical capital, but not human capital
  • Human capital, unlike physical capital, is not perfectly mobile, as it can be restricted by nationality, culture and language
    (Physical capital cannot be restricted other than if trade restrictions are used)
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26
Q

What is the reward for capital?

A

Interest/Rate of return

(The return that the firm gains from using the capital good in it’s production process)

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27
Q

What is the reward for entrepreneurship?

A

Profits made by the firm which will be received by the entrepreneur in the form of a divident

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28
Q

What is the reward for land?

A

Money generated by the land in the form of rent or mortgages

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29
Q

What is the reward for labour?

A

The wage they make for doing their job

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30
Q

What is meant by division of labour?

A

The division of labour, is a process where firms split up their production process into smaller tasks and assign these to their workers based on their strengths

31
Q

What is meant by specialisation?

A

Specialisation is when workers carry out a specific task or tasks, based on their skillset

32
Q

What are the pros of the division of labour?

A
  • Enables specialisation that can increase output, as individuals are focusing on what they are best at and master their own task
  • Improves the quality of the good or service being produced. If we use division of labour and specialisation, workers will become even better at their tasks, as they will repeat it continuously –> This will improve the quality
  • Decreased unit costs –> The same worker, will be able to produce more output in the same amount of time if they become better at carrying out the task, which they will through specialisation
33
Q

What are the cons of the division of labour?

A
  • When workers specialise on just one task, they can become bored and lack job satisfaction –> This can lead to demotivation, leading to a lack of concentration, which will lead to mistakes, decreasing the quality of the good or service produced
  • Can lead to absenteeism –> Which is when workers skip work on purpose because they are bored of their job –> If specialist employees skip work, then the production process may break down as there may not be another employee who can carry out that job
  • Can lead to unemployment –> If workers specialise doing a specific task and then that task is no longer needed due to technological advancement, then employees may not have the skills necessary to get a new job
34
Q

What is the role of an entrepreneur in a contemporary economy?

(Contemporary just means current - So in today’s economy)

A
  • Identify potential income-earning opportunities
  • Willing to assess and bear the risk involved in taking on new projects
  • Responsible for organising the other factors of production
35
Q

What is meant by short run?

A

The period where a firm is able to vary its input on one of the factors of production, (labour), whilst the other factors remain fixed

36
Q

What is meant by long run?

A

The period where a firm is able to vary the inputs of all it’s factors of production

37
Q

What are the 3 main economic systems?

A
  1. Market economy
  2. Planned economy
  3. Mixed economy
38
Q

What is a market economy?

A

An economic system where market forces are allowed to guide the allocation of resources within a society

(Majority of goods and services are private)

39
Q

What is a planned economy?

A

An economic system where decisions on resource allocation are made by the government

(Majority of goods and services are public)

40
Q

What is a mixed economy?

A

An economic system where resources are allocated partially based on market forces and partially based on input from the government

41
Q

What is the government’s role in a market economy?

A

To provide a stable and secure environment, in which markets can work effectively

42
Q

What do consumers and firms try to do in a market economy system?

A

Consumers try and maximise the satisfaction they gain from consuming a range of products

Firms seek to maximise their profits by responding to consumer demand through the medium of price signals

43
Q

How does a mixed economy system work?

A

Prices and other market forces provide signals to firms and consumers, but the government can intervene by influencing the allocation of resources through taxes and regulation

44
Q

Some argue that state intervention should be market friendly. What does this mean?

A

It means that governments should intervene in the economy, but they should do so in a way that helps markets work, rather than trying to replace market forces

45
Q

What is a transition economy?

A

A transition economy is when a country moved from being a centrally planned economy to a market economy

46
Q

What are the pros of market economies?

A
  • Lower prices. In a free market economy, there are often lots of producers competing against each other in a market –> This forces airlines to cut costs and use competitive pricing in order to improve efficiency. Which will allow firms to gain more profits and increase their market share
    –> Whilst also benefiting consumers through lower prices
  • Choice. In a free market economy, competition means producers are constantly trying to improve their products in order to outdo their rivals. This leads to a higher quality of choices for consumers. This improves consumer choice
47
Q

What are the cons of market economies?

(Go through final point in an extra session in order to make sure their is nothing else to add)

A
  • Monopolies may occur in a market economy, which is when there is only one big firm in the market. Monopolies cause firms to put their prices up as they know that consumers will have to pay them as the monopoly firm may be the only one offering ther good or service
    –> This negatively effects consumers
    –> With less pressure to reduce prices due to their monopoly, there is also less pressure to decrease prices, meaning the problem will only worsen
  • Market economies can often suffer from market failure. A free market economy will underprovide public goods, like schools. Positive externalities caused by these services will not occur as frequently, due to the underproduction of public sector goods and services
    –> Demerit goods produced by firms such as alcohol will be overproduced and overconsumed, as people don’t think about external benefit due to information failure
48
Q

What are the pros of centrally planned economies?

A
  • Correct market failures. The government has total control over a planned economy, so it can intervene immediately.
    Ex: If the government notices the consumption of demerit goods starts to increase due to information failure, then they can simply put an indirect tax or minimum price on the good and suddenly, the demand will fall
  • Less inequality. The government is in charge of all firms, so they can make sure that workers are all paid a fair and equal wage.
  • Government can stop large monopolies from abusing their power, as governments can set maximum prices so that all consumers can afford goods and services produced by monopolies who may have previously taken advantage of their power to set prices that are not possible for all consumers to meet
49
Q

What are the cons of centrally planned economies?

A
  • When the government steps in, to improve market failure, it can often cause government failure –> Things like putting a minimum price on a good or regulating the good, can lead to unintended consequences, such as black markets and smuggling
  • Less inequality can destroy incentives. If everyone ends up with the same wage, then there is no point working harder as you will receive the same amount of money. This disincentivies hard work, which will lead to a decrease in output, causing a firms profits to decrease
50
Q

What needs to happen for a minimum price to be effective, (disincentivising the production of a good or service)?

A

It must be above the equilibrium

51
Q

What is the most common type of market failure we see in CIE AS Level Microeconomics?

A

Information failure

52
Q

What is information failure?

A

When a participant in an economic exchange does not have perfect knowledge or as much knowledge as the other participant in the exchange

53
Q

What is a production possibility curve? (PPC)

A

A production possibility curve shows us all the possible combinations of production of two goods or services if we use all our resources efficiently

54
Q

What is another name for a production possibility curve? (PPC)

A

Production possibility frontier, (PPF)

55
Q

What does the placement of our current production of the two goods or services on our PPC show us?

A

It shows us whether we are being productively efficient or not

If we are currently producing on the curve of our PPC, then we are using all of our resources efficiently

If we are producing within our PPC, then we are being productively inefficient, because we could produce more if we utilised our factors of production

56
Q

Is it possible to produce beyond our productive potential?

A

Not with the current factors of production

It is only possible to produce past the PPC, (past our productive potential), if we improve the quality and, (or), quantity of our factors of production

57
Q

How do we show constant opportunity cost on a PPC?

A

All straight line PPC’s have a constant opportunity cost

(No matter how shallow or steep the line is)

*ASK FOR A BETTER EXPLANATION AS TO WHY

58
Q

How do we show increasing opportunity cost using a PPC?

A
59
Q

Why does our PPC shift inwards?

A

A decrease in the quality or quantity of our factors of production

60
Q

Why does our PPC shift outwards?

A

Due to an increase in the quality or quantity of our factors of production

61
Q

What are the consequences of an inward shift of our PPC?

A

…

62
Q

What are the consequences of an outward shift of our PPC?

A

…

63
Q

The significance of position within a PPC.

A

…

64
Q

Watch the video on PPF SHIFTS ON UPLEARN IF THERE IS ANYTHING YOU DON’T UNDERSTAND!

A

…

65
Q

What is a private good?

A

A good which imposes a cost on society to produce. It is also a good that is limited in quantity and will therefore have a high opportunity cost

66
Q

What is a free good?

A

A good which can be enjoyed without any cost to society. It is a good that is unlimited and has no opportunity cost. (Ex: The air we breathe)

67
Q

There are 3 features that characterise a private good. What are they?

A
  1. Excludable
  2. Rivalrous
  3. Rejectable, (If an individual doesn’t wish to consume a good, then they don’t have to)
68
Q

What is a public good?

A

A public good is a good that is non-excludible and non-rivalrous.

*It is also not rejectable, as once it is provided to all, no individual can reject it

69
Q

Give 2 examples of public goods.

A

Street lights and lighthouses

70
Q

What is meant by the term non-excludable?

A

You cannot restrict someone from benefiting from the public good or service - Meaning you cannot charge for it
(Ex: A sea wall will stop flooding and protect everyone in that area, even if they haven’t contributed to paying for it)

71
Q

What is meant by the term non-rivalrous?

A

If a good is non-rivalrous, then it means the consumption of the good doesn’t prevent anyone else from using it

(Ex: If you are enjoying your street light on the way home; does that mean there will be less light available for those walking behind you? …No)

72
Q

What problem do public goods create?

A

The free-rider problem

73
Q

What is the free-rider problem?

A

A problem that arises when consumers overuse a public good without paying for it

AS Level Microeconomics (5 decks)

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