1.1 Flashcards
What is the Economic Problem ?
- The basic problem of economics is that of scarcity. People have infinite wants but there are finite resources available
- Scarcity is a relative concept as resources are not necessarily scarce but they are scarce in relation to the demands placed upon them
Who are the economic agents ?
- Economic agents are groups that participate in the economy
- Producers/firms create goods and services.
- Consumers buy goods and services made by firms, both individuals and firms can be consumers
- The government sets the rules that other economic agents must follow
What are the Factors of Production ?
- Capital - refers to all man made resources that are used to produce goods or services in the future
- Enterprise - Is the willingness and ability to take risks in order to make a product or service
- Labour - Is all productive human effort
- Land - Is all the natural resources used in the production
- CELL
What is Opportunity Cost ?
- Opportunity cost is the cost of giving up one thing for the next best alternative
- It is the value of the next best alternative forgone
What are renewable resources ?
A renewable resource is one that can be replenished, so their stock level can be maintained over a long period of time E.g. Solar Power
What are non renewable resources ?
Non renewable resources can not be renewed. The stock level of the resource decreases over time. E.g. Oil and Natural gas
How can non renewable resources be managed ?
They can be managed by limiting/preventing deforestation etc
Why do economists use models ?
- Economists use models because they can not conduct scientific experiments
- Models can be used to predict the impact of economic change
What are the two basic models in economics ?
- Theoretical models which are based on theory and not data
- Empirical models which are based on data and not theory
What is Ceteris Paribus ?
Ceteris Paribus is an assumption made by economists, it means ‘assuming other variables remain constant’
Why do economists use Ceteris Paribus when building models ?
- We can not control external variables so we assume ceteris paribus
What is a capital good ?
Capital goods are goods that are produced in order to produce other goods
What is a consumer good ?
A consumer good is a good that is bought to satisfy wants and needs
What is a PPF ?
- A Production Possibility Frontier shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology.
- Simply, it shows how much of two goods you can make with the given resources and technology
What does a movement along the PPF curve mean ?
Indicates a change in the combination of goods produced : e.g. more consumer goods and less capital goods.
What does a shift of the PPF curve mean ?
A shift of the curve indicates a change in the productive potential of the economy
How is Economic Growth portrayed on a PPF ?
An outward shift on a PPF
How causes an outward shift on a PPF ?
- An increase in the quantity and quality of the factors of production (Q2CELL)
- Innovation and invention of new products and resources
- Better management of factor inputs
- Discovery of new natural resources
How is Negative Economic Growth portrayed on a PPF ?
An inward shift on a PPF
What causes an inward shift on a PPF ?
- High unemployment
- Natural disasters
- Conflict
- long term fall in productivity of labour
What are Positive Statements?
- They are objective.
- They are statements that or based on data which are not influenced by opinion.
- They can be tested.
What are Normative Statements ?
- They are subjective statements that are based on opinion rather than fact.
- They carry value judgement
What is a Value Judgement ?
- A value judgement is an evaluative statement of how good or bad you think an idea or action is.
- Value judgements can influence economic decision making and policy.
What type of statements are value judgements ?
Normative statements
What is productivity ?
- Productivity is the effectiveness of productive effort
- Output produced / total inputs used
What does increased productivity lead to ?
- Higher quality of output
- More efficient use of resources
What is Specialisation ?
Specialisation is when we concentrate our resources on a specific task or product.
What are the benefits of specialisation ?
- Higher Output : Production is raised and quality can be improved.
- Consumer sovereignty : Larger range of goods and services produced
- A bigger market : Trade and growth
- Economies of scale : An increase in the size of the market leads to a lower unit cost
What are the disadvantages of specialisation ?
- Makes a firm vulnerable to a change in global demand
- Resources are finite, what if that resource runs out ?
- National interdependence, what happens if there is war or turmoil ?
What is division of labour ?
The division of labour occurs where the production process is broken down into many separate tasks
What are the benefits of the division of labour ?
- Can raise productivity as people become more proficient.
- Workers feel valued
- This then helps to lower the supply cost per unit, Cost effective
- Saves time when work is split into production lines
- Consumers benefit via lower prices
What are the disadvantages of division of labour ?
- Repetitive work can lower motivation and in turn lower productivity
- Workers would take less pride, quality of good will suffer
- Expensive to train all the workers
What is the relationship between division of labour and specialisation ?
When division of labour occurs, work has been specialised in that field of production ; and the whole production process happens more efficiently
Who came up with these two ideologies ?
- Adam Smith
- He showed how through the division of labour worker productivity can increase and firms can then take advantage of increased efficiency and decreased costs of production
What are the main functions of money ?
- A medium of exchange
- A store of value, an asset
- A unit of account, used to value assets
- A standard of deferred payment
What are the main characteristics of money ?
- Durability
- Portable
- Divisible
- Hard to counterfeit
- Accepted
- Valuable
What is a Free market economy ?
- Resources are allocated solely by the price mechanism, based on supply and demand.
- There is a limited role for the government
What are the advantages of a free market economy ?
- More efficient, due to higher demand from the customers, firms are likely to lower prices and make more efficient use of resources
- Consumer sovereignty, they have choice
- Economies of scale arise
- There is more personal and political freedom
What are its disadvantages (Free market) ?
- Can lead to monopolies
- Can lead to a rise in income and wealth inequality
- Under provision of merit goods
- Little control of demerit goods
What is the profit motive ?
The incentive to make profit, minimising costs and maximising revenue.
What is competition ?
In a market, firms have to meet consumer wants and needs otherwise the consumers may switch to the competitors
What do the profit motive and competition lead to ?
- Cost effective production
- More choice for consumers
- Quality and innovation are higher
What is a Mixed market economy ?
In a mixed market economy , some resources are owned by the public sector and some are owned by the public sector.
What is the role of state in a mixed economy ?
- Creating a framework of rules
- Supplements and modifies the price system
- Stabilises the economy
- Redistributes income
What is a Command economy ?
- An economy in which the government determines what goods should be produced, how much should be produced and the price at which it will be sold.
- Everyone receives the same wage regardless of their job
What are the advantages of a command economy ?
- Prevents mass unemployment
- Everyone has basic necessities
- Less wastage of resources
- Merit goods are encouraged and demerit goods are rare
What are the disadvantages of a command economy ?
- Less motivation and efficiency
- Consumers lose their freedom
- Less choice, innovation and lower quality due to the absence of the profit motive and competition
- State can not make all the right decisions, may lead to a waste of resources
What are the objectives of a command economy ?
Consumers, workers and the government are all assumed to be working for the common good
Who was Adam Smith ?
Adam Smith wrote about the invisible hand of resource allocation, and the role of self interest, in an early reference to free-market economies. Smith is regarded as the founder of free market (laissez-faire) economics, despite recognising the need for some government intervention.
Who was Friedrich Hayek ?
- Hayek disagreed with Adam Smith, he argued that the intervention in money markets was one of the main causes of economic instability.
- Hayek argued really strongly against command economies, noting that a small group of individuals would be entirely responsible for determining the allocation and distribution of resources ; in his view, it would be completely impossible for them to ever have enough information to do this properly and meet peoples needs.
Who was Karl Marx ?
- Marx developed on Smiths ideas on capitalism, but mostly considered the negative consequences. He thought that the impact on labourers would be massive and detrimental.
- Marx believed that the drive for profit by business owners would push worker wages to low levels and they would be exploited.
- Ultimately, he said that exploited workers would work together and overthrow capitalism in a revolution.
