1.1 Flashcards
What is the definition of PPF? (production possibility frontier)
The maximum possible combination of goods that can be produced with current technology and resources.
Define specialisation:
The production of a limited range of goods by an individual organisation.
Free Market Economy
Individuals are free to make choices about the FoP without government interference.
Mixed Economy
Individuals have some freedom of choice, but state also controls some resources.
Factors of Production (CELL)
Capital (man-made resources made in production)
Entrepreneurship (the willingness and ability to take risks
Land (all natural resources)
Labour (productive human effort)
Normative Statement
Subjective and based on opinion. Cannot be proven or disproven. E.g. ‘the government should raise taxes’.
Adam Smith (18th C)
Father of modern economic theory. Described specialisation and the division of labour in a pin factory.
Friedrich Hayek (20th C)
A free market economist. He argued government control leads to the loss of freedom.
Command Economy
All factors of production are controlled by the state.
Karl Marx (19th C)
Important critic of capitalism and the exploitation of labour.
What is the main economic problem?
The problem of scarcity: there are infinite human wants and finite human resources.
Normative statement example:
The gov. should raise taxes.
Positive statement example
Raising taxes increases gov. revenue.
Using an example, explain the concept of opportunity cost.
The same resource cannot be used to produce different things. The opportunity cost is the cost of one thing in terms of the next best option given up. For example, if a farmer plants wheat on a field, the OC is planting a different crop.
What does a PPF curve show and why is it curved?
It shows the maximum possible combination of goods that can be produced with current technology and resources. It is curved as both products depend on the same finite resource for their manufacture. Law of diminishing returns
Why is a PPF graph curved?
Law of diminishing returns - there comes a point where an added production factor has less of an impact.
Sketch a PPF showing:
unobtainable, efficient, inefficient, firm specialising in one product:
draw
Name an example of Division of Labour + EXPLAIN WHY USEFUL
Production of cars. Different people produce different parts: Wheels, doors, engines.
Increasing productivity due to less time taken and reduces CoP.
Name the three most important economic agents that make decisions.
Government
Producers
Households
4 functions of money
Medium of exchange
Measure of value
Store of value
Method of deferred payment
3 types of economies:
Mixed, Command, Free market.
Ceteris Paribus
“All things being equal.” Keep it simple and only change one factor at a time.”
What is a positive statement? Give an example.
An objective fact, that can be tested and proven. (Absent of value judgements / emotion).
E.g. raising taxes will increase gov. revenue.
What is opportunity cost?
The same resource cannot be used to produce different things. The cost of one thing in terms of the next best option given up.
What is Capital?
Man-made resources used in production.
What is Entrepreneurship?
The ability and willingness to take risks.
What is economic growth / decline?
An increase / decrease in the total production or productive potential of an economy.
What is division of labour?
The production process is separated into lots of small steps.
Examples of scarcity:
Water in India and China.
Food shortages around the world.
PPF curve, representing maximum productive potential of an economy:
PPF showing economic growth / decline:
draw
PPF showing change in capital production:
draw
PPF showing change in consumer production:
What did Adam Smith find out about both: specialisation and DoL?
They can increase labour productivity. (output per worker).
Allowing firms to ↑ efficiency + ↓ CoP.
What are the advantages of specialisation and DoL?
↑ Lab. productivity. (concentrating on one thing).
May lead to higher quality g+s (More skilled).
Time not wasted (between jobs, getting out tools etc.)
Saved training costs (workers only trained on one job).
What are the disadvantages of specialisation and DoL?
Worker Alienation (one specific task = boring = poorer quality of work).
Standardised product due to mechanisation = reduction in craftsmanship.
Delays in one aspect of production stop every other task.
Workforce don’t have wide industrial training - could suffer from structural unemployment.
What are the advantages of Specialisation to trade?
Theory of comparative advantage states countries should specialise in goods with the lowest OC.
(This will boost economy + lead to greater output globally).
What was the problem associated with barter?
There had to be a double-coincidence of wants for trade to happen.
(Whereas money = MoE - acceptable everywhere).
Why is money better than barter at being a store of value?
Barter - goods such as fruits went out of date.
Money - able to keep value for long time.
What does the function of money: method of deferred payment mean?
Money allows debts to be created.
Advantages of the FM ‘Invisible hand’:
Automatic system - invisible hand.
Consumer sovereignty - consumers have freedom of choice.
Political freedom.
Productive efficiency - firms in competition.
Freer market economies = HIGHER GROWTH
Disadvantages of FM economy / invisible hand:
High levels of inequality.
Lack of merit goods, little control of demerit goods.
Problem of externalities.
Monopolies could arise.
Advantages of command economies:
Min. standard of living.
Less wastage of resources (no need for advertising).
Cost effective due to standardised products.
Control of externalities.
Long term planning - allows for industries to become established. (E.g. the infant industries that may have failed in the short term).
Disadvantages of command economies:
Wastage of resources - (Impossible for state to make so many decisions correctly).
Less motivation / efficiency - everyone receives the same wage.
Loss of freedom.
Define monopoly (UK):
A company with more than 25% market share.
Benefits of free markets (EPIC):
Allocative Efficiency is promoted.
Productivity is promoted, due to profit motive + competition.
Dynamic Efficiency (Investment). Research, more capital.
Job Creation - quantity is at max lvl.
What assumption do we make in economics?
People are rational beings (Homo Economicus).
What decisions do rational people make?
Ones that maximise their utility/ satisfaction
What rational decisions do governments make?
They try to maximise everyone’s social welfare
