1.1 Flashcards
Why do economists develop models, how is it done, what happens next?
To explain how the economy works e.g- theories of supply and demand
Model is put forward, evidence is gathered, it is then accepted changed or rejected
Why are assumptions made
Too many variables which can change an economic model
What is ceteris paribus
All other things remain equal
What is a positive statement
A statement which is objective, made without any value judgment or emotions
Can be tested or proven
What is a normative statement
Subjective, based on opinions so cannot be proven or disproven
What is the role of value judgments
Different economists may make different judgments from the same statistic therefore is can influence economic decision making
What is the problem of scarcity
People have finite needs but infinite wants. People have infinite wants but resources are limited
How do economies try to solve the problem of scarcity
Working out what to produce, whom to produce for and how to produce
What is an opportunity cost
The next best alternative forgone
What are the 4 factors of production
CELL
Capital
Enterprise
Land
Labour
What does the PPF show
Maximum possible combination of capital and consumer goods that the economy can produce with its current resources and technology
Why is it difficult to make scientific experiments in economics
Economics is a social science, therefore it is difficult to set up experiments to set up hypothesis, this is because economists gather data in the everyday world where variables keep changing
Who are the 3 economic agents
Consumers, producers, government
How is opportunity cost important to consumers
Consumers will make choices on how to use their limited income based on what brings them the greatest level of satisfaction
How is opportunity cost important to producers
Producers must choose what to do with their limited resources and their decisions will be based on profit
How is opportunity cost important to the government
Government must make decisions on where they should spend their limited tax revenues based on what will maximize social welfare.
What part of the PPF represents the maximum productive potential of the economy
Any point on the curve
what does it mean if a point is within the curve but not maximising output
inefficient allocation of resources
What does it mean when the curve on the PPF shifts to the right, how is it caused
Economic growth,
Higher productivity - increased output per unit of input used in production
Better management-reduces waste, improves quality
Increase in stock of capital and Labour
Innovation and invention
Discovery of land
Increasing quantity and quality of factors of production
What does it mean if the curve on the PPF shifts to the left, how is it caused
Economic decline
Natural disasters
Natural resources running out
Quality and quantity of Labour- war, migration, depression
What does it mean if there is a fall in capital goods but no change in consumer goods n in PPF
fall in efficiency or a change in resources that only affects capital good manufacture
What does it mean if there is an increase in ability to produced consumer goods but no change in capital goods on PPF
Improvement in tech that makes production of consumer goods more efficient
What does a movement along a curve indicate compared to a shift of the curve on the PPF
Movement-change in combination of goods produced with the same allocation of resources
Shift-change in productive potential of the economy/change in number of resources
What is specialization
The process of focusing on a specific task or area of production
What is division of Labour
When Labour becomes specialized in a particular part of the production process
Blurt Adam smith
Developed ideas of specialization and division of Labour and showed how it can increase Labour productivity based on observations in a pin factory
Free market economy, invisible hand which allocated resources to everyone’s advantage
Competition lowers prices as firms want to be competitive which benefits consumers
Argued state needed to provide things the free market economy wouldn’t have e,g laws and property rights
Advantages of specialization and division of Labour in organizing production
Labour productivity will increase - quicker and better workers due to concentration on one thing, therefore higher quality of work - more skilled
Time is not wasted moving between jobs or getting out tools
Trained to do one specific task - cost effective
Disadvantages of Specialisation and division of Labour in organizing production
Work may get boring-poor quality of work- leave business (play music can be a solution)
If workers lose jobs, may be hard to find new ones if they are trained in one skill
Advantages of specialization in production of goods and services to trade
Comparative advantage- countries should specialize in producing goods where they have a lower opportunity cost so they are best at producing. So economy will boost - greater output globally
Disadvantages in specialization in production of goods and services to trade
Countries may become over depended on one export- economy may collapse if fail
Countries may specialize in non renewable resources which could run out
High interdependence, could be problematic if trade is prevented
What are the functions of money
A medium of exchange - as barters was only applicable with double coincidence of wants. But money can be used to buy all goods and services
A measure of value - compare value of 2 goods
Store of value- can keep value compared to barters where goods like fruits lost value if expired
A method of deferred payment- buy now pay later
What is a free market economy
Where governments leave markers to their own devices, so the market force of supply and demand allocate scarce resources
Friedrich Hayek blurt
Argued state control of economy leads to loss of freedom
Believed that individuals know what they need in their own situation
Advantages of free market economy
System is automatic due to the invisible hand - resources are moved out of a production of a good when people stop wanting it or costs are too high
Consumers have freedom of choice
High motivation - working hard can lead to high potential rewards
Firms will produce goods at the lowest cost they can - productive efficiency
Disadvantages of the free market economy
High levels of inequality
May be lack of merit goods and limited control of demerit goods
Resources could be wasted on unproductive expenses such as advertising
What is the command economy
All factors of production is owned by the state and Labour is directed by the state. There is no private property and everyone working is assumed to be working for a common good.
Karl Marx blurt
Believed in the command economy and criticized capitalism
Capitalists profit came from exploited Labour as they underpaid workers for the value they created.
Advantages of the command economy
Easier to coordinate resources in times of crisis
Government can compensate for market failure
Inequality reduces welfare may be maximized
Monopoly power can be prevented
Disadvantages of the command economy
Consumer preferences may not be met
Limits personal freedom
Governments fail, may not be fully informed on what to produce
What is the mixed economy
Market is controlled by the government and forces of supply and demand
What is the governments role in a mixed economy
Create framework of rules -e.g-property rights
Supplements and modified the price system-produce pubic and merit foods and limit demerit goods
Redistributes income-take money from rich and give it to poor- income tax
Stabilize Economy-fiscal and monetary policy
