1.1 Flashcards
Define PPF
maximum productive potential of an economy when all resources are fully and efficiently employed
Define capital goods and consumer goods
Capital goods are goods produced to aid production of consumer goods, they are good that can be used to produce other goods eg machinery
Consumer goods are goods demanded and bought by households and individuals eg clothes
Define positive and normative statement
Define cetirus paribus
Positive statement - objective statement made without any value judgement and can be tested and proven eg will, is
Normative statement is based on value judgement and cannot be tested or proven eg should,best,worse
Cetirus paribus= all other things held equal
Define
-Basic economic problem?
-Renewable and non renewable resource?
-Opportunity cost
Economic problem is that of scarcity, wants are infinite and resources are finite
Renewable- resources of economic value that can be replaced/replenished at the rate of consumption
Non-renewable- resources of economic value that cannot be replaced/replenished at the rate of consumption
Opportunity cost- the next best alternative forgone when making a choice
What does growth and decline mean in PPF diagram
In PPF growth means more of both goods are produced which can be achieved by increases the quantity or quality of resources
In PPF decline because less of both goods are produced caused by: natural disasters, natural resources running out, a decrease in the quantity/ quality of labour due to war,migration or fall in spending on education
What is division of labour and specialisation
Division of labour is when labour becomes specialised in a particular part of the production process and tasks are broken down to increase efficiency
> Adam smith
Specialisation- production of a limited range of goods/services by firm/individuals/company
ADV of specialisation in production
- Increased labour productivity- workers specialise in one task= quick, better and more efficient
- Decreased cost per unit = increased efficinecy and profits as mistakes are minimised as workers are specialised
- Trained in one task= saves money and time and decreases costs
- More job choice as many roles to fill
- Repetition in work = decreased mistakes and increased quality and skill
- Less time wasted moving between jobs or getting tools= efficient
DIS of specialisation in production
- Boredom and monotony of work = decrease productivity or quality = increases staff turnover= increases recruitment costs
- Can lead to structural unemployment = occupational immobility as workers are only specialised in one task
- If production is delayed in one part of production process = delays or stoppage until problem is fixed= time wastage and resources to fix problems
ADV of specilaisation in production of goods/services to trade?
- Increased global output as countries produce what their best in due to comparative advantage
DIS of specilaisation in production of goods/services to trade?
- Overdependancy on particular exports eg developing countries and farming
- High interdependence between countries
- Countries production of non-renewable resources and those that specialise in it could eventually run out = loss of resources and loss of high incomes for country
4 functions of money
- Medium of exchange- can be used to buy and sell goods and is acceptable everywhere unlike barter which boh parties had to want the good the other party offered
- Measure of value- compares the value of 2 goods.It also able to put value on labour
- A store of value- Its able to keep its value for a long time unlike barter where goods like fruit often went out of date and so could not keep their value
- A methods for deferred payments- debt can be crea\ted,people can pay for good/service later
Free market
Command economy
Mixed economy
A free market- resources are allocated by price mechanism and there is no government intervention
Adam smith- invisible hand
Friedrich hayek- state control= loss of freedom
Command economy- all factors of production are allocated by the state, they decide what,how and for whom to produce goods
Karl marx- criticised capitalism
Mixed economy- resources are partly allocated by price mechanism and partly by the government
Everything about Adam smith
- specialisation and division of labour
- supported free markets
-invisible hand is efficient at allocating resources - the gov should leave markets alone, gov intervention only with market failure
Karl marx - criticised capitalism as = workers exploted
- hated free markets as they lead to capitalism
- supported command economy
Friedrich hayek
-Criticised command economies as it si impossible for gov to collect information needed on what to produce
-Price mechanism worked as communication centre
-Supported free markets
ADV of free markets
- Tend to have higher growth
- Consumers have freedom of choice= consumer sovereignty
- automatic stabiliser due to invisible hand
- political freedom
- high motivation as people know working hard could lead to big rewards
- competition of firms means firms will produce goods at lowest cost they can ensuring productive efficiency
- no need for costly bureaucracy
DIS of free markets
- high levels of inequality since rich own more factors of production and so can grow richer
- lack of merit good and little control of demerit goods
- if competition disappears there may be monopolies who charge high prices and offer low quality of service = reduce consumer surplus
- merit goods underprovided and overconsumption of demerit
ADV of command economy
- less inequality as state provides minimum standard of living
- less wastage of resources as no comp
- standardised products means they are produced cost effectively
- gov is concerned about maximising social welfare unlike firms which want to maximise profits which can encourage merit good production and reduce demerit goods
DIS of command economy
- Less motivation and efficiency as everyone recieves the same wage, people know that working harder will not increase their standard of living
-consumers lose their freedom of choise - decision making will be siow as it has to go through many stages
and there could be an increase
in bribery and corruption - gov wön’t have market knowledge so can lead to over or under
suppy and wastage of resources and gov failure
Role of state in mixed economy?
-Rules- prevent monopolies abusing , protect consumers from poor quality. Protect property rights so there is clear ownership and protect labour from exploitation through health and safety laws
-Provision of public and merit goods eg transport and limit production of demerit goods
-redistribute income - taxes move income from rich to poor , benefits for low income earners
-Stabilise the economy- manages demand level to prevent excess or too little demand
