1.1 Flashcards
what is meant by a model
a simplified version of reality used to provide insight into economic decisions and events
what are models used for
to predict what will happen in a market, or economy when a variable is changed
what does ceteris paribus mean
all other things being equal
what is a positive statement
a testable and refutable statement, a statement about what is, eg ‘10% of the population are diabetic’
what is a normative statement
a statement that involves a value judgment about what ought to be done, eg ‘people should stop smoking’
what is the economic problem
the problem of scarcity
what is meant by scarcity
a situation that arises when people have unlimited wants in the face of limited resources
what are economic goods
goods that are scarce
what are free goods
goods that are not scarce
what are renewable resources
resources that have the ability to replenish themselves if they are not depleted at the current rate of use
what are non renewable resources
finite resources that cannot be replenished in a reasonable time period
what is meant by opportunity cost
the next best alternative foregone when an economic decision is made
what is the central purpose of economic activity
the production of goods and services to satisfy needs and wants
what are four categories of economic resources
land
labour
capital
entrepreneurship
what is involved in land
goods like minerals
raw materials
land itself
what is involved in labour
workforce
skills
ability/intelligence
what is involved in capital
machines
stock of goods
services
what is meant by enterprise
the risk takers who are prepared to work to bring the other factors of production together to make goods and services
why is choice a necessary element in the economic problem
each individual must choose which goods and services to consume, they must prioritise consumption of the commodities they need
what is a PPF
a PPF shows all the different combinations that can be produced from two goods when all other factors of production are fully and efficiently employed
what is meant by capital goods
goods used to make other goods or provide a service
what is meant by consumer goods
goods which are consumed by the end user
why is the PPF curved
because of the law of diminishing marginal returns - as you increase the units of one resource and keep other factors constant, the marginal benefit from the extra units will eventually start to decline
why does the PPF shift outwards/inwards
it shifts outwards because of economic growth which is because the productivity capacity of the economy has increased
shifts inwards because of negative growth, output decreases
what do points under the PPF mean
there are factors of production being underemployed
what do points outside the PPF mean
they are unattainable factors of production
what is meant by allocative efficiency
this occurs when a specific combination of goods is efficient for society. As this refers to a specific combination of goods, it refers to a point on the PPF, not the entire curve, so not all points on the PPF are allocatively efficient
what is marginal analysis
a way of making economic decisions based on considering the marginal benefits and costs of a change in behaviour
draw a PPF
consumer goods - y axis capital goods - x axis curved line two points on the PPF dotted lines to each point arrow on PPF to show opportunity cost numbers to represent goods
what may cause an inward shift in the PPF
damaging effects of natural disasters
destruction/loss of factor inputs caused by civil war/conflict
large scale net outward labour migration
what is meant by Specialisation
when a household or economy concentrates on producing the goods that they are most efficient at, then trade the surplus
name three benefits of specialisation
greater economic efficiency
consumer benefits
opportunity for growth for competitive sectors
what does productivity mean
the efficiency at which a good is produced in a time period. measured by rate of output per unit of input
what is meant by division of labour
where the production procedure is broken down into a sequence of stages and workers are assigned to a particular stage
what are three disadvantages of specialisation
risk of worker alienation
risk of disruptions to production process
risk of structural unemployment due to occupational immobility
what are the functions of money
medium of exhange
store of value
measure of value
method of deferred payment
what is meant by production
output in a time period
what is meant by labour productivity
output per unit of labour in a time period
what is a free market
this type of market allocates scarce resources becased on the price mechanism
what are the benefits of a free market
efficient - highest value products are in demand
it rewards entrepreneurship
what are the negatives of the free market
- inequitable - what is fair in the free market may not be fair in reality
- missing markets - goods we need in society may not be produced if they cannot generate a profit
- monopolies may arise
what is a command economy
where the government is in charge of resource allocation (eg N.Korea)
what are the benefits of a command economy
- can correct inequalities that exist in a free market
- possible reduction in unemployment
- they can break up monopolies
what are the negatives of a command economy
- less efficient - the government is not a profit maximisng entity, so the incentive for entrepreneurship and efficiency pushing activities is reduced
- asymmetric information - the government may not actually know what is best
- choice restriction
what is the mixed economy
the government forms the public sector
firms form the private sector
together, they are responsible for the allocation of scarce resources
