1.1 Nature If Economics Flashcards
What is ceteris Paribus
This assumption is that other things are being held equal or constant, so nothing else changes
Why do economists develop models. Examples of some
Economists develop models to explain how the economy works, for example the theories of supply and demand and the circular flow of income
What is a positive statement
A positive statement is a statement which is objective and made without any obvious value judgements or emotions. They can be tested to be proven or disproved and they are often expressed in the form of a hypothesis that can be analysed or evaluated
What is a normative statement
A normative statement is one which is subjective and based on opinion, so cannot be proven or disproved. It often includes word such as ought, maybe, should.
Why do economists use positive and normative statements
Economists tend to use positive statements to back up normative statements.
For example, the government should increase their interest rate is a normative statement backed up by ‘the inflation rate is 5%
What is the economic problem
The problem of scarcity. People have finite needs, but infinite wants. Although wants are infinite, resources are finite and limited
What is scarcity and examples of it
Scarcity is a relative concept as resources are not necessarily scarce in themselves but they are scarce in relation to the demands placed upon them
Water in china and India and food shortages around the world
What is a renewable resources
Examples
A renewable resource is a resource of economic value that can be replenished or replaced in a level equal to consumption
For example, oxygen, solar power and fish are renewable
What is a non-renewable resource
Examples
A non-renewable resoucre is a resource of economic value that cannot be readily replaced by natural means on a level equal to consumption
Fossil fuels such as coal and gas
What is opportunity cost
Opportunity cost is the cost of one thing in terms of the next best option which has been given up
How will consumers and producers make their choices in terms of opportunity cost
Consumers will make choices in how to use their limited income based on what gives them the greatest level of satisfaction. Producers must choose what to do with their limited resources based on what maximises profit
4 factors of production
Land - all the natural resources used in production. Such as raw materials, minerals, land.
Labour - all productive human effort, both physical and mental, paid and unpaid
Capital - refers to all man-made resources that are used to produce goods or services in the future.
Entrprenurship - the willingness and ability to take risks of combining the other 3 factors.
What does the PPF show
Production possibility frontier
The PPF shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology
Why is it usually a curve. What are the axis
It tends to be drawn as a curve because the first resources switched from capital to consumer good production are resources that are not adding much to capital goods but will be much more productive in the production of consumer goods, and vice versa.
Y-axis capital goods
X-axis consumer goods
Where on the curve is maximum potential of an economy
Any point in the curve represents maximum productive potential of the economy
How to tell if the economy has grown or shrunk
The curve will expand out if grown
The curve will retract in if shrunk
What does a movement along the PPF curve mean
A movement along the curve indicates a change in the combination of goods produced
What does a shift in the PPF curve mean
A shift in the curve indicates a change in the productive potential of the economy
What are capital goods
Capital goods are goods that are produced in order to aid the production of consumer goods in the future. Some good can be both capital and consumer. E.g. computers
What are consumer goods
Consumer goods are goods that are demanded and bought by households and individuals
What is specialisation
Specialisation is the production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way they are able to access all that they need
What is division of labour
The division of labour is when labour becomes specialised in a particular part of the production process
Which economist was specialisation and division of labour and what did he say it did
Adam smith said that the concept of specialisation and division of labour showed how it can increase labour productivity, allowing firms to increase their efficiency and lower their costs of production
Advantages of specialisation division of labour
• enables labour productivity to be increased
• higher quality of goods and services
• most cost effective to develop specialist tools, improving speed or quality
• time is not wasted moving between jobs
• workers only need to be trained to do one specific task
Disadvantages of specialisation and division of labour
• one job whole time can be boring and lead to poor quality of work
• there is a reduction of craftsmanship
• no wide industrial training and therefore could suffer from structural umemployment
Advantages of countries specialising
• the theory of comparative advantage which means that they specialise in good that they have a lower opportunity cost in
Disadvantages of countries specialising
• countries may become over-dependent on one particular export and if it fails the economy may collapse
• there will be high interdependence and this will cause problems if trade is prevented
• some say it means there will be more competition to cut costs and therefore wages will fall. Not necessarily true tho
What is a medium exchange
It can be used to buy and sell goods and services and is acceptable everywhere. Example is money
What is a measure of value in terms of the functions of money
It can compare the value of two goods, such as table and a shift. It is also able to put a value on labour.
What is a store of value in terms of the function of money
It is able to keep its value and can be kept for a long time. With barter, goods such as fruit often went out of date so could not keep their value
What is a method for deferred payment in terms of the function of money
Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. reliant on money holding value
What is a free market economy and its features
Economist thinker too
In a free market economy, individuals are free to make their own choices and own factors of production without government interference.
Resources allocated through price mechanism
Consumers make decisions based on satisfaction and producers based on profit
Adam smith believed in free market and laissez-faire
Advantages of free market economy
• the system is automatic due to the invisible hand
• consumers have freedom of choice, called consumer sovereignty
• high motivation
• political freedom
• production at lowest costs, leading to allocative efficiency
• tend to have higher growth
Disadvantages of free market economy
• tends to be high levels of inequality
• lack of merit goods and little control of demerit goods
• resources could be wasted in unproductive expenses such as advertising
• may be monopolies who could charge high
• problem of externalities
Features of a command economy
• All factors of production, except labour, is owned by the state and labour is directed by the state
• No private property
• Everyone assumed to be working for a common good
• resources are allocated by the government
Advantages of command economy
• the state provides a minimum standard of living
• there is less wastage of resources
• long term planning means industry doesn’t have to keep changing and shifting resources
• standardised products means that they are produced cost effectively.
Disadvantages of a command economy
• Impossible for state to make so many decisions correctly, this could lead to over or under supply and a waste of resources
• could be an increase in bribery or corruption
• less motivation and efficiency
• consumers lose their freedom as often led by dictators
Features of a mixed economy
• Mix of command and free market economy
• where both free market mechanism and the government planning process allocate a significant amount of the total resources in the country
Government role in a mixed economy
• Creating a framework of rules
• supplements and modified the price system
• redistributes income
• stabilised the economy
