1.1 Nature of Economics Flashcards
What is a model?
Why are models used?
A simplified representation of reality used to provide insight into economic decisions and events.
They make reality more manageable for analysis.
Why can we not construct scientific investigations in economics?
Because the real world is too complicated and has too many influencing factors
What does ceteris paribus mean?
When do we use it?
‘Other things being equal’
We use it to focus on only one variable whilst holding other influences constant.
What is a positive statement?
A factual statement, which can be tested.
What is a normative statement?
A statement that involves valued judgement about what ought to be
Define the problem of scarcity
A situation that arises when people have unlimited wants in the face of limited resources
Define opportunity cost
In decision making, it is the value of the next best alternative foregone
What are free goods?
What are economic goods?
Goods that aren’t regarded as scarce.
Goods which are scarce.
Define marginal analysis
An approach to economic decision making which involves considering the additional (marginal) benefits and costs of a change in behaviour
Discuss the importance of opportunity cost for households
Households, as consumers, have to make choices about their expenditure. To buy goods and services, they will need an income, so they must also make choices about the supply of their labour
Discuss the importance of opportunity cost to firms
Firms have to make choices on what to provide, how they should produce it, and must also decide on the prices at which they should sell their goods and services.
Discuss the importance of opportunity cost to the government
The government must make choices on expenditure, how to go about taxation, and how to regulate markets.
Define factors of production
What are the main 4 FOP?
Resources used in the production process.
Labour, Capital, Entrepreneurship, Land
What are renewable resources?
Resources that can be replenished and are not used up
What are non-renewable resources?
Natural resources that once used cannot be replenished
What are the main three economic questions asked because of scarcity?
1) What goods and services should be produced?
2) How to produce them
3) For whom they be produced for
What is a production possibility frontier (PPF)?
A curve showing the maximum combinations of goods and services that can be produced in a given period with available resources
What are the labels of the axis on a typical PPF?
Capital goods and Consumer goods
What is the difference between a capital good and a consumer good?
Capital goods are goods used to increase the productive capacity of the economy.
Consumer goods are present for use.
What does a typical PPF look like?
- Y-axis is capital goods
- X-axis is consumer goods
- Curve touching each axis (like a quarter of a circle)
Why can PPFs be curved?
Because not all factors of production are equally suited to producing two different goods
What does a point beyond the PPF curve show?
It is an unobtainable point given the present resources, so the economy cannot produce that combination of goods.
What does a point inside the PPF curve show?
The economy is not using its resources efficiently, so there are unemployed FOP.
How can an economy move towards the PPF?
By making better use of the resources available
What does a point lying on the PPF curve show?
Production is being undertaken efficiently in the sense that all resources are being fully utilised
Why does economic growth occur due to PPFs, and how can this be shown on a diagram?
As more capital goods are produced, in the next period, the productive capacity of both consumer and capital goods would increase.
Shift outwards of the PPF curve.
What form of growth does a shift outwards in the PPF show?
Define this phrase
Potential economic growth.
An expansion in the productive capacity of the economy.
How is the total output in an economy measured?
Define this phrase,.
Gross domestic product
A measure of economic activity carried out in an economy over a period of time
What did Adam Smith discover about the division of labour?
It takes 10 workers to make a pin. If only 1 worker produces them, he’d make around 20 a day. However, if 10 workers were each assigned a specific role in the production process, they could produce 45,000 a day.
What is the division of labour?
It is a process whereby the production procedure is broken down into a sequence of stages, and workers are all assigned to a particular stage
What are the benefits of the division of labour in organising production?
Individual workers become more skilled at a specific task, so become more efficient during production
What are the benefits of specialisation?
Give workers are producing what they are most suited to producing, productivity will increase, meaning that production can operate on a larger scale.
What are some disadvantages of specialisation? (3)
Workers may become bored and careless due to the repetitive nature of their job.
It may be difficult to find cover when a worker is ill.
Could cause structural unemployment.
Define the term market
A set of arrangements that allow transactions to take place
What is a barter economy?
An economy in which you trade tangible goods with one another.
What is a double coincidence of wants?
When someone who wants what you have has what you want
What are the four functions of money?
1) Acts as a medium of exchange
2) Serves as a measure of value
3) Severs as a store of value
4) Method of deferred payment
How does money act as a standard of deferred payment?
You can agree to pay for something which may be delivered in the future, for example, workers are paid at the end of each month.
How does money serve as a measure of value?
It allows the value of goods and services to be compared.
How does money act as a store of value?
Money can be used for future transactions and will keep its value
What is meant by a medium of exchange?
An acceptable form of payment for both buyers and sellers.
What is a free-market economy?
An economy in which market forces are allowed to guide the allocation of resources
How did Adam Smith explain a free-market economy?
He argued that there is an invisible hand that would be able to allocate resources efficiently.
What did Karl Marx believe?
That in a capitalist society of private ownerships, capitalists would exploit their position at the expense of labour.
What is a command economy?
A centrally-planned economy in which decisions on resource allocation are guided by the state.
What were Freidrich van Hayek’s beliefs?
He saw that after WW2, there was a move towards more government intervention.
He argued that such intervention would be damaging, and that free-markets would be effective because they rely on people responding to signals and incentives.
Define a mixed-economy?
An economy in which resources are allocated partly through price signals and partly through the basis of intervention by state.
How are incentives important in economic systems?
In a market economy, prices and profits provide incentives, whereas in planned economies, these incentives are replaced by state directives.
What is microeconomics?
The study of economic decisions taken by individual economic agents, including households and firms.
Define macroeconomics
The study of the interrelationships between economic variables at an aggregate level.
What country’s economy is the most free-market?
USA
Give an example of a country with a command economy.
North Korea
