1.1 Nature of Economics Flashcards
Economy
All the goods & services produced in an area
Difference between a good & service
Good = tangible (can be touched) Service = intangible (can’t be touched)
Order of economies from largest to smallest
US
China
Japan
Germany
UK
Factors of production definition
Resources used to produce goods & services
Factors of production:
- capital (things used to make goods/services)
- enterprise (willingness of people in business(entrepenuaers) to take risks to make profit, seeking out profitable opportunities)
- land (natural resources- oil/forest)
- labour (all work done by humans in production)
List the 2 types of land & definition
- renewable resources (capable of being regenerated)
- non-renewable resources (not capable of being regenerated)
What is capital split into
- machinery (printers, computers)
- tools (hammers, spades)
Why are factors of production scarce
- not enough skills/space
- not well educated ppl
- not enough workers
Scarce
Not sufficient in quantity or amount
The economic problem
How to use the available scarce resources to satisfy people’s infinite needs & wants as effectively as possible
3 key questions to answer the economic problem
What to produce? = ‘the consumption decision’
How to produce it? = ‘the production decision’
Who to produce it for? = ‘the distribution decision’
Economic agents definition
Groups that participate in the economy
Economics agents:
- producers (create goods/services)
- consumers (buy goods/services made by firms(businesses))
- government (sets rules other economic agents follow, produces some goods/services eg. Roads/health care)
Why do economists develop models
To explain & predict economic phenomena / the impact of economic change
Why is it difficult for economists to conduct experiments
Too many variables/factors that impact economic activity constantly changing, can’t be controlled
Theoretical models (definition/purpose)
= based on theory
- explain economic phenomena
- simplifying complex economic phenomena
Empirical models (definition/purpose)
= based on economic data
- predict economic phenomena
What do economists rely on to make models
- data
- assumptions
‘Ceteris Paribus’ assumption
= all other things being equal
= assuming other variables remain constant
Why is the ceteris paribus assumption necessary for economic analysis
It overcomes the problem of the many changing factors that can impact economic activity
Why is economics a social science
= studies society & the people in it
Opportunity cost of a decision =
= the value of the next best alternative forgone as a result of the choice made
Forgo
= to give up or do without
Uses of opportunity cost
- consumers: to decide what to spend incomes on
- producers: to decide what & how to produce goods & services
- governments: to decide what policies to choose
PPF (production possibility frontier)
= shows the maximum potential output of a combination of two goods or services an economy can achieve when all its resources are fully & efficiently used, given the current level of technology
(Negative)Economic growth
= an increase(a decrease) in the production of goods & services in an economy
Causes of economic growth
- an increase in quantity of the factors of production
- an improvement in quality of the factors of production
- combination of both
What represents economic growth on a PPF
An outward shift in the PPF
What represents negative economic growth on a PPF
An inward shift in the PPF
Consumer goods:
= goods which do not produce other goods, used to by people to satisfy their needs & wants
Capital goods
= goods which are used to produce other goods & services
Why might an economy be below its PPF curve
- an inefficient use of resources
- underutilisation of resources
What causes an economy to be on the PPF curve
- efficient allocation of resources
- as none are wasted/under-utilised
What will an increase in capital goods result in
= a long term increase in the productive potential of an economy (as it produces other goods/services)
Objective
= based on real fasts & not influenced by personal beliefs/feelings
Subjective
= influenced by or based on personal beliefs or feelings
Positive economic statements:
= can be proven true/false
= objective statements
Normative economic statements
= express opinions & can’t be proven true/false
= subjective statements
Duty:
= a tax paid on goods that are bought or imported
Words that indicate a normative economic statement:
- fair
- unfair
- should
- ought
- better
- worse
What do governments do in decision making:
- make value judgements on economic issues
- use positive analysis to help them make decisions
Specialisation:
= when an individual, firm, region or countries concentrates on the production of a limited range of goods & services
Why does specialisation allows individuals to become more skilled
They repeat the same tasks regularly so develop more knowledge and therefore become more efficient/productive
The division of labour
= the specialisation of workers on specific tasks in the production process
Why do firms benefit from the division of labour
= more efficient/productive, improves quality and faster work
Productivity:
= the measure/effectiveness of productive effort
Measured in terms of the rate of output per unit of input
Productivity = output produced / total inputs used
Increased productivity leads to:
- higher output & higher quality
- higher living standards
- more efficient use of resources
Advantages of division of labour for firms
- workers become more skilled through repetition of tasks
- productivity of workers rises = output increases
- time saved by workers focusing on narrow range of tasks
- workers easier & cheaper to train
Advantages of division of labour for workers
- higher skill levels as trained more
- potentially higher wages
Disadvantages of division or labour
- repetition of tasks can lead to boredom = quality & morale drops
- simplified job roles can reduce pride workers feel in their jobs
Advantages of specialisation:
- better quality & higher quantity of products
- more efficient use of scarce resources
- higher trade with other countries
- higher economic growth -> higher living standards
Disadvantages of specialisation
- over-reliance on a few industries is risky
- increased interdependence reduces self-sufficiency
What can cause problems with inter-dependence and relying on other countries
- political turmoil = trade wards = stop imports/exports
- natural disasters = unable to produce/export/import goods
2 methods of trading:
- barter (exchange of 1 good for another)
- money (for transaction/purchase, represents value)
Functions of money:
- medium of exchange
- measure of value
- store of value
- method of deferred payment
Medium of exchange
= something commonly accepted in exchange for goods & services
Measure of value:
= price of goods reveals its value
Store of value
= value is maintained & can be kept for a long time
(saving money, savings account)
Method of deffered payment
= allows debt to be created
(mortgage, credit card)
unit costs
= average cost to produce a unit of output
Unit cost = total production costs in period / total output in period
What does lower unit costs lead to
= higher profit…
- higher investment
- greater chance of new & improved products emerging
- higher wages
- lower prices
Ways to allocate resources
- planning
- price(market) mechanism
Planning
= process by which government allocates resources, funded through taxation
Price mechanism
= process by which the market allocate resources
Market
= anywhere buyers & sellers exchange goods & services (physical or digital)
Command economy
= an economy in which resources are allocated solely by the state(planning)
Mixed economy
= an economy in which resources are allocated by the state(planning) & the price mechanism
Free market economy
= an economy in which resources are allocated solely by the price mechanism
Public sector:
= part of an economy controlled or owned by the government
Private sector
= part of the economy not controlled or owned by government
Where are profit motives present & why
Firms have a profit motive in
- free market economies
- mixed economies
Why do profit motives lead to wider choice
It incentivises:
- firms to develop new products
- firms to meet consumer demand
Why is the profit motive absent in command economies
Firms are told what to produce
= limited choice for consumers
What limits choice in free market economies & mixed economics
- concentrated markets
- monopolies
Concentrated markets:
= a few large suppliers (smartphones)
Monopolies
A sole supplier of a product/service
Sell 25%
(Microsoft, google)
What does competition and profit motive presence in an economy lead to
- higher quality
- higher innovation
(consumers can switch between competitors, so always have an incentive to produce the best & cheapest good/service)
Efficiency
= optimal production & distribution of scarce resources
Why are mixed economies & free market economies more efficient than command economies
= command economies lack competition & a profit motive
(as all controlled by state, no incentive)
Why is there a less equitable distribution of wealth & income in free market / mixed economies than command economies?
owners of capital & land accumulate wealth over time & pass privilege on to children through
- property
- private education
- social networks
Why might command economies still lack equitability and what for?
- higher incomes / power have access to best education & health care
- opportunity & access to public services
What is the state made up of?
- territory
- citizens (population)
- government
Government rules over a state
Difference between government & state
- state is permanent, government is not permanent
- state made up of all citizens, government not
Roles of state in mixed economy
- allocates resources through planning
- redistributes incomes through welfare spending
- regulates consumers & firms
