1.1 Nature of Economics Flashcards
Factors of Production
Capital, enterprise, land and labour
Capital
Things which are used to make goods and services
E.g. machinery
Enterprise
The willingness of people in business to take risks to make a profit
Land
The natural resources such as oil, forests and land itself
Labour
All of the work done by humans in production
Economic Questions
What to produce?
How to produce it?
Who to produce it for?
Economic Problem
How to use the available scare resources to satisfy people’s infinite wants and needs as effectively as possible
Economic Agents
Groups that participant in the economy
Three Economic Agents
Producers, consumers and governments
Economic Agents
Producers
Producers create goods and services
Economic Agents
Consumers
Consumers buy goods and services made by firms.
Individuals and firms can be consumers
Economic Agents
Governments
Governments set rules that the other economic agents have to follow. It also produces some goods and services such as roads and healthcare
Models
Economist explain how the economy works by developing models.
These are used to predict the impact of economic change
It is difficult for economists to conduct experiments.
Therefore they rely on data and assumptions to explain and predict economic phenomena
Types of Models
Theoretical model and empirical model
Theoretical Model
Based on theory.
Explains economics phenomena.
Simplifying complex economic phenomena.
Empirical Model
Based on economic data.
Predict economic phenomena.
Ceteris Paribus
Assuming other variables remain constant
Economics is a social science with several constantly changing factors making it hard to decide if evidence supports or disagrees with a hypothesis thus they assume all other factors stay the same
Isolates factors that are being analysed
Opportunity Cost
Value of the next best alternative forgone
Opportunity Cost Consumers Use
Decide what to spend their incomes on
Opportunity Cost Producers Use
Decide what and how to produce goods and services
Opportunity Cost Governments Use
Decide what policies to choose
PPF
Production Possibility Frontier
The maximum potential output of a combination of two goods or services an economy can achieve when all its resources are fully and efficiently employed
Economic Growth
An increase in the production of goods and services in an economy
Negative Economic Growth
A decrease in the production of goods and services in an economy