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Old Micro > 1.1 Nature of Economics > Flashcards

1.1 Nature of Economics Flashcards

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1
Q

Factors of Production

A

Capital, enterprise, land and labour

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2
Q

Capital

A

Things which are used to make goods and services

E.g. machinery

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3
Q

Enterprise

A

The willingness of people in business to take risks to make a profit

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4
Q

Land

A

The natural resources such as oil, forests and land itself

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5
Q

Labour

A

All of the work done by humans in production

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6
Q

Economic Questions

A

What to produce?
How to produce it?
Who to produce it for?

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7
Q

Economic Problem

A

How to use the available scare resources to satisfy people’s infinite wants and needs as effectively as possible

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8
Q

Economic Agents

A

Groups that participant in the economy

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9
Q

Three Economic Agents

A

Producers, consumers and governments

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10
Q

Economic Agents

Producers

A

Producers create goods and services

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11
Q

Economic Agents

Consumers

A

Consumers buy goods and services made by firms.

Individuals and firms can be consumers

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12
Q

Economic Agents

Governments

A

Governments set rules that the other economic agents have to follow. It also produces some goods and services such as roads and healthcare

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13
Q

Models

A

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

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14
Q

Types of Models

A

Theoretical model and empirical model

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15
Q

Theoretical Model

A

Based on theory.
Explains economics phenomena.
Simplifying complex economic phenomena.

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16
Q

Empirical Model

A

Based on economic data.

Predict economic phenomena.

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17
Q

Ceteris Paribus

A

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

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18
Q

Opportunity Cost

A

Value of the next best alternative forgone

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19
Q

Opportunity Cost Consumers Use

A

Decide what to spend their incomes on

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20
Q

Opportunity Cost Producers Use

A

Decide what and how to produce goods and services

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21
Q

Opportunity Cost Governments Use

A

Decide what policies to choose

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22
Q

PPF

A

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

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23
Q

Economic Growth

A

An increase in the production of goods and services in an economy

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24
Q

Negative Economic Growth

A

A decrease in the production of goods and services in an economy

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25
How is economic growth shown on a PPF
Outward shift
26
How is negative economic growth shown on a PPF
Inward shift
27
Causes of Economic Growth
An increase in the quantity of the factors of production An improvement in the quality of the factors of production Combination of the two
28
Consumer Goods
Goods that do not produce other goods. | Used to satisfy people’s wants and needs
29
Capital Goods
Goods which are used to produce other goods and services
30
What does it mean if an economy is below its PPF curve
Inefficient use of resources | Underutilisation of resources
31
What does an increase in capital goods lead to
A long term increase in the productive potential of the economy
32
Objective Statement
A statement based on real facts and not influence by personal beliefs or feelings
33
Subjective Statement
A statement influenced by or based on personal beliefs or feelings rather than based on facts
34
Positive Economic Statement
Statements that can be proven true or false. | Objective statements
35
Normative Economic Statement
A statement that expresses opinions and cannot be proven true or false. Subjective statement
36
What do governments do in decision making
Make value judgements on economic issues. | Use positive analysis to help them make decisions
37
Specialisation
Production of a limited range of goods by a producer
38
What is needed for specilisiation to work
High levels of trade
39
Division of Labour
Specialisation of workers on specific tasks in the production process
40
Why does specialisation lead to higher skilled workers
The workers are focused on only one task and they are constantly repeating said task thus becoming more skilled
41
How do firms benefit from the division of labour
It increases efficiency which boosts productivity and output
42
Productivity
The effectiveness of productive effort | Measured in terms of the rate of output per unit of input
43
How does capital increase labour productivity
Machinery aids workers making them more efficient increasing output
44
What does increased productivity lead to
Higher output and quality Higher living standards More efficient use of resources
45
Division of Labour Advantages
Workers become more skilled through repetition Productivity increases leading to output increase Time is saved by workers Cheaper to train workers
46
Benefit of division of labour on firms
Greater quantity and higher quality of output
47
Benefit of division of labour on workers
Higher skill levels and potentially higher wages
48
How is productivity calculated
Output Produced / Total Inputs Used
49
Division of Labour Disadvantages
Repetition of tasks lead to boredom causing drop in quality and morale Simplified job roles reduce pride of works in their role and they feel insignificant
50
Specialisation Advantages
Better quality and higher quantity of goods More efficient use of scare resources Higher trade with other countries Higher economic growth => higher living standards
51
How does specialisation lead to increased output
Workers are constantly repeating the same tasks making them more skilled. This means they will be able to work at a more efficient pace than if they were not specialised. Increase in efficiency leads to increased production and increase output.
52
How does specialisation lead to higher living standards
Increase quantity of products are produced at a higher quality. This leads to economic growth occurring which leads to higher living standards.
53
Specialisation Disadvantages
Over-reliant on a few industries is risky | Increased interdependence reduces self-sufficiency
54
What are the two methods of trading
Money and bartering
55
Functions of Money
Medium of exchange Measure of value Store of value Method of deferred payment
56
Medium of Exchange
Something commonly accepted in exchange for goods and services
57
Measure of Value
The price of a good reveals its value
58
Store of Value
Value is maintained and can be kept for a long time
59
Method of Deferred Payment
Allows debt to be created
60
Unit Cost Formula
Total production costs in period / total output in period
61
What is the difference between bartering and money
Bartering is giving something worth a similar amount for a good or service. Money is buying something for the value it is worth
62
How is a mortgage an example of a method of deferred payment
Deferred payments are payments which are made overtime. A mortgage is paid over time in monthly instalments as it is a loan taken from the bank which is considered to be debt.
63
What do lower unit costs lead to
Higher investments Greater chance of new and improved products emerging Higher wages Lower price
64
What are the ways used to allocate resources
Market mechanism | Planning
65
Price Mechanism
The process by which the market allocates resources
66
What is the allocation of resources through planning
The process by which a government allocates resources. This is funded though taxation
67
Command Economy
An economy in which resources are allocated solely by the state
68
Mixed Economy
An economy in which resourced are allocated by the state and the price mechanism
69
Free Market Economy
An economy in which resources are allocated solely by the price mechanism
70
Public Sector
The part of an economy which is controlled or owned by the government
71
Private Sector
The part of an economy which is not controlled or owned by the government but by firms, organisations and individuals instead
72
What does a profit motive lead to
Firms to develop new products | Firms to meet consumer demands
73
What type of economies is the profit motive present in
Free market and mixed economies
74
What is the effect of the profit motive being absent in a command economy
Firms are told what to produce leading to limited choice for consumers
75
Why is the profit motive absent in a command economy
Command economies are controlled by the government. The government is not a business so its main focus is not to generate profit but provide for its citizens instead
76
Why is choice limited in certain markets in a mixed/free economy
Monopolies are present
77
Profit Motive
The desire for financial gain as an incentive in economic activity
78
Why is quality and innovation higher in mixed/free economies
Both competition and the profit motive are present
79
Why does the presence of profit motive lead to higher quality and increased pace of innovation
Firms want to be able to increase the price of their products for the profit motive. This is done through improving profits through faster innovation
80
Why does the presence of competition lead to higher quality and increased pace of innovation
Firms want consumers to buy products from them and not their competitors thus leading to higher quality products and faster innovation to attract them
81
Efficiency
The optimal production and distribution of scare resources
82
Which types of markets are more efficient and why
Mixed/free economies are more efficient than command economies due to the presence of competition and the profit motive
83
Why does competition lead to lower production costs
Competition leads to lower prices for consumers to pay. To make up for this, producers try to lower their production costs to maintain profit
84
Why do mixed/free economies have a less equitable distribution of income and wealth than command economies
The owners of capital and land accumulate wealth over time passing ownership to their children though property, private education and social networks. Command economies lack equitablity in terms of opportunity and access to public services
85
What is a state made up of
Government Citizens Territory
86
What is the difference between income and wealth
Income is the flow of money that comes into households while wealth is the total net worth of an individual
87
Who rules a state
Governments. | The state is permanent while the government is not
88
What is the role of states in a mixed economy
Allocate resources through planning Redistributed incomes through welfare spending Regulate consumers and firms
89
How does the state support citizens that are unable to work in a mixed economy
Proving benefits (redistribution of income through welfare spending)
90
Adam Smith
Stated concept of specialisation and division of labour and showed how it increases labour productivity allowing firms to increase efficiency and lower costs of production
91
Friedrich Hayek
Argued state control leads to loss of freedom Believed that poor in free market countries are better off than those in command economies as they have freedom Individuals don’t make supply and demand decisions based on information, they know best what they need in their own situation
92
Karl Marx
Believed in command economy criticising capitalism Capitalist’s profit exploited labour underpaying workers for value Remove difference between incomes of owners and workers Two class system Workers would inevitably rise against property owners and seize control

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