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
How is economic growth shown on a PPF
Outward shift
How is negative economic growth shown on a PPF
Inward shift
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
Consumer Goods
Goods that do not produce other goods.
Used to satisfy people’s wants and needs
Capital Goods
Goods which are used to produce other goods and services
What does it mean if an economy is below its PPF curve
Inefficient use of resources
Underutilisation of resources
What does an increase in capital goods lead to
A long term increase in the productive potential of the economy
Objective Statement
A statement based on real facts and not influence by personal beliefs or feelings
Subjective Statement
A statement influenced by or based on personal beliefs or feelings rather than based on facts
Positive Economic Statement
Statements that can be proven true or false.
Objective statements
Normative Economic Statement
A statement that expresses opinions and cannot be proven true or false.
Subjective statement
What do governments do in decision making
Make value judgements on economic issues.
Use positive analysis to help them make decisions
Specialisation
Production of a limited range of goods by a producer
What is needed for specilisiation to work
High levels of trade
Division of Labour
Specialisation of workers on specific tasks in the production process
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
How do firms benefit from the division of labour
It increases efficiency which boosts productivity and output
Productivity
The effectiveness of productive effort
Measured in terms of the rate of output per unit of input
How does capital increase labour productivity
Machinery aids workers making them more efficient increasing output
What does increased productivity lead to
Higher output and quality
Higher living standards
More efficient use of resources
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
Benefit of division of labour on firms
Greater quantity and higher quality of output
Benefit of division of labour on workers
Higher skill levels and potentially higher wages
How is productivity calculated
Output Produced / Total Inputs Used
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
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
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.
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.
Specialisation Disadvantages
Over-reliant on a few industries is risky
Increased interdependence reduces self-sufficiency
What are the two methods of trading
Money and bartering
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 and services
Measure of Value
The price of a good reveals its value
Store of Value
Value is maintained and can be kept for a long time
Method of Deferred Payment
Allows debt to be created
Unit Cost Formula
Total production costs in period / total output in period
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
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.
What do lower unit costs lead to
Higher investments
Greater chance of new and improved products emerging
Higher wages
Lower price
What are the ways used to allocate resources
Market mechanism
Planning
Price Mechanism
The process by which the market allocates resources
What is the allocation of resources through planning
The process by which a government allocates resources. This is funded though taxation
Command Economy
An economy in which resources are allocated solely by the state
Mixed Economy
An economy in which resourced are allocated by the state and the price mechanism
Free Market Economy
An economy in which resources are allocated solely by the price mechanism
Public Sector
The part of an economy which is controlled or owned by the government
Private Sector
The part of an economy which is not controlled or owned by the government but by firms, organisations and individuals instead
What does a profit motive lead to
Firms to develop new products
Firms to meet consumer demands
What type of economies is the profit motive present in
Free market and mixed economies
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
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
Why is choice limited in certain markets in a mixed/free economy
Monopolies are present
Profit Motive
The desire for financial gain as an incentive in economic activity
Why is quality and innovation higher in mixed/free economies
Both competition and the profit motive are present
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
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
Efficiency
The optimal production and distribution of scare resources
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
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
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
What is a state made up of
Government
Citizens
Territory
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
Who rules a state
Governments.
The state is permanent while the government is not
What is the role of states in a mixed economy
Allocate resources through planning
Redistributed incomes through welfare spending
Regulate consumers and firms
How does the state support citizens that are unable to work in a mixed economy
Proving benefits (redistribution of income through welfare spending)
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
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
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
