1.1 Nature of economics Flashcards
Ceteris Paribus
All other influencing factors are held constant
Normative statement
Opinion about what ought to be. Subjective, value judgements.
Positive statement
Objective, can be tested or rejected with evidence.
Barter
Practice of exchanging goods or services without using money
Basic economic problem
Infinite wants, finite factor resources with which to satisfy them.
Capital goods
used to produce other G+S, result in long term increase in productive potential of economy
Economic agent
Participant in economic system
Land
natural resources available for production.
Return of rent
Labour
Human input into production process
Return of wages and salaries
Capital
goods used in supply of other products
Return of interest
Enterprise
organise FOP and take risks
Return of profit
Free goods
do not use any factor inputs when supplied. zero opportunity cost
Need
Essential for survival
Want
Something desirable but not essential for survival
Non-renewable resources
Finite and cannot be replaced
Renewable resources
Replaceable
Rationing
Method of allocation when there is excess demand.
Scarcity
Limited
Allocative efficiency
Value that consumers place on G/S equals cost of resources used in production
Concave PPF
Rising marginal OC as you produce more of 1 good. Due to imperfect factor mobility.
Consumer goods
Bought by consumers. Do not produce other goods. Satisfies wants and needs.
Economic efficiency
Making best or optimum use of scarce resources among competing ends so economics and social welfare secured.
Pareto efficiency
Only way to make one better off is to make another person worse off
PPF
Production possibility frontier - maximum potential output of combination of 2 G/S an economy can achieve when all resources fully and efficiently employed, given the current level of technology.
Productive potential
Amount of output an economy produced if all FOP were fully and efficiently employed
Alienation
Not part of team. Workers do not feel satsifacation of producing finished product.
CAN REDUCE MOTIVATION AND PRODUCTIVITY
Division of labour
specialisation of labour in specific tasks, intended to increase productivity.
advantages: workers become more skilled through repetition of tasks, productivity rises so output rises, time saved by workers focussing on narrow range of tasks, workers are easy and cheap to train.
disadvantages: repetition can lead to boredom, simplified job roles can reduce pride workers feel in their job
Measure of value
used to judge value of G/S
Medium of exchange
facilitates transactions between buyer and seller
Method of deferred payment
making payments at a later date
Advantages of specialisation/DoL
- Higher output - from increased productivity and efficiency (workers become more skilled through repetition)
- Increased variety for consumers
- Larger market - economies of scale exploitable
- Workers are easier and cheaper to train
Cons of specialisation/DoL
- Structural unemployment due to lack of training and skills (occupational immobility)
- Over-reliant, interdependent, more vulnerable to global shocks
- Bored workers can cause morale drop, drop in productivity
- Reduce pride they feel in work.
- Reduction in self-sufficiency
Specialisation
Business focusses on prod of limited scope of products to gain greater productive efficiency
Store of value
Money can be saved and exchanged
Command economy
Resources allocated by government
Free market economy
No state intervention, price mechanism
Consumer sovereignty
Exists when economic system produces G/S which reflect wishes of consumers.
Mixed economy
Resources partly allocated by state and price mechanism
ADAM SMITH
FREE MARKET ECONOMIST
writes about invisible hand of resource allocation
warned of monopolies, hence recognised need for some gov intervention
maintain law and order, because the many poor would want to take over the property of the rich
issuing of patents and copyright (to protect invention)
providing national defence, regulating the banking sector, building infrastructure, and public goods
FRIEDRICH HAYEK
STRONG SUPPORTER OF FREE MARKET
argued strongly against command economies
beef w Keynes who was supporter of large gov intervention
little gov intervention - except to maintain law and order and safety net for those who cannot work
KARL MARX
FOCUSSED ON NEGATIVES OF FREE MARKET
Developed Smith’s ideas.
Supporter of free market economies - large increases in productivity and output
Owners would push wages to subsistence levels and exploitation will occur.
exploited workers would work together and overthrow capitalism in a revolution
Capitalism becomes socialism
Law of diminishing marginal returns
not all factor inputs (such as land, labour and capital) are equally suited to producing different goods leading to lower productivity
Cause of concave PPF
Pros of free market
efficient allocation of scarce resources – factor resources tend to go where the expected profit is highest
Competitive prices for consumers as suppliers look to increase and then protect their market share
Innovative dynamism provides major benefits to consumers by bringing them new goods and new processes
profit motive stimulates investment which encourages economies of scale arising from big-scale production and ultimately lower prices for consumers
Competition through trade helps to reduce monopoly power and increases choice whilst lowering prices
Cons of free market
Free market activity can lead to a rise in income and wealth inequality
Businesses can develop monopoly power which leads to higher prices and damage to consumer welfare
Under or non-provision of pure public goods
Under-provision of merit goods such as health and education – which many cannot afford – leading to lower social welfare
Free markets may fail to address negative externalities from production and consumption leading to unsustainable economic growth
Deregulated financial markets often prone to bouts of instability – the fallout from which affects millions not directly involved
less equitable distribution of income and wealth because owners of capital and land pass privilege on to children
Gini coefficient
measure of statistical dispersion intended to represent the income inequality or the wealth inequality within a nation or a social group
Cons of planned economy
Bureaucratic costs - petty officialdom can lead to wasteful inefficiencies and therefore higher costs
government planners are unlikely to be as accurate as the market in determining suitable prices leading to numerous shortages and surpluses
Absence of incentives for both workers and businesses can damage productivity and lead to large levels of
over-employment / hidden unemployment and, ultimately, lower living standards
Low productivity and weak incentives can lead to rising losses for many state-owned enterprises. The
incentive to innovate is limited leading to a less dynamic economy
Changing consumer needs and wants are not expressed as preferences in markets – the state is often slow to react to these
information failures and endemic corruption
higher risk of mal investment driven by political motivations
HOWEVER, tend to have higher income and wealth inequality than other economies.
Economies of scale
cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average (unit) costs of production.
Opportunity cost
Value of next best alternative foregone
Below PPF
Inefficient and underutilisation of resources
Productivity
Effectiveness of productive effort (rate of output per unit input)
Cons of specialisation/DoL
- Structural unemployment due to lack of training and skills (occupational immobility)
- Over-reliant, interdependent, more vulnerable to global shocks
- Bored workers can cause morale drop, drop in productivity
- Reduce pride they feel in work.
- Reduction in self-sufficiency
functions of money
medium of exchange
store of value
measure of value
method of deferred payment
