1.1 Nature of Economics (1.1.4 - 1.1.6) Flashcards
What do PPFs show?
the maximum possible production of something, when an economy’s resources are fully and efficiently used
What happens to the PPF when there is economic growth and why?
it shifts outwards, as the productive capacity of the economy has increased
Why could the productive capacity of the economy have increased?
due to improvements in technology
Why could the productive capacity of the economy increasing (e.g. improvements in technology) not be equal across all products?
As the improvement in technology to produce cars isn’t necessarily going to affect the ability to produce butter
When do trade-offs occur?
when producing on the PPF
Why do trade-offs occur?
to produce more of one good, you must produce less of another
If a point is outside the PPF, what does this mean?
it is not currently possible to produce at this point
If a point is on the PPF, what does this mean?
all available factors of production are being fully used.
What are all points on the PPF in terms of efficiency?
productively efficient
If a point is inside the PPF, what does this mean?
there are factors of production being underemployed
What do movements across the PPF mean?
the reallocation of resources
What are capital goods?
goods that are used to produce other goods
What are consumer goods?
goods bought and used by consumers
What is the division of labour?
when a firm splits up the production process into smaller, separate tasks and assigns different workers to each of these tasks
How can workers specialise through the division of labour?
because workers are only focussing on one task, they can become incredibly efficient at it and specialise in it
What does specialisation through division of labour allow firms to take advantage of?
economies of scale. as production increases, average unit cost decreases
Who proved through example that division of labour could increase productivity?
Adam Smith (pins example)
What is specialisation?
when a worker, firm or economy concentrates on producing a limited range of goods and services
State two advantages of Specialisation
- reduces the cost to train workers as they only need to be trained for their particular job
- increases labor productivity
State two disadvantages of Specialisation
- workers may struggle to adapt to a new role quickly
- workers may become bored and therefore work slower
State 2 advantages of specialising in the production of goods and services to trade?
- a greater variety of products can be enjoyed
- there is greater output globally
State a disadvantage of specialising in the production of goods and services to trade?
- high interdependence, which may cause problems if trade is prevented, for example, because of war
What are the four main functions of money?
- Medium of Exchange
- Store of Value
- Unit of account
- Deferred payment
What was Barter trading?
trading one good for another good
What was the problem with Barter?
People could only trade if there was a double coincidence of wants, where both parties want the good the other party offers
How is money a medium of exchange?
As it can be used to buy and sell goods and services and is acceptable everywhere
How is money a unit of account?
As it can compare the value of two goods
How is money a store of value?
As it is able to keep its value and can be kept for a long time
How is money a method for deferred payment?
As money can allow for debts to be created. People can therefore borrow money to buy goods now, and then pay the money back in the future
What are markets?
Where goods and services are exchanged
What is a free market economy?
where all resources are allocated by the price mechanism and there is no government intervention
What is price mechanism?
the interaction of demand and supply in a free market, in which this interaction determines prices
What is a command economy?
Where the government is in charge of resource allocation
What is a mixed economy?
- the government forms the public sector
- firms form the private sector
- together, they are responsible for the allocation of scarce resources
What are 2 points on Adam Smith’s view on the economy?
- he thought consumers and producers were both driven by self-interest
- he believed that the interaction between profit-maximizing firms and consumers would lead to a mutually beneficial allocation of resources
What are 2 points on Karl Marx’s view on the economy?
- Marx argued that the free market creates inequality and a situation where the working class are exploited
- He said that this would lead to a revolution where means of production would be seized
What are 2 points on Friedreich Hayek’s view on the economy?
- He believed that firms and consumers know best, and they should use the price mechanism to interact effectively
- Hayek was skeptical of command economies and argued that asymmetry of information stopped them from making good decisions about resource allocation
