1.1 Nature of Economics Flashcards
Economics
The study of the allocation of scarce resources.
‘Ceteris Paribus’
‘all other things being equal’ - all other variables are held constant
Why is Econ considered a social science?
-inability to conduct scientific experiments due to complexity of human nature and significant number of social interactions that are taking place in an economy
Economic models
-simplified version of reality
-due to complexities economists build models
-based on range of assumptions
-social scientific method - models are developed by economists, once a hypothesis has been repeatedly proven or rejected in different circumstances
Positive statement
A statement based on facts which can be proved or disproved
Normative Statement
A statement based on value judgements and are subjective so cannot be tested true or false.
Basic Economic Problem
Resources are scarce but wants are infinite, therefore choices must be made.
Choices to make by societies to face problem of scarcity
-What to produce and how much to produce it?
-How should the goods and services be produced?
-How should the goods produced be allocated?
Factors of Production
Land, Labour, Capital, Enterprise
Renewable resources
A resource whose stock level can be replenished naturally over a period of time.
Non-renewable resources
A resource whose stock level decreases over time as it is consumed.
Opportunity cost
The next best alternative foregone.
-scarcity means choices and each choice involves an opportunity cost.
-real cost measured
Economic goods
-goods created from resources that are scarce (limited in supply)
Free goods
Goods that are unlimited in supply and therefore have no opportunity cost.
Production Possibility Frontier
The maximum potential output of a combination of goods an economy can produce when all its resources are fully and efficiently employed
Capital Goods
goods required to produce other goods
Consumer goods
Goods designed for use by final consumers/give satisfaction (utility).
Any point on or inside the PPF is
obtainable - all resources fully employed
outside PPF is
unobtainable , because PPF shows the maximum potential output using all available resources
Inside PPF
-unemployed resources or resources not being allocated efficiently
marginal increase in the output of capital goods
means some consumer goods must be sacrificed
if PPF were a straight line
then opportunity cost would be constant
More Fop shown by
rightward shift of PPF - increase in productive capacity of economy - economic growth
movement along PPF
-change in combination of the two goods being produced - causes opportunity cost
outward shifts in PPF
-new natural resources
- increase productivity E.G technology
-improvement in education
-productivity of workforce
-increase in the size of workforce
Inward shift in PPF
-natural disaster -destruction of productive capacity -depletion of natural resources
-reduction in size of workforce
-decrease and productive capacity e.g recession
division of labour
-occurs when the work is split up into small specialised tasks
Adam Smith
The Father of Economics;
- The Invisible Hand (workings of the Price Mechanism)
- Specialisation
- Division of Labour
specialisation
Process wherein a company/individual focus on labour on a specific type of production limited scope of products so becomes more efficient
Productivity
Output per unit of input
Advantages of specialisation/division of labour
-Each worker become specialised
-set for only training in one task
-cost of production is lower
-less time is wasted
-increased productivity
Disadvantages of specialisation/division of labour
- boredom of workers decrease productivity
-limited skillset of workers
-strike can lead to standstill
-lack of variety in products
advantages of specialisation/ division of labour for countries
-comparative advantage
-increased output, greater choice and lower prices
disadvantages of specialisation/ division of labour for countries
-country becomes over-dependent on imported g/s
-if uncompetitive , unemployment could result
limits to division of labour
-size of market -e.g small= difficult to specialise
-type of product- e.g designer/unique isn’t suited for dol
-transport costs - high costs/large scale = dol may not be possible,
functions of money - helps to facilitate specilisation/division of labour
-Medium of exchange (pay for g/s with money earned)
-store of value (save for future)
-a measure of value (assess the value)
-a means of deferred payments (buy and pay later -credit)
Free market Economies
Refers to an economic system in which prices are determined by supply and demand with no government intervention
Free market features
-determined by market forces
-resources allocated by price mechanism
-private ownership of resources
-firms aim to maximise profit
-consumers - utility
Free market advantages
-consumer sovereignty
-flexibility
-no bureaucracy
-efficiency/competition/profit motive
- increase variation
-rights to own resources
Free market disadvantages
-inequality
-trade cycles i
-imperfect information
-monopolies (exploit consumers/workers)
- externalities
Who supports free market economy?
-Friedrich Hayek - Road to serfdom
-argues govs unable to efficiently cater for wants/need
-govs unable to answer q’s effiecntly
Command economy
Is one in which resources are allocated by the state
Command economy features
-state= central planner
-Public state ownership of resources / allocates resources
-state determines price
-produces aim to meet production target set by the state - -greater equality of income/wealth
-abolishment of property
Command economies advantages
-greater equality (minimum standard of living) -macroeconomic stability
-external benefits/costs
-no exploitation
-full employment
-resources maybe allocated to maximise social welfare
Command economies disadvantages
-Inefficiency
-lack of incentive to take risks (no profit motive)
-lack of variation
-shortages/surpluses bureaucracy
-no consumer sovereignty
-inflexibility
Who supports command economies?
-Karl Marx
-capitalism unstable because workers exploited
Mixed economies
-is a combination of a free-market economy and a command economy
Mixed economy features
-some resources are allocated by the price mechanism -others are allocated by the state
-difference between countries is the degree of mix
-most countries = this
-State role depends on political priorities:
-defence/internal security
-provision of public goods/services e.g education/health
- closing inequality gap
Who supports mixed economies?
Adam smith - wealth of nations 1776
-individuals follow own self interest indirectly do good for soceity
-producers response to changes in demands
-role of gov limited to defence/justice/public goods
