1.1 Nature of economics Flashcards
what is ceteris paribus?
the assumption that only two factors will change and all others will stay the same
what are positive statements?
objective statements that can be tested eg a reduction in income will increase the number of people shopping in pound shops
what are normative statements?
subjective statements which contain a value judgement (opinion) eg fossil fuels should be taxed more heavily than renewables ➡️ important as influence decision making + govt policy
what is the economic problem?
there are unlimited wants and finite resources (land, labour,capital,enterpirse) ➡️forces economic agents to make choices
how is the economic problem solved?
- deciding what to produce
- deciding how to produce
- for whom we should produce these products
whats the opportunity cost?
the benefit lost from the best alternative forgone (cost of choice)
what does a production possibility frontier show?
the maximum potential output of an economy when all resources are fully employed
whats pareto efficiency?
its impossible to make one thing better without making someone else worse off
where is the opportunity cost on a diagram?
look at how much the other axis has decreased (this is how much of one product has been given up in order to make more of another)
what does it mean if the PPF curve has been pushed out?
the economy has grown by either;
- getting more of something
- making more of what they’ve got
- the graph is also pushed outwards when there is an efficient allocation of resources
how can you see possible and unobtainable production on a PPF curve?
- point lies within or on the curve is it possible
- point lies outside the curve it is impossible as production can’t be above max
➡️countries aim to be as close to the curve
what are capital goods?
goods used to make consumer goods eg machinery
what are consumer goods?
used/consumed by the consumer and do not further aid production eg a slice of pizza
what’s specialisation?
when we concentrate on a product or task
whats division of labour?
specialisation by individuals
advantages to the business of specialisation and division of labour?
✅
- more motivated (and quicker) ➡️ increase output
- better quality + range of products
- reduced training costs
advantages to the employee of specialisation and division of labour?
✅
- higher wages as business makes more profit
- sense of achievement to be specialised in something
- improved skills of the job
disadvantages to the business of specialisation and division of labour?
❌
- employees less motivated as job repetitive and boring
- employees expect higher wages as more experiences
- inflexibility as workers can’t do multiple jobs
- countries will be less self sufficient
disadvantages to the employee of specialisation and division of labour?
❌
- repetitive and boring having to do the same task everyday
- replace by machinery
- difficult to find other jobs
whats productivity?
a way of measuring how effectively a firm is producing its output
formula for productivity?
output(producers)/input(workers)
whats the free market?
based on consumer buying decisions
✅
efficient, only best value demanded so firms have incentive to make goods as efficient as poss
entrepreneurship, rewards taking risks
choice
❌
inequalities of wealth
non profitable businesses wouldn’t; exist as firms won’t make any profit
monopolies, successful firms dominate the market making them the only choice
illegal things can be sold
whats a command economy?
the state/gov controls all resources
✅
welfare maximised as govt can redistribute income fairly
low unemployment, govt tries to provide everyone with a job
prevent monopolies
❌
poor decision making by govt
restricted choice
lack of risk taking and efficient as not motivated to make profits
state slow to adapt to consumer wants
whats a mixed economy?
combination of command and free market
- govt role ;
- change laws
- change tax levels
- buying/selling
➡️try and maximise the benefits of the free market and the command economy
who was Adam Smith?
supported the free markets
- believed consumer and producer get what they want and due to demand and supply prices will work for both
- invisible hand
whats the invisible hand model?
factors of production move to where they are needed in the economy (self interest balanced with competition)
- when people are free to engage in voluntary transactions and pursue their own economic interests, the invisible hand of the market guides their actions to collectively benefit the entire society
who was Karl Marx?
believed an economy should exist for the benefit of the workforce
- critiqued the desire for profits, owners always trying to make money as they will take this too far and lower costs so workers will be paid as little as possible
- specialisation = loss of creativity
what are the functions of money?
- a medium of exchange
- a store of value
- a unit of account
- a standard of deferred payment
characteristics of money?
- durability
- portable
- divisible
- hard to counterfeit
- accepted
- valuable
what is automation?
production which uses technology to replace or enhance human labour
what are non-renewable resources?
finite in supply, can’t be replenished at a faster rate than they are used
- crude oil
- natural gases
what are renewable resources?
are replaceable if the rate of extraction is less than the natural rate at which a resource renews
- wind turbines
- solar pannels
who was Friedrich Hayek?
strongly advocated for free-market
- Hayek said that government intervention in money and financial markets was one of the main causes of instability
- the only role of the government should be to maintain law and order
- strongly argues against the command economy because a small number of people cannot have enough knowledge on what consumers want
