1.1 Nature of Economics Flashcards
why is economics a social science?
it studies human behaviour and decision making within and beetween markets
why are models and theories developed?
- theories: helps to explain the many choices
- models: help predict the impact of economic change
- built on assumptions
what is the need to make assumptions?
(prior conditions made before a macro/micro analysis is built)
- the asumptions help to simplify analysis, however can be critised for not being realisticsimplification of economic idea
- simplification of an economic relationship
what is ceteris paribus?
isolates the relationship between two variables, by assuming that all influencing factors are held constant
an assumption
assumptions
EXAM TIP
- write at least one assumption during analysis
- later on critique and evaluate your analysis later by questioning this assumption
eg: an increase in goods……assuming they rae normal goods, however……..
why are models only built of data and assumptions?
economists cannot conduct scientific experiments
why is it difficlut for economists to run experiments?
the factors are variously changing
what is the economic problem?
the problem of scarcity:
* unlimted wants as a society
* finite resources
what are examples of finite resources?
limited
* workers
* machines
* acres of land
* reserves of oil
describe non-renewable resources:
- finite in supply
- rate of extraction is determined by current market price. Higher prices= more profit= inrease in rate of rxtracttion since higher profits
coal, oil, gas
describe renewable resources
- replaceable (rate of extraction/consumption < rate of resource renewal)
- exhausatable if not manged properly
- tragedy of the commons & unsusuainable use of common pool resources
solar energy, tidal power,
what is tragedy of the commons?
an economic theory :
where people act out of self inteest an eventually finsh a resource- without acknowledging wider impacts
who are the three main economic agents?
- conusmers
- goverment
- producers
What is opportunity cost?
- the unavoidable trade offs in the prescence of scarcity
- the value of the next best alternative
what you sacrifice
what is an economy?
the goods and services produced in an area
what is the importance of opportunity costs on the economic agents?
- consumers: decide what to sepnd their incoome on
- producers: decide how and what to produce goods
- goverment: decide which policies to choose
what are the 4 factors of production?
- land :natural resources
- capital : things used to make goods and services
- labour : work done by humans during production
- enterprise: wilingness of people to make risks and take profits
what is automation?
uses capital and machinary /new technology to replace or enhance human labour
replacing labour= capital labour substitiution
what is investment?
the purchase of capital
what is production possibility frontier?
shows the maximum potential output combinations of two goods or serices that an economy can achieve when all it’s resources are fully and efficently employed
what is the law of diminishing marginal returns?
a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.
what is economic growth and how it is caused?
increase in production of goods and services
due to:
* increase in quantity of factors of production
* increase in quality of facrors of production
Describe this Production possibility Frontier
Show economic growth and negative economic growth on a PPF
Economic growth : arc shift Outwards
Negative economic growth : arc shift inwards
why is it impossible for economist to run scientific experiments?
there are too many variables to isolate
what needs to happen for an economy to produce a currebtly unobtainable comnination of goods/servives in the future?
- quality and quanitity of factors of production needs to increase
- increase in productivity
- improvement in technology
what are consumer goods?
goods that are used to satisfy people’s wants and needs
what are capital goods?
goods which are used to produce othergoods and services
what does it mean for an economy to be at any point on a PPF?
an efficent allocation of resources, since non are being wasted or under utilised
Why might the graph shift from point B to C?
An increase in disposable income (wages)
what happens if there is an increase in capital goods?
there will be a long term incresae in the productive potential of the economy
why might a ppf shift inward?
- war
- conflict
- net migration of people out of a country
- resource depletion (because of climate change)
what are positive economic statements?
- can be proven true or false
- (objective statements)
- “will” or facts
what are normative economic statements?
- express opinion and connot be proven true/false
- subjective statements
- “should”, “fair”, “unfair”,
- are value judgments
what are value judgements?
a view of rightness or wrongness of something, based on a perosnal view
where are normative and postive statements used?
- normative : goverments make value judgment on economic issues
- postivive analysis is done to help them make decisions
what is specialisation?
when an individual, firm, region, country concentrates on the production of a limited range of goods and services
what are the advantages of specialisation?
- increased quality and quantity
- more efficent use of resources
- higher output–> higher economic growth–> higher living standards
*
what is the division of labour?
the specialisation of workers on specific tasks in the production process
production process broken into many seperate tasks
what are the disadvantages of specialisation?
- over reliance on industies which could be risky (if they collapse)
- **reduced self sufficency ** due to increased interdependance
why is output increased with division of labour?
a task is divided up into sections, workers can complete their tasks accuratley in less time
what are some of the advatnages of divion by labour?
- increased output per person (repetion of a task)
- lower supply costs per unit(gain in labour productivity)
- workers become more skilled through repetition (learning by doing)
- workers are easier and chaeper to train
- time is saved by workers focussing on a narrow range of tasks
what are the disadvantages of division of labour?
- unrewarding- repetive work, lowring motivation and productivity
- workers take less pride in work- quality may suffer
*
what is the benefit of division of labour to firms and workers?
firms: greater quantity and quality of output
workers: higher skill levels potentially higher wages
what is productivity?
equation
what does increased productivity lead to?
- higher output and higher quality
- higher standard of living
- more efficent use of resources
what is productivity- definition?
the effectivness of producitive effort, measured in terms of the rate of output per unit of input
what are the two methods of trading?
- bartering (negotiating a price/haglling)
- money
what are the 4 functions of money?
- medium of exchange: comonly accepted in exchange for gods and services
- measure of value: the price reveals a good’s value
- store of value: value is miantained and can be kept for a long time
- method of deffered payment: allows debt to be created (mortage)
what did Adam Smith have to say about divsion of labour?
- it increased output
- incraese in productiity came from workers being able to just focus on one task, but could lead to bordom
studied effects ina pin factory
What are the three different types of economies ?
Describe free market economies
- resources are allocated by markets using the price mechanism
- no goverment intervention (taxes, subsisdisation, regulations)
Describe command market economies
- all resources are alloctaed soley by the state
Describe what a mixed economy looks like
- resources are allocated using the price mechanism and the goveremnt (healthcare & transport )
- public and private sector
what is the public sector?
part of an economy which is owned or controlled by the goverment
what is the private sector?
the part of an economy which is owned or controlled by individuals or groups of people, who seek to maximise profit or raise awareness
firms
what were smiths views on economies?
- supported free markets
- thought that the price mechanism was very efficent at allocating resources
- goverments should leave markets alone, only act in market failure
what is Marx’s view on economines?
- against free markets as it leads to capitalism, where workers are exploited, and inequality increases
- idea: command economy, goverment could divide resources freely
what were Hayek’s view of economies?
- having a command economy is unrealistic for one goverment to collect all information
- whereas a free economy works well with price mechanism as a good communication network
prevents people starving due to goverment underestimation
describe the price mechanism
- prices fall to eliminate excess supply
- prices rise to eliminate excess demand
- comminication network
what are the pros and cons of a free market economies?
pros:
* increased compettion in frims, cuttin costs, improve efficency,** lowers prices**
* price mechansim is super effcient
* more choices
cons:
* inequality
* monopolies
* market failures
what are monopolies?
- when a firm owns 25% or more of the market share
- therfeore they can exploit their consumers (higher prices and lower quality)
- limiting choices in free markets and mixed economies
what is a market failure?
- public goods are underprovided
- externalities are not internalised (smoking)
- information gaps can mislead the public (not eating enough vegables)
inefficent allocation of resources
why is there wider choice in a free market for consumers?
firms have profit motive this means that in order to keep up with competition, firms develop new products and must meet consumer demand…. leading to more choice
why are quality and innovation high in mixed and free market economies?
- competition
- profit motive
what are the pros and cons of command economies
pros:
* correct market failure
* less inequality
* stops monopoly abuse
cons:
* goverment failure
* destroy incentives (workers slack off and become less productive, entreprenurs innovate less because no profit incentive)
* slow economic growth and little
* limited choice
what are direct and indirect taxes?
direct: such as income/ coroperation tax
infirect: imposed on particular goods (cigarretse- to stop consumption of negative externalities)
what is goverment failure?
- unintended consequences such as black maket and smuggling
- hard to set the size of subsidy,
what is the role of the state in a mixed economy?
- allocates resources through planning
- redistributes incomes through welfare spending
- regulates consumers and firms
what is the state?
consists of:
* territory
* citezens
* goverments
is permenat unlike the goverment- rules over a stae at a given time
why are free market and mixed economies less equal?
owners of land and capital accumulate wealth over time and pass this privillage on to their children through property, private education and social networks
