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Econ Theme 1 > 1.1 Nature Of Economics > Flashcards

1.1 Nature Of Economics Flashcards

1
Q

What is the basic economic problem?

A
  • there are scarce resources to satisfy infinite human wants
  • leads to a problem of how humans allocate these resources to satisfy these wants
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2
Q

What does scarcity cause?

A
  • scarcity forces people to make choices
  • each individual must choose which goods + services to consume
  • need to prioritise the consumption of what commodities they need or want - cannot satisfy all their wants
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3
Q

What is opportunity cost?

A
  • the next best alternative
  • an individual chooses to consume one good at the cost of the item that would have been next on their list of priorities
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4
Q

What are the economic agents?

A

Consumers (individuals + households)
- make choices about their expenditure
- demand goods and services
- need an income to buy (make decisions about the supply of their work)

Producers (firms)
- produce outputs of goods or services
- make choices on what goods or services to produce, and techniques of production to be used and prices to sell

Government
- undertakes expenditure
- influences economy through taxation + regulations of market

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5
Q

Factors of production

A

Land - natural resources

Capital - machinery, tools, man made aids to production

Enterprise- organises production, entrepreneurs take calculated risks to sell goods

Labour - key input

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6
Q

Renewable resources

A
  • can be replenished but there is a danger of depleting these resources due to over-consumption e.g. over-fishing , deforestation in rainforests, solar energy
  • highlights importance of sustainable development
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7
Q

Non-renewable resources

A
  • resources are finite as stock levels decrease over time since they can’t be replenished
  • oil which is in high demand is being extracted at too high of rate - leading to search of substitutes (renewable resources)
  • the price increase of non-renewable resources could discourage consumption + give incentives to firms to develop other sources of energy
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8
Q

What is a free market economy?

A
  • private sector - owned by private individuals
  • resources privately owned
  • resources allocated by price mechanisms, demand and supply and economic agents
  • aim is to make as much profit as possible (p = revenue - cost)
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9
Q

How are resources allocated in a command economy?

A
  • government
  • financed through taxation, borrowing
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10
Q

How do consumers make choices?

A
  • they will make choices on how to use their limited income based on what will give them the greatest satisfaction
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11
Q

How do producers make choices?

A

Producers must choose what to do with their limited resources and their decision will be based on profit

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12
Q

How do the government make decision?

A

The government must make decisions on where they should spend their limited tax revenues based on what will maximise social welfare

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13
Q

Explain land as a FOP?

A
  • land is all natural resources used in production, such as raw materials, minerals, land and produce of the sea
  • owners receive rent from land or money from the sale of land
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14
Q

Explain capital as a FOP?

A
  • capitals refers to all man-made resources used to produce goods or services in the future
  • owners of capital receive interest on their land
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15
Q

Explain entrepreneurship as a FOP?

A
  • entrepreneurship is the willingness and ability to take the risks of combining the other 3 FOP, to make a product/service
  • a profit is earned in these activities
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16
Q

How do economies solve the basic economic problem?

A

They work out:
- what to produce
- how to produce it
- for whom production should take place

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17
Q

What is a positive statement?

A
  • a statement that is objective and made without any obvious value or judgement or emotion
  • they can be tested with reference to data or evidence
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18
Q

Give an example of a positive statement?

A

Raising taxes will lead to an increase in tax renue

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19
Q

What is a normative statement?

A
  • a statement that is subjective and based on opinion so can’t be proven or disproven
  • they express views of what’s considered good/bad
  • often include words such as ought and should
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20
Q

Example of a normative statement

A

The government should increase taxes

21
Q

How do economists use positive statements?

A

Economists tend to use positive statements to back up normative statements

22
Q

How do value judgments influence economic decision making and policy?

A

Different economists may make different judgements from the same statistic

23
Q

What does production possibility frontier show?

A
  • PPF shows the combination of goods and services that can be produced with a full and efficient use of resources
  • also used to test concept of opportunity cost
24
Q

What does any point on the curve represent?

A

The maximum productive potential of the economy, the most that the country can produce

25
What is the OC ratio for a straight line PPF
- a straight line PPF implies a constant opportunity cost ratio
26
What does a normal shape PPF show?
- the shape is concave to the origin of the graph - a PPF that is concave to the origin implies that opportunity cost increases the more we produce more of a product
27
Reason for PPF being concave to the origin?
- not all resources are identical - thus as the nation concentrates more on the production of one good, it has to start using resources that are less and less suitable - resources that would have been better suited to producing the other good - the opportunity cost of the other good will increase
28
How does a PPF shift show potential economic growth?
- outward shift - shows the economy having the productive capacity to produce more goods + services - caused by increase in quality/quantity of FOP - e.g. technological advances, better educated labour
29
How does a PPF shift show an economic decline?
- inward shift - FOP destroyed due to civil war, extreme weather, reduced immigration
30
What is specialisation?
The production of a limited range of goods by a company/ individual/ country
31
What is division of labour?
A process whereby the production procedure is broken down into a sequence of stages, and workers are assigned to a particular stage
32
What did Adam smith state?
- agreed with specialisation and division of labour, and how this production method could increase production and create wealth - by breaking down the production process into smaller, specialised parts, productivity rises - this is because this process helps incorporate automation into production and also means workers spend less time switching between task - the repetition of the task makes their efficiency increase
33
Advantages of division of labour
- **increases labour productivity** - quicker and efficient as workers concentrate on only one task, with the repetition meaning they become more skilled - **lower training costs** - only trained for one specific task, saves time and money - **no time is wasted** moving from one job to another, increasing productivity
34
Disadvantages of division of labour
- task becomes repetitive/boring which may result in more mistakes and higher absence —> higher staff turnover—> higher recruitment costs - skill of worker many be replaced by machine —> leading to unemployment - specialised workers find it difficult to switch other tasks —> limited work + possible higher training costs if demand or supply conditions change
35
Advantages of specialisation?
- higher output -> total production of goods and services raised, quality can be improved - variety —> consumers have access to a greater variety of quality products - lower prices -> increased competition acts as an incentive to minimise costs and keep price down
36
Disadvantages of specialisation
- countries become over dependent on one particular export -> if it fails the economy collapses - high interdependence-> cause problems if trade is prevented due to war or natural disasters - workers may find it hard to work in other sectors -> unemployment
37
How do money and specialisation relate to each other?
Specialisation occurs due to the existence of money. - money facilitates specialisation - workers specialise then get paid a salary/ wage - with the wage, workers pay other workers for the goods
38
Give the function of money
- a medium of exchange - a measure of value - a store value - a method of deferred payment
39
Explain a medium of exchange
- used to buy and sell goods and services - acceptable everywhere - problem with barter is people can only trade if there is a double coincidence (both parties want the good the other party offers)
40
Explain a measure of value
- used to compare the value of two goods - also able to put a value on labour
41
Explain a store of value
- money keeps its value as long as we spend it, for a long time - with barter, goods like fruit, go out of date so don’t keep value
42
Explain a method for deferred payment
- money can allow for debts to be created - people can pay for things without having money in the present, and pay later (reliant on money storing value)
43
Karl Marx opinion
- Marx believed that capitalists whose objective is to make profit will end up exploiting workers - this means that workers will earn lower wages + capitalists have an incentive to replace labour with machines, creating unemployment - this combined effect will create exploited and alienated workforce- leading to social unrest - he argued even if owners paid fair wages this would increase costs + cause bankruptcy- increasing unemployment + increase supply of labour so wages will go down - either way capitalism is doomed
44
Why do economists develop models?
- economists develop models to explain how the economy works - e.g. theory of supply + demand
45
How are models developed?
They’re developed by putting forward a model, gathering evidence and then accepting, changing or disregarding the model
46
What is the purpose of theories + modelling?
They’re used interchangeably and are used to explain why something is as it is and simplified to be made more useful
47
Why must assumptions be made?
They are too many variables which can change within an economic model and so assumptions must be made
48
What is ceteris paribus?
All other things remaining equal

Econ Theme 1 (11 decks)

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