1.1 Nature of economics Flashcards
What is meant economics when describing economics as a social science
It is a study of how human beings allocate scarce resources to satisfy wants of humans.
Whats is the purpose of theories and models in economics?
to explain why something is as it is
- they’re simplified to make them more useful
what is different in the way theories and models are expressed?
- Theories are expressed in words
- Models are due to requiring greater precision are expressed in mathematicalterms
what must occur when there are too many variables that can change within an economic model?
assumptions must be made
What is ‘Ceteris Paribus’ meaning?
all other things remaining equal
What makes economics a social science?
-it is difficult to set up experiments to test hypothesis
-economists gather data in the everyday world, thus other variables are always changing
What are positive statements?
-statement that is objective and made without any obvious value judgements or emotions
-They can be tested to be proven or disproven and they are often expressed in the form of a hypothesis that can be analysed and evaluated
-statements about the future can be positive if they can be proven or disproven in the future
What are normative statements?
a statement that is subjective and based on opinion
- so cannot be proven or disproven
-includes words such as ought, maybe, should or says that one action is better than another
When do economists use positive and normative statements?
-The role of value judgments
They use positive statements to back up normative statements
What do value judgements do?
influence economic decision making and policy
- different economists may make different judgments from the same statistic
What is the basic economic problem (BEP)?
-how scarce resources are allocated to satisfy infinite human wants
- an economy seeks to allocate resources by using the price mechanism and by the government
What are the 3 ways economies use to solve the basic economy problem
-working out what to produce
-how to produce it
- for whom to produce
What is the concept of scarcity in economics?
-where there are unlimited wants and finite resources
-a relative concept as resources are not necessarily scarce themselves but are scarce in relation to the demands placed upon them
What is a renewable resource?
a resource that can be replenished as long as the rate of consumption is less than or equal to the rate of replenishment, the stock will not decrease
what is a non-renewable resources?
a resource that cannot be readily replaced by natrual means on a level to consumption
- a finite resource
Define opportunity cost?
the cost of the next best alternative that is forgone when a choice is made
What are the 4 factors of production?
-Land
-Labour
-Capital
-Enterprise
Define the factor of production, Land:
all natural resources
-includes all physical land and the raw material that naturally occurs in it
- includes the sea and anything that naturally occurs in it
Define the factor of production, Labour:
human resources
- the physical and mental abilities of the population
-these are distributed unevenly amongst the population
- its possible to develop some of these abilities via education and training.
-making the worker more productive
Define the factor of production, Capital:
man-made resources
-refers to goods made by man with the specific purpose of producing other goods or services
-not useful in itself
- not purchased by consumers
- used by producers to make
other goods or services
-purchased by producers for use in the production of other goods
Define the factor of production, Enterprise:
organisational resources
-entrepreneurship is the willingness and ability to take the risks of combining the other factors of production in order to make a product or services
-successful entrepreneurs earn profit from their activities
What does the production possibility fronteir (PPF) show?
the maximum possible combination of capital and consumer goods that the economy can produce with its current resources and technology
what is the PPF used for?
to test the concepts of opportunity cost
What are capital goods?
goods used to help produce other goods
-e.g. machinery, tools, factories
what are consumer goods?
goods that satisfy needs
What is the gradient of the PPF?
the opportunity cost ratio
What does it mean when the PPF is a straight line?
- a constant opportunity cost ratio
What does it mean when the PPF is a concave shape?
the opportunity cost increases the more we produce of a product
What does it mean when the PPF moves further away from the origin?
Why may this happen?(5)
- an economy has grown because it can produce more of both goods.
- Increasing quantity of resources
- Quality of resources increases
- stock of capital increases
- improvements in technical knowledge and training
What does it mean when the PPF moves towards the origin?
Why may this happen? 3
- the economy is declining thus producing less goods than previously
- natural disasters destroy factors of production
- decrease in quantity or quality of labour due to
- war
- migration
- pandemics
- fall in spending on education
When does specialisation occur?
When each worker completes a specific task in a production process.
Who stated the concept of specialisation?
Adam smith
What did Adam smith believe ?
That worker productivity can increase.
- firms can then take advantage of increased efficiency and lower average costs of production
What are advantages of specialisation? (4)
- higher output and potentially higher quality, since production focuses on what people and businesses are best at
- there could be a greater variety of goods and services produced
- there are more opportunities for economies of scale, so the size of the market increases
- there is more competition and this gives an incentive for firms to lower their costs, which helps to keep prices down
What are disadvantages of specialisation?(4)
- work becomes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity. Workers could become dissatisfied
- there could be more structural unemployment, since skills might not be transferable, especially because workers have focussed on one task for so.
- by producing a lot of one type of good through specialisation, variety could in fact decrease for consumer
- there could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly
What are the 4 functions of money?
- a medium of exchange
- a measure of value
- a store of value
- a method of deferred payment
What is a free market economy?
Where governments leave markets to their own devices, so the market forces of supply and demand allocate scarce resources
What are the two main free market economists?
Adam smith
Friedrich hayek
What are 3 advantages of free market economies?
- firms are likely to be efficient because they have to provide goods and services demanded by consumers. They are also likely to lower their averages cost and make better use of scarce resources. Therefore, overall output of the economy increases
- the bureaucracy from govt intervention is avoided
- some economists might argue the freedom gained from having a free economy leads to more personal freedoms
What are 4 free market economy disadvantages?
- the free market ignores inequality, and tends to benefit those who hold most of the wealth. There are no social security payments for those on low incomes
- there could be monopolies, which could exploit the market by charging higher prices
- there could be overconsumption of demerit goods, which have large negative externalities such as tobacco.
- Public goods are not provided in a free market, such as national defence. Merit goods, such as education, are under provided
What is a command economy?
When the government allocates all of the scarce resources in an economy to where they think there is a greater need
What are advantages of a command economy? (4)
- it might be easier to coordinate resources in times of crises, such as wars
- the government can compensate for market failure, by reallocating resources. They might ensure everyone can accesss basic necessities.
- inequality in society could be reduced, and society might maximise welfare rather than profit
- the abuse of monopoly power could be prevented.
What are disadvantages of command economy?(3)
- government fail, as do markets, and they may not be fully informed for what to produce
- they may not necessarily meet consumer preferences
- it limits democracy and personal freedom
What is a mixed economy?
A mix of both command and free market economies, the most common economic system today.
- market controlled by both government and the forces of supply and demand
