1.1 nature of economics Flashcards
what are economic goods?
certain utility to society, willing to pay, degree of scarcity and therefore has an oppurtunity cost
what are free goods?
cannot be traded, characterised by abundance
what is the basic economic problem?
how can available scarce resources be used to satisfy peoples infinite needs and wants as effectively as possible? (limited amounts of resources resulting in choices)
what is a need?
something which is neccesary for survival
what is a want?
something which is desired, isn’t a need
what is ceteris paribus?
means that when the effect of a change in one variable is considered, it is assumed that all other variables is considered, it is assumed that all other variables are held constant
what is a positive statement?
positive statement describes facts or how something is
what is a normative statement?
normative statement describes opinions or how things should be
what is an economic agent
economic statement is people or groups of people who fall into the same category, by performing some function in economic activity
what do economic agents do?
economic agents make decisions on how resources are allocated
who are the economic agents?
economic agents are producers, consumers, household or the government
what do producers do?
producers are firms or people who make goods or provide services
what do consumers or households do?
consumers or households are people or firms who make or provide goods or services
what does the governments do?
governments sets rules that other participants in economy have to follow, also produces and consumes goods and services
what does CELL mean, and do
Capital (equipment, factories, schools help produce)
Enterprise (entrepenues that take risk)
Land (earth natural resources)
Labour (work done by people ‘labour force’)
what does PPF mean
production possibility frontier
what do PPFs show
combination of two goods or services, showing maximum output combinations when using all available factors of production efficiently
what could allow nations to consume beyond their own PPF
trade between countries allow nations to consume beyond their PPF, potentially leading towards gains in economic welfare
what shows welfare or gain in allocative efficiency
shown through more of both goods with same resources
A, B and C are on the curve, what does that mean?
maximum efficiency
D is inside the curve, what does that mean?
inefficient, too little being produced, unemployed resources used inefficiently
E is outside the curve, what does that mean?
unattainable, cant produce more due to current factors of production
what can increase the current factors of production?
increase in factor resource, increase in productivity, improvement in technology
what does a straight PPF mean?
marginal opportunity cost of switching resources between consumer and capital goods is constant
what does diminishing returns mean?
additional resources are devoted to producing a good, marginal increase in smaller output
what does economic growth entail
changes in production or technology
what is a capital good?
a good which is required to produce other goods
what is a consumer good?
a good which provides satisfaction to consumers
what does specialisation mean?
concentration of production on a narrow range of goods or services
what can specialise
countries, regions, firms or workers can specialise within an industry
what are advantages of specialising?
higher output, wider range of goods or services, greater allocative efficiency, higher productivity
what are disadvantages of specialising?
finite resources, change in fashion or tastes, deindustrialisation, national interdependance
how is higher output an advantage?
resources are purely focused onto efficient production, resulting in higher trade and higher growth
how is greater allocative efficiency an advantage?
greater allocative efficiency is an advantage as it decreases scarcity
how is higher productivity an advantage?
there is a better use of workers, with a decreased cost of production
how is change in fashion/ tastes a disadvantage?
becoming overspecialised could potentially mean that there is unwanted items
how is deindustrialisation a disadvantage?
there are better, more efficient firms, when businesses deindustrialise there is higher rates of unemployment
how is national interdependence a disadvantage?
national interdependence means that countries need to be able to export surplus and import goods and services which are needed
what did Adam Smith say
free market system along with free trade would produce true national wealth, economic growth through division of labour
what is division of labour?
division of labour is the breaking down of the production process into separate tasks upon specialisation
what are advantages of division of labour?
higher production, specialist capital for workers, lower prices
what are disadvantages of division of labour?
demotivation of workers, higher worker turnover, risk of long-term unemployment, highly standardised goods or services
why is risk of long term unemployment a disadvantage?
overspecialisation of workers, automated machines can do the jobs
what are limits to division of labour?
size of markets, type of market, transport costs
what are the functions of money?
medium of exchange, measure of value, store of value and method of deferred value
what are the main characteristics of free market economies
private ownership of resources, market force determine prices, producers aim to maximise profit, consumers aim to maximise utility, resources are allocated by price mechanism
what are advantages of free market economies?
flexibility, officials not needed to allocate resources, competition and profit motive promote efficient allocation of resources, consumers and producers have their own rights
what are disadvantages of free market economies?
inequality (less resources, less rich), instability (booms and slumps), imperfect information, danger firms will exploit consumers if only supplier.
what did Friedrich Hayek say?
‘state planning would involve restrictions on freedom and use of force’
what are the main characteristics of a command economy?
public ownership of resources, state determines prices, producers aim to meet production targets set by state, state allocates resources, greater equality of wealth and income than free market economies
what are disadvantages of command economies?
greater equality, booms and slumps smoothed out, external benefits and costs accounted, no exploitation, full employment
what are disadvantages of command economies?
inefficiency (allocation inefficient, absence of profit motive and competition), lack of incentive to take risks, restriction of freedom of choice, inflexibility)
what is a mixed economy?
a mixed economy is a mixture of a free market economy and a command economy, with some resoruces being allocated by price mechanism while others are allocated by the state.
what is the role of the state in a mixed economy?
defence and national security, provision of public goods, provision of public services such as education and health, redistribution from the rich to the poor
