1.1 Nature Of Economics Flashcards
What forms an economy’s ’economic activity’ ?
Economic activity includes a wide range of actions such as :
- Production of goods and services.
- Consumption of goods and services.
As resources are scarce, what three questions must we ask concerning economic activity ?
What to produce ?
Whom to produce for ?
How to produce ?
How many economic agents are there ?
3
What are the three main economic agents ?
Producers - people/firms that produce goods or supply services.
Consumers - people/firms who purchase the goods/services.
Governments - establishes rules for economies.
What do economic agents base thier decisions on ?
Various incentives -
- firms - profit maximisation
- consumers - satisfaction
- governments - welfare
What are the two categories for types of resources ?
Renewable and non-renewable
What is meant by a renewable resource ?
Non-finite sources, which regenerate faster than the rate they are used at.
What are some examples of renewable resources ?
Oxygen
Wind energy
Solar energy
What is meant by non-renewable resources ?
There is a finite supple of these resources - they are being used up faster than they are able to be produced.
What does a PPF diagram showcase ?
The PPF shows an economies maximum / potential productive potential.
How is opportunity cost shown on a PPF diagram ?
On the slope of the PPF.
Why is the PPF curved ?
This is due to the law of diminishing returns.
What is meant by the ‘ law of diminishing returns’ ?
As you increase units of one resource and keep other factors constant, the marginal benefit from the extra units will eventually start to decline.
What does an outward shift mean on a PPF diagram ?
Sign of economic growth - this is because the productive capacity in an economy has increased.
What are the trade offs when producing on a PPF ?
To produce more of one good, then you must produce less of the other. ( movement along the curve shows this ).
When is an economic performing at full capacity ?
When it is exactly on the frontier.
When is an economy performing below potential capacity ?
When the dot representing the economy is below the frontier.
What is meant when a point is beyond the frontier ?
An economy is not currently possible to produce at this point.
What is meant by an economy working below capacity ?
There are spare resources, as not all the resources is employed.
What does efficiency refer to ?
The lack of waste.
What does static efficiency refer to ?
Refers to the efficiency at a point in time.
What is meant by productive efficiency ?
This is the ability of firms to produce goods and services at the lowest possible cost, given the level of output and the available technology. It means that a firm is using all its resources in the most efficient way possible, producing the maximum output with the minimum input.
What is meant by allocative efficiency ?
Allocative efficiency is reached when no one can be made better off without making someone else worse off. Most efficient allocation for resources.
What is true of every point of the PPF and what may not be true?
At each point on the PPF it is productively efficient. However not very point is allocatively efficient.
