1.1 nature of economics Flashcards
economic assumptions made:
- economic agents are rational
- consumers aim to maximise benefit/utility
- firms aim to maximize profit
- ‘ceteris paribus’ assumption that all else remains the same
models in economics def
theoretical concept looking at how different variables interact
positive statement def
factual, objective, evidence-based comment that is not influenced by opinion and can be verified by data checks
normative statement def
subjective, opinion/prejudiced, ‘questionable’ comment requiring a value judgement
value judgment def
statement put forward by individuals that can’t be formally verified
opportunity cost def
benefit lost of the next best alternative when a choice is made
what is the basic economic problem
unlimited wants of people with limited resources which leads to scarcity, then a choice has to be made of what to produce, how and for whom to be produced. all things produce opcost
economics def
study of allocating scarce resources
economic activity def
satisfying the wants and needs of society
wants vs needs
needs are the G+S needed for survival while wants are the non-essentials wanted by society
trade offs def
range of alternatives forgone
what does the PPF show
maximum combos of G+S that can be produced when all resources are effectively employed, shows the problem of choosing how to use scarce resources when producing G+S - opcost
productive potential def
max. output when all factors of production are used = PPF line
capital good def
man made good used for making consumer goods that produces a stream of income
consumer good def
good satisfying needs and wants of consumers with immediate benefit for consumer
marginal analysis def
opportunity cost between 2 points on the PPF
when does the PPC line shift?
when the size of an economy changes
specialisation def
economic units focusing only on producing specific goods/services
division of labour def
specialisation used in an organisation
specialisation advantages
- greater understanding of requirements of production
- specialising of units at what they’re best at - do better
- efficiency - no time taken switching between jobs
- technical economies of scale - more capital lowering lrac
specialisation disads
-monotony - lower quality or quantity of work
- may be limited by market size - cannot really happen in smaller size firms because it is not affordable
- threat of structural UE if industry declines
- less flexible workforce - overall lower labour occupational mobility
DoL ads
- improved performance and efficiency as workers get good at the jobs they’re doing
- lower costs of prod
- competitive advantage
- production/assembly lines can increase speed and accuracy of production more
DoL disads
- monotony affecting quality and quantity
- monotony causing issues like high absenteeism and higher labour turnover
- UK issue - higher wages undercut low cost overseas work
- UK issue - valuing quality over price
adam smith view of specialisation and DoL
said that simplicity and repetition of tasks will lead to ‘stupidity’ and ‘ignorance’ which will lead to demotivation
free market def
basic economic problem solved by market forces - supply and demand
what is the market mechnaism?
supply and ddemand working together to determine prices and quantityies,, businesses privide nad consumers take
characteristics of free market
private sector ownership, free enterprise, limited government intervention, firms competing for market share, resources allocated by market forces
adam smith free market views
‘laissez faire economics’ and ‘the invisible hand’
minimal government intervention onlky to watch over monopolies, grant patents, provision of public goods
friedrich hayek free market
even more free market than smith - government role only to maintian rule of law and be a societal safety net - otherwise would cause totalitarianism - very against collectivism
free market advantages
- competitive market
- consumers have large choice
- rewards entrepreneurship and encourages innovatin
- productive efficiency
- economic growth
free market disads
- wealth inequality
- little regulation
- overprovision of demerit goods
- little control over negative externalities
difference between negative externalities and demerit goods
demerit goods: immediate negative effect on consumer
negative externalities: negative spillover effect on a third party
command economy def
resources allocated by government only who maeks all decisions
command economy ads
- greater equality
- low unemployment
- prevention of absolute monopoly power
- maximise social welfare
- focus on common good
command economy disads
- lack of competition inhibits innovation
- inefficiency - inefficient firms are protected which is bad
- bureaucratic - the planning of committees
- proce controls may not be accurate leading to shortages or suprluses
