1.1 Nature Of Economics Flashcards
Economics
The study of how to best allocate scarce resources amongst alternative needs and wants
Ceteris paribus
where we analyse the impact of two variables on each other assuming all other variables are equal
Positive statement
Statements that can be proven right or wrong according to data
Normative statement
Value judgement based on opinion
Scarcity
Where there are not enough resources relative to needs and wants
Basic Economic Problem
Resources are scarce but wants are infinite and therefore choices within the allocation process needs to be made.
The Three Questions
What is to be produced? How is production organised? For whom is production for?
Renewable resources
Renewable resources e.g fish stock and forests that can be exploited over and over because they have the potential to renew themselves. This is given that the rate of consumption remains less than the rate of renewal
Non renewable resources
Resources e.g coal and oil which once exploited cannot be replaced
Opportunity cost
The next best alternative forgone
Factors of production
Land is the natural resources used in production.
Labour is all productive human effort.
Capital refers to all man made resources that are used to produce goods and services in the future.
Entrepreneurship is the willingness and ability to take risks of combining the other FOPs in order to make a product or service
Production Possibility Frontiers
The maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology.
Productive capacity
The point at which all FOPs are fully employed.
Consumer goods
Goods that are demanded and bought by households and individuals
Capital Goods
Goods that are produced in order to aid the production of consumer goods in the future.
Specialisation
The production of a limited range of goods by a company/individual/country.
Division of labour
When labour becomes specialised in a particular part of the production process
Labour productivity
Output per worker
Adam Smith on Specialisation and DOL
Specialisation and DOL can increase labour productivity allowing firms to increase efficiency and lower their COP.
Split a pin making process into 18 different operations and as a result the pin company was able to produce 5000 pins per person employed.
Adv of Specialisation + DOL in organising production
Increased labour productivity - workers will be quicker and more efficient if only having to focus on one thing and develop their skills.
Higher quality of goods/services - workers more skilled at their job.
Cost effective to develop specialist tools and to train workers in only one specific job.
Time not wasted e.g moving between jobs.
EV of Specialisation + DOL in organising production
Poor quality of work - works feel bored because of repetition
Reduction of craftsmanship due to mechanisation
If one process is delayed, all other processes suffer
Structural unemployment due to lack of wide industrial training
Specialising in production of goods and services to trade
If countries specialise, it is essential that they trade in order to obtain all the good and services that consumers demand
Adv of specialising to trade
Theory of comparative advantage which states that countries should specialise in producing goods where they have a lower opportunity cost and so they are relatively best at producing. Will help boost economy which leads to greater output globally.
EV of specialising in trade
Over-dependency on a particular export.
Risky for countries who specialise in non renewable resources
High interdependence will cause problems if trade is prevented
More competition to cut costs and therefore wages may fall
Functions of money
A medium of exchange - money can be used to buy and sell good/services and is acceptable everywhere.
A measure of value - money can compare the value of two goods.
A store of value - money is able to keep its value and can be kept for a long time
A method for deferred payment - money can allow for debts to be created as people can pay for things without having money in the present
Free market economy
An economy where resources are allocated through market forces (S+D) and consumers/firms own the fops without gov intervention
Adam Smith on Free market
Invisible hand which allocated resources to everyones advantage.
Competition in the market caused lower prices as firms wanted to be competitive and so this benefits consumer as they can get cheaper goods. State needs to provide goods /services that the free market won’t
Friedrich Hayek
The poorer are better off in the free market because they have have freedom of choice. Central planning of gov leads to what a small minority wants being pushed onto the whole society. Individuals know best what they want and how much.
Adv of free market
System is automatic due to invisible hands (resources are moved out of production when people stop wanting it/high costs).
Consumer sovereignty
High motivation as working hard can lead to high potential rewards
Political freedom
Productive efficiency due to lower costs
Higher growth in free market economy
EV of free market
High inequality since rich own more FOPs
Lack of merit goods and little control of demerit goods
Resources wasted on unproductive expenses e.g advertising
Creation of monopolies if competition disappears
Problem of externalities
Command economy
Economy where resources are allocated by the government and all FOPs are owned by the gov and labour is directed by the state.
Advantages of command economy
Minimum standard of living leading to no inequality
Less wastage of resources
Long term planning so industries do not have to keep changing and shifting resources
Standardised products meaning they are produced cost effectively
Objective is social welfare maximisation so merit goods are encouraged whilst demerit goods aren’t produced
EV of command economy
Impossible for state to make so many decisions correctly made lead to waste of resources
Slower decision making which could lead to an increase in bureaucracy
Same wages leads to less motivation and efficiency
Loss of freedom for consumers
Mixed economy
An economy where both the free market mechanism and the government planning process allocated a significant amount of total resource in a country
Government role in a mixed economy
Creating a framework of rules which can help prevent abuse of monopolies.
Supplements and modifies the price system as the provides public and merit goods
Redistributes income
Stabilises the economy as the gov will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand.
