1.1 nature of economics Flashcards
what is cereris paribus?
‘all other things remaining equal’
scientific experiments
-social science so it is difficult to set up experiments and test hypothesis
-other variables are always changing
what is a positive statement?
a statement without judgement that can be tested to be proven or disproven
what is a normative statement?
a statement which is subjective and based on opinion
what is the role of value judgements?
-economists tend to use positive statements to back up normative statements
-value judgement can influence economic decision making
what is the problem of scarcity?
-people have finite needs but infinite wants
-resources are scarce in relation to the demand placed upon them
what is a renewable resource?
-a resource that can be replenished or replaced on a level equal to consumption
-e.g oxygen, solar power
what is a non renewable resource?
-a resource that can not be readily replaced by natural means on a level equal to consumption
-e.g fossil fuels like coal, oil and gas
what is opportunity cost?
the benefit lost from the next best alternative forgone
what are the four factors of production?
-land
-labour
-capital
-enterprise
what is a capital good?
-goods produced in order to aid the production of consumer goods in the future
-e.g machines, furniture, buildings
what is a consumer good?
-goods demanded and bought by households and individuals
-e.g clothing, food products
what is specialisation?
-the production of a limited range of goods by a company/individual/country
-means that trade is essential as it is the only way they are able to access all that they need
what is the division of labour?
when labour becomes specialised in a particular part of the production process
advantages of division of labour
-labour productivity will be increased as they will be concentrating on one thing
-might lead to higher quality of goods and services
-time is not wasted moving between jobs or getting out tools
-training will be cheaper as they only need to be trained to do one thing
disadvantages of division of labour
-one specific task can become boring leading to lower quality work
-reduction in craftmanship as there is a more standardised product due to mechanism
advantages of specialisation
-the theory of comparative advantage states countries should specialise in producing those goods where they have a lower opportunity cost, and so they are
relatively best at producing
-this will help them boost their economy so there is greater output globally
disadvantages of specialisation
-countries may become over-dependent on one particular export and if this fails their economy may collapse
-high interdependence
the four functions of money
-a medium of exchange
-a measure of value
-a store of value
-a method for deferred payment
free market economy
-individuals are free to make their own choices and own the factors of production without government interference
-resources are allocated through the price mechanism
Adam Smith (1723- 1790)
-invisible hand which allocates resources to everyones advantage
-he believed competition in the market caused lower prices as firms wanted to be competitive and so this benefits the consumer as they can get goods
cheaply
Friedrich Hayek (1899- 1992)
-state control economy leads to loss of freedom
-believed that the poor in a free market were better off then the poor in a command economy because at least they had freedom
-governments plans were only suited to a small minority of society but everyone had to obide to them
advantages of free market economy
-system is automatic due to the invisible hand
-consumers have freedom of choice
-high motivation
-political freedom
-productive efficiency as high competition
-tend to have higher growth
disadvantages of free market economy
-high levels of inequality
-lack of merit goods and little control of demerit goods
-resources could be wasted on unproductive expenses
-monopolies
-externalities
command economy
-all factors of production, except labour, is owned by the state and labour is directed by the state
-there is no private property and everyone is assumed to be selfless, working for a common good
-resource allocation is carried out by
the government, rather than the price mechanism
Karl Marx (1818- 1883)
-believed in the command economy and criticised capitalism
-his theory stated that these underpaid workers would inevitably rise against property owners and seize control of the means of production
advantages of command economy
-provides a minimum standard of living, ensuring no one is extremely poor as there is less inequality
-there is less wastage of resources as there is no need for competitive services nor
advertising
-long term planning means that the industry doesn’t have to keep changing and
shifting resources
-standardised products means that they are produced cost effectively.
disadvantages of command economy
-impossible for the state to make so many decisions correctly, which could lead to
over or under supply and a waste of resources
-slow decision making, could increase bribery and corruption
-less motivation and efficiency
-consumers lose their freedom
mixed economy
both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country
governments roles in a mixed economy
-creating a framework of rules: they prevent the abuse of monopolies
-supplements and modifies the price system: they produce public and merit
goods and limit the production of demerit goods
-redistributes income from rich to poor
-stabilises the economy: the government will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand
