1.1 Nature of Economics Flashcards
What is the meaning of ‘ceteris paribus’?
All other things equal
What are positive statements?
An objective statement based on empirical evidence that can be scientifically tested
What are normative statements?
Matters of opinion that are subjective and cannot be scientifically tested as right or wrong
What is the basic economic problem?
How to satisfy the unlimited wants and needs of the population with limited resources
What is scarcity?
When there is a mismatch between the resources required and the resources available
What is the difference between renewable and non-renewable resources?
Renewable resources can be replenished/replaced on a level equal to consumption
Non-renewable resources cannot be readily replaced by natural means on a level equal to consumption
What is opportunity cost?
The value of the next best alternative forgone
What does the PPF show?
The maximum output combination of two goods that an economy can produce when all resources are being fully employed
What is a trade-off?
When you opt for an objective at the cost of another conflicting benefit
What are 2 problems with opportunity cost?
- Some factors e.g land can be hard to switch to alternative uses
- There may be lack of information of alternatives and their costs
Name 3 factors that lead to an outward shift in PPF
- Improved technology
- Improvements of labour e.g training
- Economic growth
Name 3 factors that lead to an inward shift in PPF
- Recession
- Natural disasters
- International lockdown/pandemic
What are consumer goods?
Goods that are purchased for consumption to satisfy needs and wants
What are capital goods?
Physical assets or resources used in the production of goods and services
What does the slope of PPF represent?
Represents the opportunity cost of producing one good in terms of another good
What is specialisation in terms of firms and workers?
- Producing a limited number of goods instead of a wide variety to more efficiently produce those goods
- A worker only performing one task or a narrow range of tasks
What is the division of labour?
The breakdown of a larger task into smaller, specialised tasks that can be performed by different workers
Name 3 benefits to the business of specialisation
- Increased quality of goods mean firms can increase prices
- Decreased production time means production costs fall
- Workers only need to be trained for one specific task, lowering costs
Name 2 benefits to the worker of specialisation
- Higher pay for specialised work
- Increased job choices - can specialise in jobs they find appealing
Name 2 drawbacks to the business of specialisation
- Repetition leads to boredom in workers, decreasing quality of production
- High staff turnover costs, workers quit due to low morale
Name 2 drawbacks to the worker of specialisation
- Reduces the range of workers skills
- Easier to replace skilled workers with machines as production has been broken down
What are the 4 functions of money?
- A medium of exchange: used to buy and sell goods and services, is acceptable everywhere
- A measure of value: it can compare the value of two goods
- A store of value: it is able to keep its value and can be kept for a long time
- A method for deferred payment: people can pay for things without having money in the present, can lead to debt
What is an economic system?
A way of making decisions about how to allocate resources
What is a market economy?
Where decisions about resource allocation is made between households and firms through supply and demand without the intervention of government
What is a planned/command economy?
An economy where all of the resources are owned by the state and the government controls the distribution of goods/services
What is a mixed economy?
Economy where individuals, firms and the government own factors of production and distribute goods/services (mixture of planned and market economy)
What is 1 advantage and 2 disadvantages of a market economy?
- Firms are competitive so will produce goods at the lowest cost, ensuring productive efficiency (leads to innovation/lower prices + better quality)
- May be a lack of merit goods and little control of demerit goods
- increases inequality = gap between rich and poor grows
What is 1 advantage and 1 disadvantage of a planned economy?
- The state provides a minimum standard of living, ensuring less inequality
- As everyone receives the same wage and standard of living, motivation and efficiency decreases
What is the governments role in a mixed economy?
- Creating a framework of rules
- Supplements and modifies the price system: produces public and merit goods
- Redistributes income e.g income tax, benefits
- Stabilises the economy: attempt to manage level of demand
What are 3 locations on the PPF diagram?
- Inefficient allocation of resources (economy located within PPF)
- Efficient allocation of resources (if the economy is located on any point of the curve)
- Unattainable (any point beyond the PPF, with current FOP)
Who is mostly associated with the benefits of division of labour/specialisation?
Adam Smith
What is Friedrich Hayek associated with?
- Mixed economies
- believed that command economies were flawed
What is Karl Marx associated with?
- Command economies
- believed that free markets lead to capitalism (owners of FOP exploit the workers)
What is Adam Smith associated with?
- Free markets
- advocated for free markets with low levels of government intervention
