1.1) nature of economics Flashcards
what are the two kinds of economic statements?
positive statements - objective statements that can be tested by referring to evidence, doesn’t have to be quantitative
- e.g. ‘reduction in income will decrease the number of people shopping for luxuries’
- important because they can be tested to see if ideas are correct
normative statements - subjective statements that contain a value judgement - basically opinions
- cannot be confirmed if the statement is true or not - only agreement or disagreement
- e.g. ‘use of fossil fuels should be taxed highly’
- important because they influence decisions and policy
what is the economic problem?
how can infinite wants and needs be fulfilled by finite resources as effectively as possible?
- essentially the problem of efficiently allocating scarce resources
what are the factors of production and their rewards?
land - natural resources
- territory, non-renewable, renewable, materials, water and animals
- almost all scarce, except air
- reward is rent
labour - work done by people
- contributions to the production process
- labour force - people available to work
- human capital - how productive a worker is
- rewards are wages
capital - equipment used in production
- equipment, factories, school to help produce = must be made before
- reward is interest
enterprise - willingness to take a risk to make a profit
- use the other three to create a product and set up a business
- if it succeeds then they gain a profit
what does a production possibility frontier (PPF) show?
shows the options that are available when you consider the production of just two types of goods or services
- can also be capital - goods used in the production of other goods - or consumer goods on each axis
what do the points on a PPF indicate?
- all points on the PPF are productively efficient but not allocatively because they don’t - reflect the production of goods
- outside the PPF isn’t achievable using the current level of resources in the economy
- inside the PPF means it is productively inefficient and more of a product can be made without a compromise
what is a trade off?
when you have to choose between conflicting objectives because they can’t all be achieved at the same time
what is opportunity cost?
it is the cost of the next best alternative foregone
what causes the PPF to shift?
anything that causes the level of resources to change e.g.
- increased number of workers -> increased possible output -> PPF shifts outward
- improved technology or improvements to labour
BUT
- natural disaster - PPF shifts inwards
what is a free market economy?
- allocates resources based on supply and demand and the price mechanism
- anything can be sold at any price that people will pay for it
- adam smith: believer of the free market and described how the ‘invisible hand’ would allocate resources in society’s best interest
- marx was critical of this ans argued that it created a small ruling class that exploited working wage earners
- hayek believed that consumers and producers had the best knowledge of what they want and need and govts lack this information
what are the pros and cons of a free market economy
+ efficiency - only the products at the best value will be in demand so firms have the incentive to try and make goods as efficiently as possible
+ rewards for entrepreneurship - ideas for new, better products or production methods can make a lot of money, hence encouraging risk-taking an innovation
+ more choice - due to incentives for innovation. plus, consumers can buy whatever they want without government restrictions
- inequalities - can lead to huge differences in income that are regarded as unfair. anyone who isn’t able to work would receive no income - lack of welfare
- non-profitable goods may not be made e.g. drugs that treat rare conditions may never sell enough
- risk of monopolies by successful businesses allowing them to abuse their dominance
what is a command economy?
- a planned economy, where the government decides how resources should be allocated
- they also control wages and the pricing of goods etc.
- aligns with marx’ ideas of communism
what are the pros and cons of a command economy?
+ thought to maximise welfare - as govts. have control over the economy, they can prevent inequality and redistribute income. plus, ensure that beneficial and essential goods are produced
+ low unemployment - can try to provide everyone with a job and a salary
+ government authorities prevent monopolies
- lack of information means that govts. may make poor and slow (ineffcient) decisions about what should be produced
- consumers have limited choice in what they can consume and firms are limited in what they can make
- govt owned firms have no incentive to innovate or take risks because they don’t need to make a profit
what is a mixed economy?
- a combination of free market and government intervention (60/40)
- govt = public sector, businesses = private sector
- most countries have a mixed economy
what is productivity?
- way of measuring how efficiently a company or economy is producing its output - can be measured overall or per FoP
- labour productivity is output per worker - can improve through training, experience, improved technology ++ specialisation
how does specialisation lead to the division of labour?
- division of labour is a type of specialisation where the production is split into different tasks and specific people are allocated to each task
- smith explained that productivity could be increased through DoL
