1.1 Nature of economics Flashcards
Define a Positive Statement
- A positive statement is a statement which is objective and made without any obvious value judgements or emotions.
- They can be tested to be proven or disproven
- They are often expressed in the form of a hypothesis that can be analysed and evaluated.
- Statements about the future can be positive if they can be proven or disproven in the future.
What are the 4 Factors of Production?
- Land
- Labour
- Capital
- Enterprise
How is economic efficiency achieved?
Economic efficiency is achieved when resources are used for their best use. At all points on the PPF, resources are allocated efficiently.
What are consumer goods?
Goods that are demanded and bought by households and individuals.
What are capital goods?
Goods that are produced in order to aid the production of consumer goods in the future. Some goods can be both consumer and capital goods, for example computers.
Specialisation and the division of labour in organising production: (Advantages)
- The division of labour enables labour productivity to be increased Workers will be quicker, better and more efficient as they are concentrating on one thing and so can quickly develop their skills. It also is likely they will have natural abilities or talents in their task.
- This may also lead to a higher quality of goods and services, since workers are more skilled at their jobs.
- It is more cost effective to develop specialist tools, improving speed or quality.
- Time is not wasted moving between jobs and getting out tools etc.
- Workers only need to be trained to do one specific task , rather than many, saving time and money.
Specialisation and the division of labour in organising production: (Disadvantages)
- If someone is only doing one specific task, it can make work very boring which will lead to poor quality of work and people leaving the business.
- Firms can take some action to reduce this, for example by playing music.
- There is a reduction of craftsmanship and a much more standardised product because of mechanisation.
- If for some reason production in one process is delayed, every other task has to stop until that problem is solved.
- The workforce do not have wide industrial training and could therefore suffer from structural unemployment.
What are the 4 Functions of Money?
- A medium of exchange : It can be used to buy and sell goods and services and is acceptable everywhere.
- A measure of value : It can compare the value of two goods, such as a table and a skirt. It is also able to put a value on labour.
- A store of value: It is able to keep its value and can be kept for a long time.
- A method for deferred payment: A method for deferred payment:
Advantages of a Free Market Economy
- The system is automatic due to the invisible hand; resources are moved out of production of a good when people stop wanting it or costs are too high.
- Consumers have freedom of choice, called consumer sovereignty.
- There is high motivation as people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish.
- There is political freedom.
- Because firms are in competition, they will produce goods at the lowest cost they can, ensuring productive efficiency.
- In general, freer market economies tend to have higher growth.
Disadvantages of a Free Market Economy
- There tends to be high levels of inequality, since the rich own more factors of production and so can grow richer.
- There may be a lack of merit goods (goods considered as intrinsically good) and little control of demerit goods (intrinsically bad).
- Resources could be* wasted on unproductive expenses* such as advertising, switching the factors of production and providing competitive services.
- If competition disappears then there may be monopolies, who charge high prices and offer low quality of service.
- There is the problem of externalities.
A monopoly is a market structure with a single seller or producer that assumes a dominant position in an industry or a sector.
Advantages of a Command Economy
- The state 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, which is very expensive. - Long term planning means that the industry doesn’t have to keep changing and shifting resources. This is important as some industries may take a number of years to get established and would fail if planning was short term.
- Standardised products means that they are produced cost effectively.
As the government, who are generally motivated by the wellbeing of the country, rather than the companies, who are motivated by profit, decide resource allocation, objectives other than profit can be followed: merit goods are encouraged and increased whilst demerit goods aren’t produced.
Merit goods are those goods and services that the government feels that people will under-consume
demerit goods are products or services that are over-consumed or consumed to a greater extent than is considered socially desirable from the perspective of society as a whole (eg tobacco/alcohol
Disadvantages of a Command Economy
- It is impossible for the state to make so many decisions correctly, which could lead to over or under supply and a waste of resources.
- Decision making will be slow as it has to go through various stages and there could be an increase in bribery and corruption (an increase in bureaucracy).
- As everyone receives the same wage, there is less motivation and efficiency because people know that working harder will not increase their standard of living.
- Consumers lose their freedom and it is often led by dictators.
The government’s role in a mixed economy:
- Creating a framework of rules ; Preventing the abuse of monopolies, consumer protection laws, protecting property rights, also, they ensure safety standards, protecting employers and employees.
- Supplements and modifies the price system (+Merit goods; -Demerit goods)
- Redistributes income - They move income from one group of people to another, from the rich to the poor.
- Stabilises the economy (manage the level of demand in the economy to prevent extremes of too much or too little demand)
- Government intervention occurs mainly through taxation (to raise revenue) and then spending that revenue to redistribute income and provide essential goods/services
- There are many different type of tax intervention including personal income tax, corporation tax, value added tax, tariff on imports, inheritance tax etc.
- Income is redistributed through the creation of a welfare system which often includes unemployment benefits, healthcare, and pension provision
- Government spending is often focused on infrastructure, merit goods (e.g. schools) and public goods (e.g. national defense)
The Distinction Between Free Markets, Mixed and Command Economies
Advantages and Disadvantages of Free Market Economies
Advantages and Disadvantages of Command Economies
What causes an outward shift in the PPF diagram?
- Economic growth occurs when there is an increase in the productive potential of an economy
- This is demonstrated by an outward shift of the entire curve. More consumer goods and more capital goods can now be produced using all of the available resources
- This shift is caused by an increase in the quality or quantity of the available factors of production
What can cause an inward shift in the PPF?
Economic decline - when there is any impact on an economy that reduces the quantity or quality of the available factors of production
One example of how this may happen is to consider how the Japanese tsunami of 2011 devastated the production possibilities of Japan for many years. It shifted their PPF inwards and resulted in economic decline
Pros & Cons of the Division of Labour & Specialisation in Production
Structural unemployment - Unemployment caused by a mismatch between workers skills and the available jobs in the economy
Pros & Cons of the Division of Labour & Specialisation in Trade
State and explain the 4 Functions of Money:
