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Micro > 1.1 - Nature Of Economics > Flashcards

1.1 - Nature Of Economics Flashcards

1
Q

What is ceteris paribus?

A

Assumes that all other factors are held equal, so nothing else.

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2
Q

Why can’t economists use scientific experiments?

A

There is no way of knowing what will happen in the economy - it is unpredictable.

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3
Q

What do economists use instead of experiments?

A

Models - they are devised to picture real-life scenarios.

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4
Q

What is a positive statement?

A

An objective statement - can be testified with factual evidence and is either accepted or rejected.

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5
Q

What is a normative statement?

A

A subjective statement - based on judgement and opinion.

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6
Q

What is the basic economic problem?

A

Scarcity.

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7
Q

What is scarcity?

A

People having finite resources but infinite wants.

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8
Q

What do economies do to try and solve the economic problem?

A

Work out what to produce, how to produce it and for who.

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9
Q

What is opportunity cost?

A

The benefit lost from the next best alternative forgone.

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10
Q

What are the alternatives of an opportunity cost known as?

A

Trade-offs.

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11
Q

Who are the 3 economic agents?

A

Individuals, firms and governments.

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12
Q

What do the economic agents do?

A

Partake in the economic activity and the demand / supply for goods.

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13
Q

How do firms choose how to produce something?

A

They combine the 4 factors or production to understand the best way to produce.

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14
Q

What are the 4 factors of production?

A

Capital
Enterprise
Labour
Land

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15
Q

What is a PPF?

A

A production possibility frontier - can be used to show different combinations of output for 2 products.

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16
Q

What does a PPF allow us to understand?

A

The problem of choosing how to use scarce resources + the constant presence of an opportunity cost when one combination is chosen over another.

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17
Q

What does it mean if the point is ON THE LINE?

A

Production is efficient.

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18
Q

What does it mean if the point is BELOW THE LINE?

A

The production is inefficient - not all the resources are being used.

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19
Q

What does it mean if the point is ABOVE THE LINE?

A

It is unachievable - there are not enough resources to get there.

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20
Q

Why are the 2 goods of a PPF always competing?

A

Because one product is always chosen over the other, so the economic agent sacrificed the benefit of using the other good.

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21
Q

What is economic growth caused by?

A

An increase in any of the factors of production.

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22
Q

What happens to the PPF when economic growth happens?

A

Shifts to the right - causes an increase in productive capacity for greater output.

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23
Q

What causes a shift to the RIGHT of a PPF? (5)

A

Higher productivity
Better input management
Increased labour
Innovation / invention
Discovery of new resources

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24
Q

How do trade-offs affect PPFs?

A

Trade-offs between competing products happen because there is a choice on how to use resources.

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25
Q

What is a capital good?

A

A good producing a stream of income in the future - will benefit FUTURE generations as it is a long-term benefit.

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26
Q

What is a consumer good?

A

A good produced for IMMEDIATE benefit to the consumer - is a short-term benefit.

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27
Q

What is marginal analysis?

A

Can be used to enhance our understanding of PPFs.

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28
Q

What is economic growth?

A

The percentage change in total output of a country.

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29
Q

What is economic decline?

A

When there is a reduction in an economy’s production capacity.

30
Q

What happens to a PFF when economic decline happens?

A

A shift to the left - less output is produced.

31
Q

What causes a shift to the LEFT of a PPF? (4)

A

Natural disasters
War and conflict
Outward migration
Economic recession

32
Q

What is economic sustainability?

A

The impact of economic choices on objectives such as employment / growth.

33
Q

What does high unemployment rate cause?

A

Unlikely sustainability.

34
Q

What does too much economic growth cause?

A

Run out of resources - unsustainable.

35
Q

What is social sustainability?

A

The impact of economic choices on society.

36
Q

What is important for households to have?

A

Should be able to access decent quality living to improve Iife standards.

37
Q

What is environmental sustainability?

A

The impact of economic choices on the environment.

38
Q

What should production processes consider when considering the environment?

A

Production should be taken with minimizing negative impact, and resources should be used efficiently.

39
Q

What is specialisation?

A

It occurs when economic units such as individuals, firms, regions or countries concentrate on producing specific goods or services.

40
Q

What is division of labour?

A

Using specialised workers within an organisation - can lead to increased output per worker.

41
Q

What is Adam Smith’s theory?

A

The division of labour occurs when workers are assigned specific tasks to do in the workplace, which can lead to consistency and improved job performance.

42
Q

What are the pros of division of labour? (3)

A

More efficient
More specific
Can achieve economies of scale

43
Q

What are the cons of division of labour? (3)

A

Can become monotonous - boring / repetitive
Low productivity can lead to affected quality
Threat of structural unemployment

44
Q

What is structural unemployment?

A

When a worker becomes so specialised in a certain area that if they are fired / the business fails, their skill range is too narrow to be able to find another job.

45
Q

How does specialisation benefit economic agents? (3)

A

They can:
Reduce unit costs
Improve quality
Use technology to improve accuracy and speed

46
Q

How does specialisation affect PPFs?

A

Businesses are able to trade with other economic agents - PPF shifts to the right due to economic growth.

47
Q

What are the benefits of specialisation by COUNTRY? (4)

A

Improves trade abilities
Customers have more choice —> more satisfied
Quality of products improved
Countries can become interdependent

48
Q

What are the costs of specialisation by COUNTRY? (4)

A

Over-reliance in resources that are limited
Structural unemployment - declining quality of life
Threat of external factors
Developing countries can only be secondary / tertiary industries

49
Q

Why is the exchange of goods / services necessary for businesses?

A

Allows them to receive what is necessary for them to survive.

50
Q

What is barter?

A

When goods / services are exchanged between 2 parties without a medium.

51
Q

Why is money now used instead of barter?

A

It is efficient.

52
Q

What does money act as? (4)

A

Medium of exchange
Store of value - saved for later as value increases
Unit of account - measures value of a good
Standard of deferred payment - pay later

53
Q

What is a free market?

A

When the basic economic problem is solved by market forces. There is little government intervention.

54
Q

How does a free market work? (2)

A

Businesses supply at a price that allows them to make a profit.
Customers will demand what is supplied with prices they can afford.

55
Q

What is market mechanism?

A

When consumers / producers / governments want to maximise things for their personal benefit

56
Q

What does each member of the economy want to maximise? (3)

A

Consumers - personal welfare
Producers - profits
Governments - benefits to society

57
Q

What are some characteristics of a free market? (5)

A

Private secure ownership
Free decision making
Limited government intervention
Competition for market share / employment / salaries
Allocation of resources is determined by market forces

58
Q

What is the invisible hand theory?

A

The self regulating behaviour of the market place - believes that individuals seeking profit will naturally lead to an efficient allocation of resources.

59
Q

What organisational approach does the invisible hand theory suggest?

A

Laissez-faire

60
Q

What are the pros of a free market economy? (5)

A

Competitive markets
Encourages innovation / entrepreneurship
Productive efficiency
Economic growth
Consumers have more choice

61
Q

What are the cons of a free market economy? (3)

A

Inequalities in wealth
Can lead to loss of control
Provision of demerit goods

62
Q

What are demerit goods?

A

Ones whose consumption are considered unhealthy / undesirable. e.g. alcohol, drugs, cigarettes.

63
Q

What are merit goods?

A

Ones that beneficial to the community, e.g. libraries, health care, education, parks.

64
Q

What is a mixed economy?

A

When resources are allocated by a combination of both the free market and government.

65
Q

What is the goverment’s role in a mixed economy? (3)

A

Reduce negative externalities
Control demerit goods
Supply merit goods

66
Q

What is the state’s role in a mixed economy? (6)

A

Provide public goods
Control macroeconomic variables
Provide a legal framework
Reduce customer exploitation
Encourage free trade
Create competition

67
Q

Who is Friedrich Hayek?

A

Believed that the state should maintain the rule of law, but the state should not interfere in the market.

68
Q

What did Friedrich Hayek believe in?

A

Believed collectivism would lead to totalitarian rule with restriction - was AGAINST this.
Instead he advocated for decentralisation, where the state was to act as a safety net with limited government intervention.

69
Q

What is a command economy?

A

When resources (including labour) are allocated by the government, they have total control that allows greater quality across all businesses + removes demerit goods.

70
Q

Who is Karl Marx?

A

Believed that labour was being exploited by capitalism and business owners took advantage of them to make a profit.
This would lead to an imbalance between wealthy capitalists and a mass of poor labour.

Micro (2 decks)

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