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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
What is a capital good?
A good producing a stream of income in the future - will benefit FUTURE generations as it is a long-term benefit.
26
What is a consumer good?
A good produced for IMMEDIATE benefit to the consumer - is a short-term benefit.
27
What is marginal analysis?
Can be used to enhance our understanding of PPFs.
28
What is economic growth?
The percentage change in total output of a country.
29
What is economic decline?
When there is a reduction in an economy’s production capacity.
30
What happens to a PFF when economic decline happens?
A shift to the left - less output is produced.
31
What causes a shift to the LEFT of a PPF? (4)
Natural disasters War and conflict Outward migration Economic recession
32
What is economic sustainability?
The impact of economic choices on objectives such as employment / growth.
33
What does high unemployment rate cause?
Unlikely sustainability.
34
What does too much economic growth cause?
Run out of resources - unsustainable.
35
What is social sustainability?
The impact of economic choices on society.
36
What is important for households to have?
Should be able to access decent quality living to improve Iife standards.
37
What is environmental sustainability?
The impact of economic choices on the environment.
38
What should production processes consider when considering the environment?
Production should be taken with minimizing negative impact, and resources should be used efficiently.
39
What is specialisation?
It occurs when economic units such as individuals, firms, regions or countries concentrate on producing specific goods or services.
40
What is division of labour?
Using specialised workers within an organisation - can lead to increased output per worker.
41
What is Adam Smith’s theory?
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
What are the pros of division of labour? (3)
More efficient More specific Can achieve economies of scale
43
What are the cons of division of labour? (3)
Can become monotonous - boring / repetitive Low productivity can lead to affected quality Threat of structural unemployment
44
What is structural unemployment?
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
How does specialisation benefit economic agents? (3)
They can: Reduce unit costs Improve quality Use technology to improve accuracy and speed
46
How does specialisation affect PPFs?
Businesses are able to trade with other economic agents - PPF shifts to the right due to economic growth.
47
What are the benefits of specialisation by COUNTRY? (4)
Improves trade abilities Customers have more choice —> more satisfied Quality of products improved Countries can become interdependent
48
What are the costs of specialisation by COUNTRY? (4)
Over-reliance in resources that are limited Structural unemployment - declining quality of life Threat of external factors Develop**ing** countries can only be secondary / tertiary industries
49
Why is the exchange of goods / services necessary for businesses?
Allows them to receive what is necessary for them to survive.
50
What is barter?
When goods / services are exchanged between 2 parties **without** a medium.
51
Why is money now used instead of barter?
It is efficient.
52
What does money act as? (4)
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
What is a free market?
When the basic economic problem is solved by market forces. There is little government intervention.
54
How does a free market work? (2)
Businesses supply at a price that allows them to make a profit. Customers will demand what is supplied with prices they can afford.
55
What is market mechanism?
When consumers / producers / governments want to maximise things for their personal benefit
56
What does each member of the economy want to maximise? (3)
Consumers - personal welfare Producers - profits Governments - benefits to society
57
What are some characteristics of a free market? (5)
Private secure ownership Free decision making Limited government intervention Competition for market share / employment / salaries Allocation of resources is determined by market forces
58
What is the invisible hand theory?
The self regulating behaviour of the market place - believes that individuals seeking profit will naturally lead to an efficient allocation of resources.
59
What organisational approach does the invisible hand theory suggest?
Laissez-faire
60
What are the pros of a free market economy? (5)
Competitive markets Encourages innovation / entrepreneurship Productive efficiency Economic growth Consumers have more choice
61
What are the cons of a free market economy? (3)
Inequalities in wealth Can lead to loss of control Provision of demerit goods
62
What are demerit goods?
Ones whose consumption are considered unhealthy / undesirable. e.g. alcohol, drugs, cigarettes.
63
What are merit goods?
Ones that beneficial to the community, e.g. libraries, health care, education, parks.
64
What is a mixed economy?
When resources are allocated by a combination of both the free market and government.
65
What is the goverment’s role in a mixed economy? (3)
Reduce negative externalities Control demerit goods Supply merit goods
66
What is the state’s role in a mixed economy? (6)
Provide public goods Control macroeconomic variables Provide a legal framework Reduce customer exploitation Encourage free trade Create competition
67
Who is Friedrich Hayek?
Believed that the state should maintain the rule of law, but the state should not interfere in the market.
68
What did Friedrich Hayek believe in?
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
What is a command economy?
When resources (including labour) are allocated by the government, they have total control that allows greater quality across all businesses + removes demerit goods.
70
Who is Karl Marx?
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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