1.1 Nature of economics Flashcards
1.1.1 - 1.1.6
What are the 3 key economic questions?
- What to produce
- How to produce
- For whom to produce for
What is the economic problem?
We have unlimited wants but finite resources
What is a normative statement?
Statements that carry value judgements
What is a positive statement?
Statements that carry true fact
How is economics a social science?
- As it cannot be tested
- Not based on facts
- Based off of value judgement and human behaviour
- Contains theories and models
What are consumer goods?
Goods and services that satisfy our needs and wants
What are capital goods?
Used to produce consumer goods and services
What are the 4 factors of production
- Land
- Labour
- Enterprise
- Capital
What are the factor rewards for land?
Rental income to whoever owns the property
What are the factor rewards for labour?
Workers are paid wages and saleries
What are the factor rewards for enterprise?
Businesses and firms earn profit
What are the factor rewards for capital?
Interest and Dividends
What is opportunity cost?
Cost of the next best alternative forgone
What are the 3 economic agents?
- Consumers
- Producers
- Government
What is the aim of consumers?
To maximise satisfaction
What is the aim of producers?
To maximise profits
What is the aim of the government?
To maximise economic and social welfare of citizens
Why may consumers act irrationally?
- Impulse buy
- Overconsumption
- Addiction
What is a non-renewable source?
Cannot be readily replaced at the same rate that it is being consumed
What is a renewable source
Can be readily replaced
What is ceteris paribus
All factors are kept equal in order to make an assumption
(i.e - an increase in factor causes an increase in the latter)
What is the difference between a want and a need?
Want = desire
Need = necessity
What is social welfare?
Anything society benefits from
What does PPF stand for?
Production possibility frontier
What are PPF’s
shows the possible combinations of two goods you can produce
What does it mean when a point on a PPF graph falls outside the curve
Unattainable: not enough resources
What does it mean when a point on a PPF graph falls inside the curve
Inefficient use of resources/ Products are not being used
What is the law of diminishing marginal terms
If a factor of production is increased past optimal then it will become less productive at a diminishing rate
What does it mean if a PPF graph is a straight line?
constant opportunity cost:
What is productive efficiency
Maximum output of products with minimum cost
What is allocative efficiency
Resources are distrubuted in a way that maximuses overall satifaction in an economy
What does an outward shift on a PPF curve show?
The economy is growing and therefore can produce more of both choices
What does an inward shift on a PPF curve show?
The economy is shrinking due to a failure to allocate resources
What cause an outward shift
- Better management of factor inputs
- Increase in the stock of capital and labour supply
- Innovation and invention
- Advancements in technology
What is the primary sector?
Involves extracting raw materials
What is the secondary sector?
Involves the transformation of primary resources into goods and services
What is the tertiary sector?
Businesses that provide services i.e schools
What is the private sector?
Part of the economy owned by private individuals and companies
What is the public sector?
Part of the economy where production id organised by the government
What is specialisation?
Individuals/firms focus productive efforts on a particular task and therefore it becomes their expertise
What is division of Labour?
A specific task in the manufacturing process is allocated to a worker
Which economist stated that Division of Labour would help in the growth of a society?
Adam Smith
What are the advantages of specialisation?
- Higher Productivity & Efficiency
- Lower Costs
- More jobs opportunities
What are the disadvantages of specialisation
- Changes in fashions / trends
- Limits versatility.
- Depletion of non renewable resources
Advantages of division of labour
- Efficient use of resources
- Time efficient
- Lower prices for consumers as production increases
Disadvantages of division of labour
- Boredom due to monotony
- Workers demand higher wages
- Mistakes affect full production process
Benefits of specialisation for countries
- Allows for trade when surplus is made
- Better quality goods
- Greater choice for consumers
Disadvantages of specialisation for countries
- Over-reliance on specific nations
- Risk of over-specializing and structural unemployment
- Negative externalities
What are the characteristics of money
- Difficult to forge
- Limited in supply
- Divisible
- Durable
- Portable
What are the 4 functions of money
- A medium of exchange
- A store of value
- A measure of value
- A means of deferred payment
What does deferred payment mean
Lets you buy things now and pay later, like using a loan or credit.
What does store of value mean
You can save money and use it in the future because it keeps its worth
What does measure of value mean
Compare the worth of different goods and services by giving them a price
What does means of exchange mean
Money makes buying and selling easy because everyone accepts it
Which economist criticised command economy and why?
Frederick Hayek: believes in the ‘knowledge problem’ no central authority could ever have the knowledge held by individuals and businesses across society and planning therefore was prone to failure as society has changing needs
What is a command economy?
Production, investment, prices and incomes are determined by the government
What is free-market economy?
Prices of goods and services are determined through market forces (invisible hand)
What are market forces?
The ‘invisible hand’ that allocates resources
What is a mixed economy?
Prices of goods and services are allocated by a mix of government intervention and market forces
Provide countries that uses command economy
North Korea and Cuba
Provide countries that uses free market economy
Ireland, Singapore, Switzerland, Taiwan
Provide countries that has a mixed economy
UK, USA, Japan
Positives of free market
- Incourages innovation - competitive
- Increase in quantity/ quality
- Wider range of products increasing choice
- Customer satisfaction increases
- Greater control (no government intervention)
Negatives of free markets
- Prone to exploit workers
- Provision of demerit goods
- Lack of regulation: i.e crime, pollution, safety, risk
Positives of command markets
- Basic needs are met
- Provision of merit goods
- Equality through fair allocation
Negatives of command markets
- Opportunity costs
- Lower quality/ quanitity of goods
- Lack of incentives and innovation
- Poor use of resources
- Poor budgeting can ruin the economy
What are demerit goods
Goods deemed to be bad for society but are overconsumed
What are merit goods
Goods deemed to be good for society but are under consumed/provided
Which economist believes in free market and why?
Adam Smith: believes in the ‘invisible hand’ market forces are able to regulate themselves
Which economist believes in command economy and why?
Karl Marx: believes free market causes inequality and that owners/ firm profits increase at the expense of exploitation
