1.1 Nature of economics Flashcards
1.1.1 Economics as a social science
What is Economics?
the allocation of scarce resources to provide for unlimited human wants
1.1.1 Economics as a social science
What does Ceteris Paribus mean?
“All other things remaining equal”
This assumption is needed since economists cannot test models in scientifically controlled laboratoy conditions. e.g. the demand curve would be true if other factors (like consumer income) remained the same.
1.1.2 Positive and normative economic statements
What is a positive economic statement?
A statement which is based on facts which can be tested as true or false & are value free.
It is where economists explain the outcome of a particular policy, but are not expected to take sides.
1.1.2 Positive and normative economic statements
What is a normative economic statement?
A statement which is based on value judgements which cannot be tested as false.
Often included the words: ought, should, fair, unfair, better or worse.
1.1.2 Positive and normative economic statements
What is the role of value judgements in economic decision making and policy?
Personal preferences, beliefs & subjective assessment underpin normatice economics. This can lead to different policy prioritisation (by producers) and different ways of public spending (the government).
e.g. equity vs efficiency or environment vs economic growth
1.1.3 The economic problem
What is the basic economic problem/ scarcity?
There are finite resources compared to infinate human wants, so choices have to be made about how to use those resources.
1.1.3 The economic problem
What is an opportunity cost?
The value of the next best alternative forgone.
Consumers, producers, & governments all face opportunity costs.
1.1.3 The economic problem
What is marginal analysis?
The effects of producing or consiming on extra unit of a good or service - this mau involve both benefirs and costs.
1.1.3 The economic problem
What is a renewable resource?
A resource whose stock level can be replenished naturally over a period of time.
1.1.3 The economic problem
What is a non-renewable resource?
A resource whose stock level decreases over time as it is consumed.
1.1.3 The economic problem
What is a free good?
A good that is not scarce & available without limit. It doesn’t have an opportunity cost.
1.1.3 The economic problem
What is an economic good?
A good that is scarce & must be allocated efficiently. It has an opportunity cost.
1.1.4 Production possibility frontiers
What does a production possibility frontier show?
A production possibility fronteir shows the maximum potential level of output for two goods or services that an economy can achieve when all its resources are fully & efficiently employed, given the level of technology available.
It can be used to illustrate scarity & opportunity cost.
1.1.4 Production possibility frontiers
What is a consumer good?
A good, such as a chocolate bar, that directly provided utility to consumers. It is wanted for the satisfaction it gives.
1.1.4 Production possibility frontiers
What is a capital good?
A good that is used to produce consumer goods or services, such as a machine that helpes make chocolate bars. It is wanted not for its own sake, but rather for the consumer goods & services it can produce.
1.1.4 Production possibility frontiers
What happens if you increase the production of capital goods?
Short term: current living standards will fall.
Long term: it increases the rate of economic growth, as capital goods are crucial for increasing production. Enables future living standards to rise at a faster rate.
1.1.4 Production possibility frontiers
How can economic growth be shown on a PPF graph?
By an outward shift on a PPF graph.
1.1.4 Production possibility frontiers
What are some causes for shifts in the PPF curve?
- an increase in the quantity/ quality of resources
- more education & government training schemes
- more investment & development of new technology
- ^production factors
1.1.5 Specialisation and the division of labour
What is specialisation?
When an individual, firm, region or a country concentrates on the production of a limited range of goods & services.
1.1.5 Specialisation and the division of labour
What is division of labour?
The specialisation of workers on individual tasks in the production process to increase efficiency.
1.1.5 Specialisation and the division of labour
Who created the division of labour?
Adam Smith
1.1.5 Specialisation and the division of labour
What are the advantages of the division of labour?
- ^labour productivity -> higher living standards
- ^efficiency of resources -> reduced the cost per unit of output (as capital equipment can be used continuously throughout production)
- ^quality as workers are specialised
- less time spent training each worker
1.1.5 Specialisation and the division of labour
What are the disadvantages of the division of labour?
- repitition -> monotony/ boredom ->^turnover of staff -> ^recruitment costs
- easier to replace workers with machines -> structural unemployment
- interdependence in production
1.1.5 Specialisation and the division of labour
What is the first function of money?
Medium of Exchange: enables the buying & selling of products, making exchange easier. Money eliminates the need for barter.
1.1.5 Specialisation and the division of labour
What is the second function of money?
Measure of value: enables a value to be placed on products so they can be brought & sold with ease while also enabling comparisons between the relative values of products.
1.1.5 Specialisation and the division of labour
What is the thrid function of money?
Store of value: a convenienct way of storing wealth so that it can be spent at a later date. It will tend to hold its value in the short run as long as inflation remains low.
1.1.5 Specialisation and the division of labour
What is the fourth function of money?
Method of deffered payment: enabled borrowing & lending. A price is usually set for this – known as the rate of interest.
1.1.6 Free market economies, mixed economy and command economy
What is a free market economy?
Where all resources are privately owned & allocated via the price mechanism. Economic decisions are decentralised as there is minimal government intervention.
1.1.6 Free market economies, mixed economy and command economy
Who was Adam Smith?
Classical economic thinker. He was asscoiated with the free market economy.
He referred to the ‘invisible hand’ of self-interest as guiding supply & demand in markets.
1.1.6 Free market economies, mixed economy and command economy
Who was Friedrich Hayek?
An economic thinker who believed in the free market economy & minimal government intervention.
1.1.6 Free market economies, mixed economy and command economy
What is the main advanatge of a free market economy?
**Economic efficiency & lower prices:
**competition ->firms try to keep lower production costs & competitive prices (productive efficiency)
competition -> more demand is met (allocative efficiency)
Therefore, the price mechanism will equate consumer demand with producer supply.
1.1.6 Free market economies, mixed economy and command economy
What are some other advantages of a free market economy?
- ^quality of products to get competitive advantages
- greater choice (also more employment opportunities)
- financial incentives - more risks taken & people work harder
1.1.6 Free market economies, mixed economy and command economy
What are the disadvantages of a free market economy?
- competition -> monompolies may form
- unequal distribution of income & lack of welfare = poverty
- external cost of pollution & benefit of education are often ignored.
- information gaps persist: lack of regulations to protect consumers
- can cause ^inflation during a boom & ^unemployment during a slump
1.1.6 Free market economies, mixed economy and command economy
What is a command economy?
Where there is public ownership of resources & these are allocated by the government & decision making is centralised.
1.1.6 Free market economies, mixed economy and command economy
Who was Karl Marx?
A German philosopher & economist of the 19th century who believed that production should be directed on the basis of human need rather than profit. He was concerned with the exploitation of workers.
1.1.6 Free market economies, mixed economy and command economy
What are the advantages of a command economy?
- cooperation between firms -> ^levels of ouput (which replaces ^profits as an aim within businesses)
- reduction in inequality as gov. controls wages
- gov. may limit external costs of production (e.g. pollution)
- gov. can fund public goods (law & order, education, healthcare) which ueild high external benefits to society
- smaller swings in the business cycle = less unemployment & inflation as gov. has more control
1.1.6 Free market economies, mixed economy and command economy
What are the disadvantages of a command economy?
- price mechanism = unable to work so their may be excess demand & excess supply -> insufficient allocation of resources.
- lack of competition -> inefficinecy -> low productivity
- lack of competition -> poor quality (esp when maximising output)
- less choice (also for workers)
- lack of financial incentives
- economic growth & living stabdards grow at a slower rate
1.1.6 Free market economies, mixed economy and command economy
What is a mixed economy?
Where some resources are owned & allocated by the private sector & some by the public sector. Most developed countries are command economies.
1.1.6 Free market economies, mixed economy and command economy
Which economist is associated with the command economy?
Karl Marx
What is the price mechanism?
Where demand and supply determine the price of a good.
automatic - helps balance supply with consumer demand.
the ‘invisible hand’- Adam Smith
