1.1 - Nature of Economics Flashcards
Introduction to Markets and Market Failure - Microeconomics
Economics
The allocation of scarce resources to provide for unlimited human wants.
Ceteris Paribus
“All other things being equal” – used to isolate the effect of one variable change at a time.
Positive statements
A factual claim (objective) that can be tested or proven true or false (e.g., “An increase in income leads to more spending”)
Normative statements
A value-based opinion (subjective) that cannot be tested or proven (e.g., “The government should increase the minimum wage”)
The basic economic problem
The allocation of scarce (finite) resources given infinite wants, so choices have to be made.
Factors of production
CELLS: The scarce resources (inputs) used to make the things people want and need (outputs). Individuals and firms are rewarded for providing these in the form of rent, wages, etc.
Capital
as a factor of production, the stock of man made assets and aids to production, e.g., machinery, vehicles, factories, schools, hospitals
Reward/Incentive – Interest from the investment
Enterprise
as a factor of production, risk takers (entrepreneurs) who innovate and produce goods and services
Reward/Incentive – Profit
Land
as a factor of production, is all natural resources
e.g., materials, water, animals, non/renewable resources.
Reward/Incentive – Rent
Labour
as a factor of production, human resources/workforce
Reward/Incentive – Wages
3 fundamental questions when allocating resources
- What to produce? - businesses decide this based on consumer demand
- How to produce it? - businesses decide based on what’s cost-effective and most efficient to minimise the use of our scarce resources
- Whom to produce for? - those who have enough income to afford it
What’s the difference between renewable and non-renewable resources?
Renewable resources regenerate (e.g., solar energy), while non-renewable ones are finite (e.g., oil)
3 economic agents
*Consumers
*Producers
*Governments
Incentives
A factor motivating an economic agent to behave in a particular way. These incentives can be based on religion, financial promises or moral/ethical beliefs.
What does a PPF show?
The maximum potential of an economy and the opportunity cost of using scarce resources.
What does a straight-line PPF show?
An indication of perfect factor substitutability of resources.
Opportunity Cost
The next best alternative forgone
Problems with using the concept of opportunity cost
- Often, not all alternatives are known
*Some factors don’t have alternate uses
*There may be a lack of information on alternatives and their costs.
*Some factors (like land) can be hard to switch to an alternative use.
How does a PPF show opportunity cost?
The slope of the curve shows the amount of one good given up to produce more of another.
What causes shifts in the PPF?
Economic growth (shift outwards) or decline (shift inwards) due to changes in resource quantity or quality.
What’s the difference between capital and consumer goods?
Capital goods are used to produce other goods (e.g., machinery), while consumer goods are for immediate consumption (e.g., food).
Trade off
When you have to choose between conflicting objectives because you can’t achieve all your objectives at the same time. It involves compromising and aiming to achieve each of your objectives a bit.
What is specialisation?
Focusing on a narrow range of tasks to increase productivity.
What is the division of labour?
Breaking down production into separate tasks, allowing workers to focus on specific roles.
