1.1 Nature Of Economics Flashcards
What’s the Neo-classical theory?
Assumption that economic agents will maximise their benefits and act rationally - so supply and demand is used
What are the 3 sectors of the economy?
Primary sector - raw materials extracted Secondary sector - manufacturing Tertiary sector - services
Ceteris Paribus
assuming everything else stays constant
What is Positive economics?
the scientific/ objective study that’s factual
Statements of fact can be tested
supported by evidence
What is Normative economics?
Judgements on how economies and markets should work statements can’t be refuted by evidence Statements contain value judgements
What’s the basic economic problem?
Nearly all resources are scarce, but human wants are infinite, so resources have to be allocated
The 4 factors of production
Land
Labour
Capital
Enterprise/Entrepreneurship
Barter
swapping one good for another without using money
What are the 4 functions that money has to fulfil?
a medium of exchange - buying and selling a measure of value a method of deferred payment (able to make delayed payments) a store of value
Near monies
act as a store of value, but can’t exchange them but are convertible into it have higher paid interest than current accounts E.g - savings account, treasury bills
Computational weakness
When prices like £3.99 are used to look cheaper and harder to add up
What causes the PPF to expand?
Expands when economic growth happens
Quality of resources increase
Quantity of resources increase
Real value
adjusted by inflation
Nominal value
(normal)
values that haven’t been adjusted to inflation
Allocative efficiency
occurs when a social welfare is maximised
What are the 3 types of economies?
Free market economies (Adam Smith)
- Majority of resources allocated via the price/ market mechanism/ market forces of supply and demand
- Limited government intervention
Mixed economies (Friedrich Hayek)
- combines elements of both the private sector and the public sector
- Resources are allocated partly through the price mechanism and partly through government planning
Command economies (Karl Marx)
- A command economy is an economic system where the government makes all decisions about the allocation of resources
- Prices, production, and incomes are controlled by the state, with little or no role for the private sector
What did Adam smith advocate (support)?
Free markets with low levels of government intervention
Recognised that there was a role for governments to ensure efficiency in the allocation of resources and provide public and merit goods
However, he believed economies function best when private individuals work in their own self-interest
What did Friedrich Hayek advocate?
Believed there was flaws in a command economy
Felt that the threat to efficiency and economic growth is overly heavy government intervention
Identified information gaps between what the economies actually required and what the central planners in command economies were saying it required
- These gaps led to shortages or surpluses of goods/services in command economies
What did Karl Marx advocate?
Believed free markets lead to capitalism, which exploits workers
- Creates inequality, which will lead to a breakdown between the classes
The role of the State is therefore to share the means of production and ownership with all of the workers in society
- This required the abolition of private property
