1.1 Nature of Economics Flashcards
what does cetaris paribus mean
all other variables remain constant
what is a positive statement
one that is a statement of fact - can either be true or false
what is a normative statement
one that is based on opinions or beliefs - they cannot be proven
what is the basic economic problem
resources are scarce - humans have infinite wants and needs but only finite resources
what is a renewable resource
one that can be used repeatedly and naturally replenished
what is a non-renewable resource
one that cannot be naturally replenished
what is opportunity cost
the loss of the next best alternative when making a decision
what does a PPF show
the maximum possible output of two G/S a country can generate if it uses all of its FOPs
what is a capital good
assets that help a firm or country to produce output (manufacturing)
what is a consumer good
end products that have no future productive use
what does an outwards shift of a PPF mean
economic growth - increase in the productive potential of an economy
what causes an outward shift of a PPF
an increase in the quality or quantity of available FOPs
what is the division of labour
when a task is broken up into several component tasks
what are the pros of the division of labour and specialisation
lower cost per unit due to higher productivity
lower costs can mean lower prices
lower costs can mean higher profits and higher wages
increased productivity can allow firms to break into international markets
creation of low skilled jobs
what are the cons of the division of labour and specialisation
task repetition can lead to decrease in worker motivation and boredom
decreased motivation can lead to lower productivity and poorer manufacturing quality
may increase worker turnover rates
mass produced products often lack variety
if a worker loses a job its harder to find a new one since they are only trained in one skill
what is the preferred medium of exchange
money/currency - a measure and store of value and a method of deferred payment
why is bartering problematic
it requires two people to want each other’s good (double coincidence of wants)
what are the 3 main economic agents
consumers
producers
the government
what are the three fundamental economic questions
what to produce?
who to produce for?
how to produce it?
what did Hayek believe
free markets with no government intervention are best. that there were information gaps between what the economy actually required and what the central planners in charge said it required, which created shortages or surpluses of G/S in command economies
what did Smith believe
free markets with some government intervention are best (mixed economy). governments ensure efficiency in the allocation of resources, but felt economies functioned best when private individuals work in their own self-interest
what did Marx believe
free markets lead to capitalism where bosses exploit their workers. which creates inequality. the State should should share means of production and ownership with all workers in society. abolition of private property, and the State becomes the central planner
what is a free-market economy
an economy with no government intervention in the allocation of resources and distribution of G/S
what is a command economy
an economy where all the resources are owned by the state and the government controls the distribution of G/S
what is a mixed economy
a mix of a command economy and a free market, where the government owns some FOPs and distributes some G/S
what are the advantages of a free market
profit incentive motivates people to work
greater variety of G/S
competition leads to higher quality G/S
competition encourages innovation
unlimited profits, income and wealth so higher standards of living
more efficient use of scarce resources
what are the disadvantages of a free market
wealth is concentrated as the rich are able to buy up scarce FOPs
increased inequality
product quality may fall as firms try to increase profit
exploitation of workers and consumers
monopolies develop as firms increase market power
what are the advantages of a command economy
less inequality
all workers receive the same wage to achieve social equality
less unemployment
resources can be directed to urgent priorities
the government owns monopoly businesses so consumer exploitation is avoided
what are the disadvantages of a command economy
receiving the same wages disincentives people from gaining difficult skills
lack of competition means less innovation
lack of efficiency as central planning always leads to surplus of G/S
black markets exist to address shortages
lower standards of living
restricted personal freedoms
