1.1 Nature of Economics Flashcards
What is Ceteris Paribus?
It is an assumption that all other variables remain constant.
Why may Economics be seen as not a science?
It studies human nature and human nature cannot be reduced to scientific laws. However, when looking at groups of individuals it may be easier to spot trends and predict behaviours.
What is a positive economic statement?
These are economic statements which do not have any obvious judgement or bias. They can be proven true or false. Statements about the future can be positive if they can be proven true in the future.
What is a normative economic statement?
This is an economic statement which uses judgement and cannot be proven true or false.
How are economic statements used to make valued judgements?
Positive economic statements are often used to back or support normative economic statements.
What is the basic economic problem?
It is a problem of scarcity. It is that consumers have infinite wants, but there are finite and limited resources to fulfill these infinite wants. Economies try to solve these problems by selecting what to produce, how to produce and whom to produce for.
What is a renewable resource?
A renewable resource is one which can be replenished at the same rate it is being consumed. A non renewable resource cannot be replenished at the same rate.
What is an opportunity cost?
The cost of the next best alternative that money can be spent on.
What is a factor of production?
The inputs and resources that firms need to produce goods and services. These are land, labour, capital and enterprise.
What is a PPF?
It shows the maximum potential output with regard to two goods that an economy can produce at a given time frame with a fixed amount of technology.
What does a shift out in the PPF mean?
There has been an increase in quantity or quality of the factors of production.
What does it mean if you are not operating on the PPF?
An inefficient or misallocation of factors of production, thus spare capacity.
What are capital and consumer goods?
Capital goods are the goods used to produce other goods, consumer goods are the ones used to fulfill consumer demands.
What is specialisation?
This is when an individual, firm, region or country reduces their production to a limited range of goods and services.
What is the division of labour?
When certain individuals are allocated to specific parts of the production process.
What did Adam Smith believe about the division of labour?
Adam Smith believed that division of labour eld to increased efficiency. A pin factor could make 5,000 pins per employee if they split the production process into 18 teams, but if they did not they could make less than a few dozen each.
What are the advantages of division of labour? (5)
Labour productivity will increase
Higher quality of goods and services
Less time wasted on changing tasks
Lower training costs
Specialist tools can be bought which increase efficiency
What are disadvantages of division of labour? (4)
It reduces the craftsmanship of the goods
It can lead to boredom and therefore lower quality of goods
It can lead to structural unemployment if they are only trained in one task.
Interdependence leads to greater chance of delays in production.
What are the functions of money?
Store of Value
Method of Deferred Payment
Medium of Exchange
Measure of Value
What is a free market economy?
This is when the resources are allocated by the price mechanism. Consumers and firms own all the factors of production and there is no government intervention.
Which economists believe in the free market?
Adam Smith and Friedrich Hayek
What did Adam Smith believe about the free market?
He believed that in the free market there is an invisible hand which controls prices and provides other market forces. Therefore due to self interest, the free market will allocate resources best. However he did believe that government need to offer property rights and provide goods such as roads.
What did Friedrich Hayek believe about free market economies?
He believed that in free market economies poor people were better off because they at least had the free will to choose what they want to do. He also believed that governments only truly reflect the actions of a small number of people within an economy.
What are the advantages of the free market? (6)
Consumers have freedom of choice
Firms are productively efficient
The market forces are automatic
There is political freedom
They tend to have higher growth
High motivation (American Dream)
What are the disadvantages of free market? (5)
Low merit goods, High demerit goods
Externalities
High Inequality
Unproductive expenses on advertising
May be formation of monopolies
What is a command economy?
All factors of production, except for labour, are owned by the government. There is an absence of property rights and all goods are standardized.
Who believed in the command economy?
Karl Marx believed in the command economy because he believed it would lead to workers being paid fairly as in capitalist societies they would be exploited. He also believed capitalist society would breed growing income inequality in the long term.
What are the advantages of the command economy?(5)
There is a minimum standard of living
Products are standardized so it is cost effective
There is long term planning so there will be no shocks
Low wastage of resources
Merit goods will be provided and externalities will be considered
What are the disadvantages of common economies? (5)
There is imperfect information so there will always be wastage
There can be bribery and corruption
Effects will take time as it has to be passed through governments
Consumers loose their free choice as its rules by dictators
Less motivation and efficiency
What is a mixed economy?
An economy where resource allocation is done by both governments and firms.
What is the governments roles in the free market? (4)
Provide a framework for rules
Redistribute incomes
Provide merit goods
Provide stability through fiscal and monetary policy
