1.1 - Nature Of Economics Flashcards
what is an economic model?
a simplified representation of a real world economic situation that is used to analyse and understand the underlying economic principles at work
examples of economic agents?
-firms
-households
-governments
what is an economic assumption?
a simplified statement about how economic agents behave in a given situation
ceterius paribus?
-all other factors remain constant
challenging ceterius paribus?
-many other factors can cause an impact
-eg many factors effect unemployment
-assumes no change in labour productivity
-assumes a competitive labour market
1.1.2
what is a positive statement?
- can be tested with available evidence
what is a normative statement?
-based on value judgements
-cannot be tested
-usually contain the word should
what is a value judgement?
-a statement about what an individual or firm believes is the most important
-influences economic decisions
1.1.3
basic economic problem?
-scarcity
-unlimited needs and wants but limited resources
factor of production?
-an input that allows production to take place
FOP examples?
-land
-labour
-capital
-enterprise
land?
-physical space and raw materials
-reward = rent
labour?
-the work done by the people who contribute to production
-reward = wages
capital?
-money or equipment
that allows production
reward = interest
enterprise?
people who use land, labour and capital to make a profit
-reward = profit
what is opportunity cost?
-the value of the loss of the next best option
3 main questions when regarding economic problem?
-what, how and whom to produce for
what does microeconomics focus on?
-how effectively we can meet wants and needs with the limited resources we have
-resources should be allocated where consumers value them the most
what is allocative efficiency?
-using resources as effectively as possible to meet the most highly valued needs and wants
economic objective of individuals?
-higher income = more consumption of goods/services
economic objective of firms?
-maximise profits
economic objective of govs?
-economic growth
-maximise social welfare
-low unemployment
=low + stable inflation
what is the purpose of any economic activity?
to increase people’s economic welfare by creating outputs that satisfy their various needs and wants
1.1.4
what is the PPF?
-production possibility frontier
-an economic model that considers the max possible production that a country can generate if it uses all of its FOP’s efficiently to produce 2 goods/services
law of diminishing marginal returns?
- the satisfaction from consuming an additional unit of the same thing will be less for each additional unit consumed
what does PPF curve show?
-how much an economy can produce with existing resources
-compares 2 different products to show trade off between production as 2 resources are switched between them
PPF: what do we assume?
-all FOP are variable#
-all workers have same skills and abilities
-switch workers from one good to another
what are capital goods?
-assets that help a firm or nation to produce output
what are consumer goods?
-end products that have no further use
using PPF to describe productive potential?
-on curve = efficient allocation of resources
- inside curve = not all resources being used
-outside curve = impossible with current FOP
PPF to describe opportunity cost?
-to produce one more unit of capital goods, economy must give up production of some units of consumer goods
what causes an outward shift in the PPF
-higher productivity of factor inputs
-innovation of new products
-increase in stock of capital and labour supply
-better management of factor inputs
what causes an inward shift in the PPF?
-damaging effects of natural disaster
-large scale net outward labour migration
- trend decline in labour productivity = negative net investment
- destruction of factor inputs
when does economic growth occur?
- when there is an increase in the productive potential of an economy
what is a trade off?
when you have to choose between conflicting objectives because you can’t achieve them all at the same time
what is the opportunity cost?
the loss of the next best alternative when you make a decision
what are some problems with using the concept of opportunity cost?
-often, not all alternatives are known
-some factors don’t have alternative uses
-may be a lack of information on the alternatives
-some factors may be hard to switch
1.1.5
division of labour?
-production split into specific tasks and each worker allocated to a specific task
what are markets a method for?
allocating scarce resources
Adam Smith?
-father of economics
-the wealth of nations
-developed ideas of division of labour and specialisation
agglomeration?
benefits that come when firms and people locate near one another
advantages of specialisation?
-higher labour productivity = lower unit cost of supply = higher business profits = outward shift in PPF
-learning by doing increases output
- higher surplus of output that can be traded internationally = economic growth
-lower prices = higher real incomes and GDP growth
disadvantages of specialisation?
-unskilled, repetitive work can demotivate workers so quality suffers
-higher worker turnover
-little training may = occupational immobility
-mass produced goods lack variety
what are consumer goods?
-goods that satisfy needs and wants
-3 types - durable and non durable, services
consumer durable goods?
-provide a steady flow of satisfaction
consumer non-durables?
products used up in the act of consumption
what is production?
a measure of the value of output of goods and services
-measured by national GDP or an index function
what is productivity?
- a measure of the efficiency of the FOP
-measured by output per worker per hour
-major determinant of economic growth and inflation
calculate output of goods and services?
factor inputs + factor productivity
what does higher productivity allow?
-businesses to pay higher wages and achieve increased profits at the same time
what does specialisation cause to increase?
-increases productivity as capital and skills become more effective
what are the functions of money?
- act as a means of exchange
-store of value
-standard of deferred payment
characteristics of money?
-widely accepted
-hard to counterfeit
-durable
-holds value over time
1.1.6
free-market economy?
-low levels of gov intervention
-decision making is de-centralised
-no pure free markets
command economies?
-high levels of gov intervention
-gov controls allocation of resources
-price mechanism has no role
-karl marx
mixed economies?
gov provides some goods and tries to reduce consumption of other goods
advantages of a free market?
-higher income after tax
-competition acts as an incentive to provide high quality goods
-higher economic growth
disadvantages of a free market?
-businesses can exploit consumers
-markets can be dominated by a few businesses
-higher inequality
-public goods may not be produced
-under provision of merit goods
advantages of a command economy?
-lower inequality than in a free market
-prevents monopoly abuse
disadvantages of a command economy?
-lack of choice in products
-less income after tax
-less incentive
-businesses struggle to maintain high production levels
-inefficient allocation of resources
advantages of a mixed economy?
-similar level of economic development to a free market economy
-under consumed products provided by the state
disadvantage of mixed economies?
-gov intervention can lead to inefficiencies
-higher inequality than command
