1.1 Nature of Economics Flashcards
purpose of models
to explain choices we make in daily life. built on assumptions that simplify analysis
what are assumptions
initial or prior conditions made before a micro / macroeconomic analysis is built
ceteris paribus
the assumption that all influencing factors are kept the same
what are assumptions made by economists
ceteris paribus
people are rational
people aim to maximise utility (satisfaction)
people act independently - when making decisions
information is always accurate
what is a positive statement
objective statements that can be tested and proven or rejected using data
what is a normative statement
subjective statements that carry value judgements - an opinion that varies
role of value judgements
help us to explain why economic polices vary from place to place
what is the basic economic problem
how to meet infinite wants with finite resources
what must societies do with the economic problem
decide what goods and services to produce
the best way to produce goods and services
who is to receive the goods and services
what is scarcity
the finite resources in the market - economic agents must make rational choices
what are the economic agents
government
consumers
firms
4 factors of production
land
labour
capital
enterprise
what are capital goods
goods used to make consumer goods and services - factory machinery
non renewable resources
resources that have a finite supply - i.e oil and precious metals
renewable resources
resources that do not run out and can be renewed - wind power, solar power
opportunity cost
unavoidable trade offs - satisfying one thing resulting in not being able to satisfy something else
what are ppfs used for
to show the max potential output combinations of two goods that an economy can achieve when all resources are fully and efficiently employed
when does a ppf have a straight line
when the rate of substitution between the two items in question is constant or the same.
what causes an outwards shift of the ppf
higher productivity
technological advancements
discovery of more natural resources
what causes an inward shift of a ppf
natural disasters
war
fall in long term labour productivity
what is specialisation
when we concentrate on producing on producing a specific product or task - countries producing specific things - bangladesh and textiles
what is division of labour
breaking down a production process into smaller tasks - workers cannot produce an entire item on their own
benefits of specialisation
higher output
greater variety
larger market
disadvantages of specialisation
boring work leading to lower productivity
workers may take less pride in their work
mass produced goods lack variety and individualism
