1.1 Nature of economics Flashcards
What is ceteris paribus and how is it used
Holding all things equal
It is used to isolate the effect of a specific variable while keeping other factors constant. This assumption also allows economists to analyse the relationship between variables without the complications of factors
List two examples of ceteris paribus and what they are
- Law of demand: Stating all being other things being equal when the price of a good or service decreases the quantity demanded iincreases
- Supply and price: It assumes that other factors affecting supply are held constant which allows economists to examine how changes in price impact the quantity producers are willing to supply.
what is behavioral economics? And what is dropped with this
and why?
· The study on the impact of psycho-
Logical, social and emotional factors
en economic decisions.
Here, we drop ceteris paribus to
capture human behaviour.
What are positive and normative statements?
objective statements that can be tested and evaluated based on evidence
normative, subjective statements that carry judgments personal beliefs or preferences and
what is the economic problem
There are only a finite amount of resources available to supply people’s unlimited wants, creating the problem of scarcity
what is opportunity cost
The benefit lost of the next best alternative, when making a choice
what are trade offs
the idea that an economy must make trade offs when allocating resources producing more of one good means producing less of another
They are reflected in the PPF as it reflects the idea that an economy must make trade offs when allocating resources producing more of one good means producing less of another.
what is division of labour
a type of specialization where production is split into different tasks and specific people are allocated to each task the
3 advantages and 3 disadvantages of division of labour
+ increase in labor productivity, training costs are reduced, and people can specialize in what they’re best in the in
- Workers can end up being bored, doing repetitive tasks. There is a lack of flexibility. Countries can become less self sufficient, which can be a problem if trade is disrupted.
what is a barter system
trade means people can buy the stuff they’re no longer making meaning. Obtaining specific items is necessary. Swapping goods with other countries is called a barter system. This can be inefficient due to the time and effort required.
What are the four main functions of money
medium of exchange, store of value, unit of account and standard of deferred payment.
Define medium of exchange and store value.
Medium of exchange is the money as an asset widely accepted or acceptable. It facilitates transactions between buyers and sellers.
an asset that holds value over time.
define unit of account and standard of deferred payments
Unit of account: a nominal unit of measure used to value; cost products, assets, debts, incomes and spending
The accepted way in each market to settle a debt
Define free market, command economy and mixed economy
Free: An economic system that is controlled by the market forces of supply and demand not the government
Command: A government controls the means of production and determines levels of output
<ixed: Where resources are allocated by a combination of both the market mechanism (free) and the government (command)
What are the advantages (4) and disadvantages (4) of the free market
+ Consumers have choice / freedom
+ Competitive market
+ Rewards entrepreneurship
+ Economic growth and productive efficiency
- Inequalities in wealth
- Supply of de-merit goods
- Little regulation
- Little control of negative externalities
Advantages (3) and disadvantages (3) of mixed economy’s
+ Reduce negative externalities
+ Supply merit goods
+ Provide public goods
- Excessive taxation
- Ineffective regulation
- Government monopolies
What did Adam Smith believe in and why did this come about
He believed in the free market and described how its “invisible hand” would allocate resources in society’s best interests.
He said this came about because consumers and producers are motivated by self interests seeking to maximise personal gains
What did Kharl Marx critic
He criticised the free market saying labour was exploited by capitalism where a small ruling of class of producers dominated exploiting the larger working class
What did Friedrich Hayden support, critic and believe in
He supported the free market and was a critic of the command economy saying governments shouldnt intervene with resources due to their lack of information.
He believed individual consumers and producers have the best knowledge of what they want and need so should be left to allocate resources with the signalling device of the price mechanism
Advantages (2) and disadvantages (2) of command economy
+ Greater equality
+ Removal of demerit goods
- Lack of choice
- Businesses have no freedom with decisions
