1.1 Nature of Economics Flashcards
What is Ceteris Paribus?
All sciences make assumptions when developing models and theories, and this allows them to simplify the problem. Economists use the term ‘ceteris paribus’ meaning all other things remaining equal
What is a Positive Statement?
A positive statement is a statement which is objective and made without any obvious value judgements or emotions. They can be tested to be proven or disproven
What is a Normative Statement?
A normative statement is one which is subjective and based on opinion, so cannot be proven or disproven. It often includes words such as ought, maybe, unwise or should
What is Value Judgement?
A statement about how good or bad you think something is, based on personal opinion rather than facts
What is the problem of Scarcity?
The basic problem of economics is that of scarcity . People have finite needs, but infinite wants. Although wants are infinite, resources are finite and limited.
What are Renewable Resources?
A renewable resource is resource of economic value that can be replenished or replaced on a level equal to consumption. As long as the rate of consumption is less than or equal to the
rate of replenishment, the stock will not decrease.
- For example, oxygen, solar power and fish are renewable.
What are Non-Renewable Resources?
A non-renewable resource is a resource of economic value that cannot be readily replaced by natural means on a level equal to consumption. This includes fossil fuels such as coal, oil and gas.
What is Opportunity Cost?
The cost of the next best alternative foregone.
What are the 4 Factors of Production?
- Land - All natural resources used in production e.g. raw materials, land or minerals.
- Labour - All productive human effort, both physical and mental, paid and unpaid.
- Capital - All man-made aid to manufacture.
- Enterprise - The willingness and ability to take the risks of combining the other 3 factors in order to make a product or service.
What are Production Possibility Frontiers?
The PFF shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology.
- A movement along the curve indicates a change in the combination of goods produced.
- A shift of the curve indicates a change in the productive potential of the economy.
What are Consumer Goods?
Consumer goods are goods that are demanded and bought by households and individuals.
What are Capital Goods?
Capital goods are goods that are produced in order to aid the production of consumer goods in the future.
What is Specialisation?
Specialization refers to the concentration of individuals, firms, or nations on producing a limited range of goods or services.
What is the Division of Labour?
The division of labour is a form of specialization where tasks are divided among workers.
What economist stated specialisation and the division of labour allowed firms to increase labour productivity, efficiency and lower their costs of production?
Adam Smith
What are the 4 functions of money?
- A medium of exchange: It can be used to buy and sell goods and services and is acceptable everywhere.
- A measure of value: It can compare the value of two goods, such as a table and a skirt. It is also able to put a value on labour.
- A store of value: It is able to keep its value and can be kept for a long time
- A method for deferred payment: Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. This relies on money storing its value.
What is a Free Market Economy?
In a free market economy, individuals are free to make their own choices and own the factors of production without government interference. Resources are allocated through the price mechanism.
- Laissez faire approach from the government.
What economist believed in the Free Market Economy?
Adam Smith
What did Friedrick Hayek believe?
Friedrich Hayek (1899-1992) argued that state control of the economy leads to the loss of freedom. He believed that the poor in free market (or freer market) countries were better off than those in command economies because at least they had personal freedom.
What is a Command Economy?
In a command (planned) economy, all factors of production, except labour, is owned by the state and labour is directed by the state. There is no private property and everyone is assumed to be selfless, working for a common good. Resource allocation is carried out by the government, rather than the price mechanism.
What did Karl Marx believe?
Karl Marx (1818-1883) believed in the command economy and criticised capitalism. Marx believed that capitalist’s profit came from exploiting labour as they underpaid workers for the value that they actually created. He wanted remove the difference between the incomes of owners and workers and believed that capitalism would collapse leading to communism.
What is a Mixed Economy?
Both types of economies have benefits but also major problems so most economies have tried to move towards some form of compromise economy , called a mixed economy. This is an economy where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country.
What is the government’s role in a Mixed Economy?
- Creating a framework of rules: Regulation and consumer protection.
- Supplements and modifies the price system: They produce public and merit goods, such as emergency services and transport, and limit the production of demerit goods.
- Redistributes income: They move income from one group of people to another, from the rich to the poor. They use tax, such as income tax, to take money away from one group then give the money to the poor.
- Stabilises the economy: The government will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand. They do this through fiscal and monetary policy.
