1.1 - Nature Of Economics Flashcards
1
Q
Ceteris paribus
A
All other things being equal
2
Q
Positive statement
A
Backed up by evidence
3
Q
Normative statments
A
Opinion based
4
Q
A
5
Q
Basic economic problem
A
Unlimited needs and wants and limited resources
6
Q
Opportunity cost
A
Value of next best alternative forgone
7
Q
Factors of production
A
- capital
- entrepreneurship
- land
- labour
8
Q
Capital
A
- Physical goods used in production process
9
Q
Fixed capital
A
Machines and buildings
10
Q
Working capital
A
Finished/semi finished consumer goods
11
Q
Incentive for capital
A
Interest from investment
12
Q
Entrepreneurship
A
- managerial ability
- resources drawn together into the production process
13
Q
What’s an entrepreneur
A
Someone who takes risks, innovates and uses factors of production
14
Q
Incentive/reward for entrepreneurship
A
Profit - incentive to take risks
15
Q
Land
A
- natural resources
- physical space for fixed capital
16
Q
Reward/ incentive for land
A
Rent
17
Q
Natural resources
A
- oil
- coal
- wheat
- water
18
Q
Labour
A
Human capital (the workforce of the economy)
19
Q
Reward for labour
A
Wages
20
Q
Are factors of production inputs or outputs?
A
Inputs
21
Q
What outputs do FOPs produce?
A
Goods and services
22
Q
What are renewable resources?
A
Resources where rate of consumption is less than rate of replenishment
23
Q
Non renewable resources
A
Resources is consumed faster than its renewed - stock of resource will decline overtime
24
Q
How can we reduce rate of decline of non renewable resources?
A
- recycling
- substitutes (wind farms)
25
What does a PPF show?
The max productive potential of an economy using a combo of 2 goods/services when resources fully and efficiently employed
26
What can PPFs also show?
The opp cost of using scarce resources
27
Law of diminishing marginal utility
As consumption increases the satisfaction derived from each additional unit decreases
28
What do we assume when drawing the of PPF curve?
- fixed amount of resources used
- constant state of tech
29
When would the PPF shift out?
- quality/quantity of resources increases which increases productive potential, causing growth
- eg. Advancements in tech
30
Why would the PPF shift in?
- decrease in quality/quantity of resources eg. Natural disasters
31
Why is moving along the PPF different to shifting it?
- moving along uses same number and state of resources and incurs opp cost
- shifting it uses more/less resources of worse/better quality which reduces/increases opp cost
32
Capital goods
Goods that can be used to produce other goods
- eg machinery
33
Consumer goods
Can’t be used to produce other goods
- eg clothing
34
When does specialisation occur?
When each worker ha s a specific role in a production process
35
Who started the concept of specialisation?
Adam smith
36
Who can achieve specialisation?
- individuals
- businesses
- regions of countries
- countries
37
Benefits of division of labour
- increased worker productivity
- lower costs of production for firms
- higher output and potentially higher quality
- graduate variety of goods and services
- more opportunities for economies of scale so market size increases
- more competition gives incentive for lower costs keeping prices down
38
39
Disadvantages of division of labour
- repetitive which lowers workers motivation can decrease quality and productivity
- more structural unemployment as skills may not be transferable
- hard to cover
- higher worker turnover
40
Functions of money
- medium of exchange
- measure of value
- store of value
- method of deferred payment
41
Money as a medium of exchange
- w/o money goods and services were traded and they weren’t always with the same amount and exchange could only happen if there was a double conscience of wants
42
Money as a measure of value
- allows price comparisons
- also values labour
43
Money as a store of value
- can be kept for a long time without expiring
44
Money as a method of deferred payment
- money allows for debts to be created
- this relies on money storing it’s value
45
What’s a free market economy?
- no gov intervention
- market forces of s&d allocate scarce resources
- everything owned privately
46
Who supported free market?
- Smith
- Hayek
47
Smith
- theory of invisible hand
48
Hayek
- gov intervention makes market worse
- after 1930s crash he said the Fed caused crash by keeping IR low and encouraging malinvestments
49
Who determines what to produce?
Consumer preferences
50
Who decides how to produce?
Producers - seek profits
51
who decides who the product is produced for?
- whoever has greatest purchasing power
52
Advantages of free market
- firms likely to be efficient as they have to provide goods and services demanded by consumers
- firms likely to lower costs and make better use of scarce resources causing overall output to increase (GDP)
- bureaucracy from gov intervention is avoided
- more personal freedom
53
54
Disadvantages of free market
- ignores inequality so no benefits
- monopolies that exploit market
- overconsumption of demerit goods
- public goods not provided therefore merit goods (education) are under provided
55
What is a command economy?
Gov allocates all scarce resources
56
57
Who supported command?
Karl Marx
58
Why did Karl Marx see the free market as unstable?
- profits created in free market came from exploitation of labour and not by paying workers to cover the value of their work
- he argued for ‘the common ownership of the means of production’
59
What determines what is produced in a command economy?
What the gov prefers
60
What determines how something is produced in command Econ?
Governments and their employees
61
What decides who the products are produced for in command Econ?
Who the gov prefers
62
Advantages of command
- easier to coordinate resources in time of crisis
- gov can compensate for market failure by reallocating resources
- reduced inequality
- prevents abuse of monopoly power
63
Disadvantages of command
- governments can fail and may not be fully informed for what to produce
- might not meet consumer preferences
- limits democracy and personal freedom
64
What is a mixed economy?
It has features of both command and free economies :
- market controlled by gov and forces of S&D
- gov often provide public goods and merit goods
65
Who decides what is produced in mixed economy?
- both consumer and gov
66
Who decides how to produce in mixed economy?
- by producers making profits and the government
67
What decides who its produced for in mixed economy?
- both who gov prefers and the purchasing power of private individuals
