[1.1] Nature of Economics Flashcards
What is meant by ceteris paribus?
The assumption that all other factors, apart from the factors being considered/investigated, will remain equal/not change.
Why do economists use models, as opposed to conducting scientific investigations?
The size, scales, and number of factors involved make it impossible for economists to investigate economies like scientists investigate the natural world.
Instead, economists must make models that act as simplified versions of very complex economies. This is achieved by making assumptions (e.g. ceteris paribus).
What is a positive statement?
An objective statement that can be tested to be true or false.
e.g. “Workers in the UK earn less than £10 an hour on average.”
What is a normative statement?
A subjective statement that includes some kind of value subject.
e.g. “The government should raise the minimum wage.”
How do value judgements influence economic policy?
Different economists will make different value judgements from the same models and statistics.
Therefore, economic policy depends largely on the value judgements being made by the government.
What is the basic economic problem?
Human wants/desires are unlimited, whereas the resources available to meet those wants are limited.
People have to make choices that involved trade-offs as a result of this problem.
What is the difference between a renewable and non-renewable resource?
Renewable resources can be replaced over time.
Non-renewable resources cannot be replaced. They will eventually run out.
What is opportunity cost?
The value of the next best alternative that had to be sacrificed in order to make a choice.
e.g. You go into clothes shop with £30. You see a jacket with a price of £30 and a pair of shoes also with a price of £30. You purchase the pair of shoes - meaning you’ve made a choice that has involved a trade-off. Your opportunity cost is the value of the jacket that you did not purchase (as you only had £30, so could no buy both items).
Why is opportunity cost important for governments?
Whenever a government spends money on one sector of the economy, they are invoking an opportunity cost in the form of less spending on the next best alternative.
As a result, opportunity cost forces governments to make choices that provide the widest possible benefit.
For example - if a government decides to spend an extra £5bn on the military, it is paying an opportunity cost in the form of £5bn less spending on education.
Why is opportunity cost important for firms?
Whenever a firm spends money on one factor of production (e.g. labour), it must sacrifice (pay an opportunity cost) other factors (e.g. new equipment).
As a result, firms are forced to make choices that will generate the largest return on investment (future profit).
Why is opportunity cost important for consumers?
Opportunity cost forces consumers to make economic choices that will provide them with the most benefit.
Consumers must choose which products to consume, and therefore must pay an opportunity cost in the form of the next best products that could not be purchased.
As a result, consumers buy the products that give them the most benefit.
What do production possibility frontiers represent?
Production possibility frontiers (PPFs) represent the maximum output that can be produced between two different goods/services when resources are fully and efficiently employed.
In other words, PPFs represent the maximum productive potential of an economy.
How can production possibility frontiers be used to explain opportunity cost?
As output shifts toward one good, output of the other good must be given up (and therefore, an opportunity cost must incur).
For example, on a PPF between Good A and Good B - producing more of Good A will mean producing less of Good B (since the PPF curve represents the maximum output between any combination of two goods).
How can a production possibility frontier be used to show economic growth?
Economic growth is shown by an outward expansion in the PPF curve.
This means that the productive potential of the economy has increased (due to new resources, new technologies, or an increase in productivity).
How can a production possibility frontier be used to show inefficiency within an economy?
If an economy is operating below the PPF curve, it is operating productively inefficiently as resources are not being used to achieve their maximum possible output.
What points on a production possibility frontier diagram represent ‘unobtainable’ production?
All points above the PPF curve are unobtainable in present circumstances.
This is because the PPF curve represents the maximum possible output - you can’t produce more than the maximum!
What are capital goods?
Goods that are used by firms to produce output.
What are consumer goods?
Goods that are sold by firms to consumers.
What is specialisation?
The process whereby workers, firms, or countries are focused on one task in production or producing only one type of output.
e. g. Silicon Valley’s specialisation in electronics.
e. g. A worker specialising in operating one machine on the production line.
What are the advantages of specialisation and division of labour within the production process?
- Higher output and higher quality (businesses become more efficient if workers are specialised in producing one type of output)
- Opportunities for economies of scale
- Lower prices for consumers as firms can lower costs of production
What are the disadvantages of specialisation and division of labour within the production process?
- Workers become bored at carrying out single task (high turnover rate).
- Occupational immobility as workers are only trained in one area, so cannot find employment if industry closes.
- Firms become too reliant on specialised workers. If a certain worker cannot work on a specific day, it could disrupt entire production process.
What are the advantages of specialisation in the production of certain goods for international trade?
- Greater variety of goods for consumers worldwide
- Greater opportunities for economies of scale
- Greater competition between firms across world (less risk of monopolies)
- Higher output of goods with a higher quality
What are the disadvantages of specialisation in the production of certain goods for international trade?
- Poorer countries may be encouraged to sell their non-renewable resources. This is not sustainable.
- Countries can become too dependent on eachother. This is an issue in the event of any supply-side shocks.
e.g. How will Americans fuel their vehicles if the Middle East stops exporting oil?
What are the four functions of money?
- Medium of exchange
- Measure of value
- Store of value
- Method of deferred payment (can be used to take loans and settle debts)
