1.1 Nature of economics LS1-6 Flashcards
Economy definition?
The goods and services produced in an area
Factors of production and definitions?
Capital - machinery etc used to make goods and services
Enterprise - the willingness of people in business to take risks to make a profit
Land - natural resources such as oil, forests and land
Labour - all of the work done by humans
Economic agents and definitions?
Groups that participate in the economy
Producers - create goods and services
Consumers - buy goods and services
Government - set rules that other economic agents must follow, also produces some goods and services such as roads, schools and healthcare
What is Ceteris Paribus
When economists assume all other variables remain constant to isolate a single variable in order to conduct an experiment?
Opportunity cost and uses?
The value of the next best alternative (as a result of the choice made)
Consumers to decide what to spend their income on
Producers to decide what and how to produce their goods and services
Governments to decide what policies to choose
Empirical vs Theoretical model
Empirical based on data, theoretical is based on theory
PPF?
Production Possibility Frontier
Shows the maximum potential output of a combo of two goods or services an economy can achieve when all its resources are fully and efficiently employed
+ve and -ve economic growth and how can this be shown on a PPF?
+ve: an increase in the production of goods and services in an economy (PPF shifts outwards)
-ve: a decrease in the production of goods and services in an economy (PPF shifts inwards)
Consumer goods vs capital goods
Capital goods produce other goods and services whereas consumer goods do not and are only used to satisfy people’s wants and needs
Whats it called when an economy isnt at a point on the PPF (is inside the arc)?
Underemployed/underutilised allocation of resources
Positive vs normative statements
Positive = objective, can be proven true or false
Normative = subjective, express opinions, cannot be proven true or false (fair, unfair, should, better, worse)
Specialisation definition
When an individual, firm, region or countries concentrates on the production of a limited range of goods and services.
e.g. UK specialises in financial industry and insurance, doctors specialise in a particular department
Why does specialisation allow individuals to become more skilled?
Concentrated time/energy into a sector means an increase in quality and quantity of skills
Division of labour definition?
The specialisation of workers on specific tasks in the production process
Productivity definition?
The effectiveness of productive effort, usually measured in terms of rate of output per unit of input
What does increased productivity lead to?
Higher output and higher quality of output
Higher standard of living
More efficient use of resources
Advantages of division of labour?
- Workers become more skilled through the repetition of tasks
- Productivity of workers increase, so output increases
- Time is saved by workers by focussing on a narrow range of tasks
- For firms: Greater quantity and quality of output
For workers: Higher skill levels, potentially higher wages
Disadvantages of division of labour?
- Repetition of tasks can lead to boredom
- Simplified job roles can reduce the pride workers feel in their jobs
Specialisation advantages
- Increased quantity and quality of products
- More efficient use of scarce resources
- Higher trade with other countries
- Higher economic growth, = higher standard of living
Disadvantages of specialisation
- Being over-reliant on a few industries is risky
- Increased interdependence reduces self-efficiency
The four functions of money?
- Medium of exchange: something commonly accepeted in exchange for goods and services
- Measure of value: the price of a good reveals its value
- Store of value: value is maintained and can be kept for a long time (£5 stays £5)
- Method of deffered payment: allows debt to be created, payed over a long period of time i.e. with a mortage
Price mechanism?
The process by which the market allocates resources, using supply and demand
Market?
Anywhere buyers and sellers exchange goods and services, can be physical or digital
Whats an economy where resources are solely allocated by the state called?
Command economy
Whats an economy in which resources are allocated by the state and the price mechanism?
Mixed economy
Whats an economy in which resources are allocated solely by the price mechanism?
Free market economy
Advantages of free market/mixed economies
Both profit motive and competition present which incentivises firms to:
* meet consumer demands
* develop new products
* have higher quality and innovation
* more efficient due to profit motive
Leads to wider choice of goods and services
Disadvantages of free market/mixed economies
- Concentrated markets and monopolies (where one firm dominates >25% of market shares) can limit choice
- Less equitable distribution of income and wealth, because owners of capital and land accumulate wealth over time and pass privilege onto their children through property, private education and networks
Disadvantages of command economies
The profit motive and competition is absent in command economies
Leads to limited choice for consumers
No incentive to increase efficiency
Efficiency defintion?
Concerned with the optimal production and distribution of scarce resources
What is the state made up of?
Territory
Citizens
Government
What is the role of the state in mixed economies?
Allocates resources through planning
Redistributes income through welfare spending
Regulates consumers and firms
