1.1(real) Flashcards
What is the basic economic problem
unlimited wants vs. limited resources (so resources have to be allocated between competing uses)
why is choice central to the basic economic problem
all economic decisions incur and opportunity cost
economics is the study of
how society allocates its scarce resources in order to maximise welfare
Central purpose of economic activity
Production of goods and services to satisfy the needs and wants of society
what are economic resources
land, labor, capital, entrepreneurship
definition of labour
human resources which contribute to output
What does a PPF show
They allow economists to analyse trade offs by showing the maximum combination of two goods or services that can be produced when a fixed number of resources are efficiently used, at a given level of technology
Why is the PPF bowed out?
increasing opportunity costs and specialization
would a fall in unemployment shift a PPF?
no, it would move closer to the line. (we are not producing at productive capacity)
economic good
a product which requires resources to produce it and therefore has an opportunity cost
what are intermediate goods
goods used in the production of other goods
why are experiments in econ hard to conduct?
economists can rarely conduct experiments and partly because it is often hard to isolate the effects of any particular event.
science experiments have controlled conditions but economic experiments are often uncontrolled
what are final goods
finished goods and services produced for the ultimate user
What are the 3 basic economic questions?
- What to produce?
- How to produce?
- For whom to produce?
3 economic agents
- Consumers
- Producers
- Government
Buffer stock scheme
A scheme intended to stabilise the price of a commodity by purchasing excess supply in periods when supply is high, and selling commodity reserves when supply is low.
Ceteris Paribus
all other things held constant. When variables that are not mentioned remain constant
why do economists build models?
Impossibility of undertaking a lab experiment. It summarises the relationships among economic variables. Models are useful because they abstract from the many details in the economy and allow one to focus on the most important economic connections.
To “think like an economist,” decisions should include:
which variables will and will not be studied
factors effecting demand
- consumer income
- consumer tastes
- substitute, - complements, - expectations, - population and demographic changes
factors effecting supply
- production costs
- technological advancements
- government policies
- natural disasters/weather conditions
- changes in expectations
- government intervention
- natural resource availability
how could worker productivity be improved?
- more training
- better technology
- specialisation
- more experience
what is the public sector
government
what is the private sector
part of the economy involving the private ownership of businesses
opportunity cost
the loss of the next best alternative forgone
positive statement
can be proven or disproven by data
normative statement
cannot be tested or validated and may contain a value judgement
are decisions made by the government normative or positive
normative, they make decisions based on their value judgements
Free goods
Goods that are unlimited in supply and which therefore have no opportunity cost
example of a free good
air
economic goods
Goods that are scarce because their use has an opportunity cost. They are created from scarce resources and therefore command a price
What is allocative efficiency?
point on the PPF that maximises social welfare
free market economy
prices for goods and services are determined by the open market and consumers
advantages of a free market? (3)
- economic efficiency,
- lower prices
- more choice
disadvantages of free market? (3)
High consumption of resources, environmental destruction, some will be out-competed,
inequality
disadvantages of a free economy? (3)
- what is fair in the free market may not be fair in reality
- goods we need in society may not be produced if they cannot generate a profit
- monopolies may arise
- inequality
- market failure prevalent
market economy
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Advantages of a command economy?
- correct market failure
- less inequality
- stop monopoly abuse
disadvantages of a command economy? (3)
- less efficient as the government is not a profit maximising entity
- government may not know what’s best due to asymmetric information
- choice restriction
- destroys incentives
example of free market economy
USA, Hong Kong 1960s
Examples of command economy
Cuba, North Korea 1980s
Examples of mixed economy
Germany, United Kingdom
Which type of economy did Smith want?
‘laissez-faire’ free market, thought that the price mechanism was perfect
Which type of economy did Hayek want?
Mixed economy
Which type of economy did Marx want?
command Economy
Example of command economy failure?
30 million deaths from a famine in China
Why did Marx hate the free market?
He believed it created prosperity for few and poverty for many. Exploited the proletariat / it would break down because owners of business made huge profits at the expense of workers
advantages of mixed economy
- economic efficiency
- income equality (social welfare programmes)
- consumer protectionism
- employment stability
- provides public goods
disadvantages of mixed economy?
- reduced innovation
- political influence
- inefficient resource allocation
- reduced incentives
what is economies of scale?
when the average cost of producing a good or service falls as the quantity produced increases
what does a straight line ppf indicate
constant opportunity cost as the two goods use identical factors of production
what is a trade-off (PPF)
the alternative you face if you decide to do one thing rather than another
What is productive efficiency?
any point on the PPF curve
Who believed in the division of labour
Adam Smith
- he observed a pin factory in Glasgow and noted that output increased when workers had their own individual tasks
What book did Adam Smith say this in?
The Wealth of Nations (1776)
division of labour
The breaking down of the production process into small parts with each worker allocated to a specific task.
3 pros of dividing labour
- each worker is arranged by their expertise, maximising productivity
- workers only need to be trained in one sector - lower training costs
- less time wasted switching from task A to task B
3 cons of dividing labour
- Specialised workers will struggle to find employment if their job collapses
- Boredm -> inc absenteeism
- Countries which over-specialise and deplete their natural resources
- We become vulnerable to those who are specialised (strikes)
- if one worker strikes, the whole production process is held at standstill
3 pros of specialisation
- increase in productivity due to use of specialist equipment
- Economies of scale - mass production brings falling long run average costs as unit costs fall
- helps firms save on training costs as each worker needs to be trained in fewer skills
4 cons of specialisation
- boredom (leads to lower productivity and output) - workers at Henry Ford’s Model T production line became so bored that they had to be paid high wages as compensation for the monotony of their work (unit costs may actually increase)
- workers struggle when unemployed (due to lack of other skills)
- can increase recruitment costs and absenteeism due to high staff turnover
- mass-produced goods can reduce consumer variety
advantages of division of labour and specialisation on trade
- if they trade these in these goods for goods that they do not produce, it can result in economic growth, more choice, lower prices
disadvantages of division of labour and specialisation on trade
- Overdependence on imported goods
- imports may exceed the value of exports
- if a country’s goods are not competitive they can suffer
3 factors that limit the effectiveness of the division of labour
-Size of market
-Type of product
-Transport costs
staff turnover
the rate at which employees leave a company and are replaced by other people
4 functions of money
- medium of exchange
- unit of account
- store of value
- standard of deferred payment
medium of exchange
anything that is used to determine value during the exchange of goods and services
standard of deferred payment
money must be acceptable to make purchases today that will be paid in the future (as there is an assumption that the currency will still hold its value)
why is there income inequality in a free market?
there is freedom to own resources, those who own resources are more likely to earn more income than others
4 characteristics of free market
-private ownership of resources
- price determined by competition between firms
- prices determined by supply and demand
- profit motive
4 characteristics of command economy
- no profit motive
- no competition
- state owned resources
- goods are allocated by the state
4 characteristics of mixed economy
- private ownership
- state ownership
- government intervention
- market-based pricing
If they are not public goods, why does the government provide healthcare?
because it creates positive externalities
Why can the free market not provide public goods?
because of the free rider problem
what does an increase in the production of capital goods on a PPF indicate?
lower living standards
How can you shift the PPF
increase the quality and quantity of the factors of production
factors causing an outward shift in the PPF?
- discovery of new natural resources
- advances in technology
- improvements in education and training
- immigration
factors causing an inward shift in the PPF?
- deep recessions
- natural disasters
- depletion of natural resources
why may a deep recession lead to an inward shift of the PPF
deep recessions can lead to reduced investment in research and development, as well as decreased innovation. If technological progress slows down, the efficiency of production processes may decline, contributing to a contraction in the PPF.
labour hysteresis
What did Hayek promote instead of government spending
private investment
advantage of free market economy compared to command economy
Competitive markets responsive to consumers (1) no competition in command economies to ensure firms are efficient (1)
* Market prices transmit information between buyers and sellers (1) no need for costly bureaucracy (1)
* Reduces risk of government failure (1) as governments do not know what is demanded (1)
definition of productivity
output per unit of input
factor of production
an input used in the production of a good or service
does an increase in unemployment shift the PPF inwards
NO. just moves to a point inside the PPF
