1.1 The Nature of Economics Flashcards
What are positive and normative statements?
Positive: objective statements which can be tested, amended or rejected by referring to evidence, and as such are more factual.
Normative statements are subjective and carry value judgements which vary depending on person and government
What is the basic economic problem?
Infinite wants and finite resources
There are scarce resources which have to be allocated between competing uses as wants are limited and resources are scarce, so a choice must be made::
- What to produce
- How to produce
- Who to produce for
What are factors of production?
- The inputs used which are then converted into the goods and services we want
- Land - all natural resources available for production, including the sea and oil - reward is rent and money earned
- Labour - human capital, reward is wages
- Capital - man made goods used to produce other goods - reward is interest
- Enterprise - individuals combine and organise other factors to create goods and services - reward is profits
What are the economic agents and the basic economic assumptions?
- Households: make choices about expenditure to maximise utility - people are rational, act independently of others
- Firms: Produce output of goods/services for profit
- Government: makes decisions about expenditure and influence economy through taxation and regulation of markets to maximise economic welfare
- Also assumed all information is symmetric
What is opportunity cost
In all transactions there is an opportunity cost, describing the unavoidable trade offs in the presence of scarcity - satisfying one objective more means satisfying other objectives lest.
It is the cost or value of the alternative that is given up or forgone when a decision is made.
What is the production possibility frontier?
-Shows the maximum potential output combinations of two goods that an economy can achieve when all its resources are fully and efficiently employed.
This can also be used to show the maximum potential output combinations of two goods that a firm can achieve, when it uses all of its resources efficiently
Usually use Capital goods against consumer goods.
What different features can be shown by the PPF?
- Economic growth may be shown on the PPF either completely outwards, of if it only occurs in one type of good then just in the direction of that good
- The gradient of the PPF can show opportunity cost as the more you produce good X you lose out on good Y
- Economic efficiency and inefficiency can be shown, for instance if a combination is within the PPF then there is an inefficient allocation of resources, whereas if it is outside the PPF there is an efficient allocation of resources.
- When a PPF shifts outwards we can say it has experienced economic growth
What causes a shift in the PPF?
outward:
- increase in productivity/efficiency
- increased capital/labour
- innovation and invention
- discovery/more extraction of resources
- increase in technology
- improved allocative efficiency
- better management of inputs
inward:
- natural disaster
- conflict and war
- net emigration
- fall in productivity and labour
- skills decline
- capital scrapping and depreciation
What is specialisation and division of labour?
Concentrate producing on a specific product or task - countries may specialise in a particular export, businesses may specialise work and tasks - this is division of labour.
Division of labour is the breaking down of a production process of a good/service into smaller tasks, each carried out by a different person/factor input - it is a type of specialisation.
What are the advantages/disadvantages of specialisation?
- Higher outputs
- Variety of goods and services
- A bigger market as global trade increases and EofS exploited
Disadvantages:
- Unrewarding, repetitive work with little skill
- Less pride in work -> quality suffers
- Dissatisfied workers strike
- People move jobs
- Increased risk of injury
- Little training and hard to find alternative jobs when leave work
- Mass produced goods may lack variety
What are the characteristics of money?
- Durable: lasts
- Portable: convenience
- Divisible: broken down
- Hard to counterfeit
- Acceptive: sufficient trust
- Valuable: holds value over time
What are the functions of money?
- A medium of exchange: any asset widely acceptable as a medium of exchange
- Store of value: holds value over time
- Unit of account: measure of value
- Standard of deferred payment: settle debts, borrow/save depending on durability
