1.1 The Nature of Economics Flashcards
Ceteris paribus
All other things are equal
Opportunity cost
The benefit lost from the second best option
What is Economics
Economics is the study of how to mange the allocations of these resources
Economic goods
Resources which are scarce
Free goods
Free goods are resources which are not scarce
Positive Economics
- Scientific or objective study of the subject.
- Positive statements are TESTABLE (they can be supported or refuted by the evidence).
- Examples: ‘The UK is currently operating at full capacity’.
- The construction sector will contract by 10% this year’.
Normative economics
- Concerned with VALUE judgements
(normally about policy). - Normative statements cannot be supported or refuted.
- Example: ’The government should pay more to the unemployed’.
- Normally includes word ‘ought’ or ‘should’
A value judgment
Economists tend to use posotive statments to back up normative statments. value judgments can influence economic decision making and policy.
What is the basic economic problem
The problem of scarcity – where there are unlimited wants and finite resources
What are consumer goods
Goods which provide value and satisfaction to a buyer. They are wanted for their own sake rather than what they produce
What are capital goods
Capital goods are goods which are needed in order to produce more consumer goods
What is a production possibility frontier
A PPF shows the different combinations of goods/services which can be produced if all resources are fully and efficiently utilized
What is the use of a production possibility frontier
It’s can be used to illustrate scarcity and opportunity costs
What does it mean if a economy is on its Production possibility frontier
The economy has effectively allocated its resources as none are being wasted
Wheat dose it mean if an production possibility frontier shifts in wards or outwards
If their is a shift inwards in a production possibility frontier then the potential for production has seen a decrease in the potential output of that economy and if there is a shift outwards then this represents economic growth
What is specialisation
This is where a company, a region or a country focus production on a limited number of goods and services
What are advantages of specialisation
- Higher output: Total production of goods and services is raised and quality can be improved
- Variety; Consumers have access to a greater variety of higher quality products
- A bigger market: Specialisation and global trade increase the size of the market
- Competition and lower prices: Increased competition acts as an incentive to minimise costs, keep prices down and maximises consumer welfare.
What is division of labour
This is a tape of specialisation where production is split into different tasks and the specific people are allocated to each task
What are the disadvantages of specialisation (over specialisation)
- When the demand for a good or service is lowered this can lead to a huge amount of unemployment
- A country which specialises In a specific product such a minerals this can lead to a depletion in that product
- This can lead to countries becomeing less self sufficient
What are the disadvantages in of division of labour
- Work can become tedious and monotonous leading to lower quality of work
- Specialisation creates interdependence in production. If one group of workers goes on strike, it could halt production across the whole industry.
- Breaking down production into different tasks makes it easier to replace skilled workers with machines, leading to structural unemployment
How did a famous economist refer to the division of labour
Adam smith showed how the production of simple manufactured items, could be greatly increased if the production process was divided up into a number of separate, simple and repetitive tasks, each worker should concentrate on one task rather than doing them all.
What is productivity
• A measure of the efficiency of factors of production
• Measured by output per person employed
• Or by output per person hour
What are the three areas where countries can specialise
Primary products - forestry, fishing, minerals
Secondary - raw materials from primary products are converted to manufactured goods
Tertiary sector - health care, banking, IT
What are the four functions of money
1) Medium of exchange - avoids bartering and the double coincidence of wants
2) A means of differed payment - As people have a value for money this means they will be able to lend money in return for interest
3) Money as a measure of value - As money can be used to provide a measure of value
4) Money can be used as a store of value - we can trust our wealth in the form of money rather than having to store it in assets
Why does bartering not work in a modern economy
Due to the double coincidence of wants
What is bartering
This is where one good is directly traded for another
When may the functions of money be compromised
The functions of money may be compromised in the case of rapid inflation
How is economics a social science
This is because it is concerned with the study of human behaviour
What are some factors of production
Land, labour, enterprise and capital
What is enterprise in relation to production
This is where all the factors of production are taken into account and the risk is taken in order for the possibility of profit
What is production
Production is the process of making or manufacturing goods and products from raw materials or components
What is a renewable resource
A resource whose stock level can be replenished naturally over a period of time
A non-renewable resource
Resource whose stock level decreases over time as it is consumed.
What is a free market economy
All resources are allocated by the price mechanism. No government intervention.
Mixed economy
Some resources are allocated by the price mechanism and some by
the government.
Command economy
All resources are allocated by the government. No price mechanism
What did Adam Smith believe about government intervention
Smith believed that the government should barley intervene with the economy and believed that “invisible hand” of self interest would guide supply and demand in markets.
What where the beliefs of Friedrich Hayek
He was a stronger believe in very little government intervention believing in free market economy’s being the most effective
What did Karl Marx believe about government intervention
Karl Marx believed in command economy’s being the most effective way for an economy to run. He argued that supply should be provided on the basis of human need rather than profit
What are some advantages of a free market economy
- Competition leads to lower prices and more economic efficiency
- Quality of the products is higher as consumer all chooses higher quality and therefore it is more profitable
- Wider range of choice for consumer
- There is financial incentive for entrepreneurs to earn profit
What are some disadvantages of a free market economy
- Monopolies may be formed as a result of completion
- There is large divide in the level of wealth
- External costs to the environment can often be ignored in the pursuit of wealth
- Information gaps can be created and this can lead to some people consuming excessive amounts of demerit goods
- Erratic swings in the business cycle may cause high inflation during an economic boom and high unemployment during an economic slump
What are some advantages of a command economy
- Cooperation between firms can lead to a high level of output
- Workers are provided with higher incomes as all incomes are provided by the government
- The government can limit external costs of production and consumption as it can increase taxes and limit pollution
- The government has more control over the economy so there are smaller swings in the business cycle
What are some disadvantages of a command economy
- The price mechanism is unable to operate and so markets may suffer from shortages and surpluses leading to in an inefficient allocation of resources
- There is lack of competition leads to lower productivity
- Poorer quality of product especially when emphasis is on maximising output rather than profit
- Less choice of goods and services
- A lack of financial incentive
What is the effect on increased demand and consumer and producer surplus
An increase in demand for a good is likely to raise producer surplus and consumer surplus
What are theories which gain universal acceptance called
Laws
What is land as a factor of production
This is all natural resources used in production. Owners receive rent from land or sums of money from the sale of land
What is labour as a factor of production
Labour is all productive human effort. Labourers receive wages.
What is capital as a factor of production
This refers to all man made resources that are used to produce goods or services in the future.
What is entrepreneurship as a factor of production
This is the willingness and ability to take the risks of combining the other three factors of production in order to make a product of service.
What is the governments roles in a mixed economy
- Creating a frame work of rules and regulations
- supplements and modifies the price system
- redistributes income through taxes
- stabilises the economy
Why did bartering need to be replaced
It only worked if there was a double coincidence of wants
what is opportunity cost
the opportunity cost is the cost of one thing in terms of the ext best option which has been given up
draw and explain a PPF diagram
check psy and math tut
what does it mean if a change in production only occurs in capital goods
This shows a fall in efficiency or a change in resources that only affects capital good manufacture
what does it mean if a change in production only occurs in consumer goods but not in capital goods
be due to an improvement in technology that makes production of consumer goods more efficient.
