1.1 The Nature of Economics Flashcards
what is meant by a model in economics?
a model is a simplified version of reality used to predict or describe what will happen in an economy if one of the variables changes
what does ceteris paribus mean?
all other things being equal, so when we change one variable we hold all others constant in order to isolate the consequences of the variable we changed
how does economics differ from a science such as physics?
it isn’t possible to conduct laboratory experiments
define positive economics
a statement that can be proven or refuted by data (may contain statistics)
define normative economics
a statement that contains a value judgement (may use words such as unfair, should, must)
what is the fundamental economic problem?
scarcity– the fact there are finite resources and infinite wants in society
define physical capital
any good used to make another good, or provide a service
define land
anything from the land, water or sky
define enterprise
a special form of labour– risk taker who bring all the factors of production together
define labour
workers and the skills and abilities they possess
define opportunity cost
the next best alternative foregone when an economic decision is made
define renewable resources
have the ability to replenish themselves if they are not depleted at the current rate of use
define non-renewable resources
finite and cannot be replenished in a reasonable time period
why is a PPF concave?
because of the law of diminishing returns– not all factors of production are equally good at the production of both goods, so opportunity cost increases as you move around the curve
what does a point inside a PPF indicate?
unemployed resources
what does a point outside a PPF indicate?
not attainable with current technology
define marginal analysis
the effects of consuming and/or producing one extra unit of a good or service
why might a PPF become steeper/shallower?
a productivity increase/decease in one of the industries being shown
benefits of specialisation
–increased productivity
–reduced cost of training
–can reduce cost of capital as it becomes more specialised to each task, not everyone needs all items of capital
define productivity
measures the output per unit of input (increased by better education, training, motivation and access to capital)
define division of labour
when a task is broken into sub-tasks and labour is allocated to each sub-task
define specialisation
where economies or households concentrate on producing goods that they are most efficient at, and then trade the surplus
name the 4 functions of money
store of value
measure of value
method of deferred payment
medium of exchange
what is the importance of a system of exchange?
finding a double co-incidence of wants is inefficient
define a free market economy
an economy with very little government intervention e.g. Singapore
define a mixed market economy
an economy with 40-50% of output produced by the government, typically where the government intervene to correct market failure e.g. UK
define a command/planned economy
a planned economy is where the decisions of what to produce, how to produce and for whom to produce are taken by the government e.g. North Korea
advantages of a free market economy
–market forces can be efficient in allocating resources (Adam Smith’s invisible hand)
–output can be higher as a result
–consumers and producers get to keep their income/profit rather than paying it to the government in taxes (Hayek argued the profit motive was more effective at allocating resources than the government)
disadvantages of a free market economy
–can have high inequality and poverty
–markets can fail e.g. pollution
–workers can be exploited by businesses (Marx argued that this would lead to a revolution)
link the types of economy and economists
command– Karl Marx
mixed– John Maynard Keynes
free– Freiderick Hayek, Adam Smith
outline Adam Smith’s theory
the wealth of nations argued that by each individual pursuing their own self-interest this would ensure that resources were allocated in the most efficient way towards producing the products and services that consumers most wanted to buy– invisible hand, and resulted in maximising welfare in society through self-interest
outline Karl Marx’s theory
the owners of capital would exploit their workers, and in many cases workers would be replaced by machines. this would mean workers are payed less, and there would eventually be a revolution as workers overthrew their masters
outline Freiderick Hayek’s theory
government intervention, even when markets failed was inefficient. he believed the free market was the best way to organise production and that the role of the government was to facilitate the working of the free market
outline John Maynard Keynes’ theory
economies needed governments to try and correct market failures and situations where the free market was inefficient. e.g. he argued the gov. should stimulate economies during recessions as they could get trapped in high unemployment
disadvantages of specialisation
–can introduce bottlenecks in a production line
–can increase labour turn-over as jobs are repetitive
–can reduce quality of the products as they are mass produced
what does a PPF show?
it shows all the different combinations of two goods that an economy can produce when all factors of production are fully and efficiently used, given the current state of technology
