1.1.1 - Nature of economics Flashcards
what is the basic economic problem?
scarcity, unlimited wants but only finite resources
what are the three fundamental economics questions?
1) what to produce? 2) how to produce? 3) For whom to produce for?
what is opportunity cost?
the cost of the next best alternative foregone when making a choice
what is a free good?
a good that is not scarce and has no opportunity cost. eg: Air
what is an economic good?
a scarce resource that has an opportunity cost eg: oil, land
what are the four factors of production?
CELLCapital - manmade effort to production, Enterprise- risk taking in combing all other factors of production Land - natural resources Labour - Human effort
what is the difference between a positive and normative statement?
Positive statement - objective statement that can tested and proveneg: “High interest rates reduce inflation”Normative statement - subjective and based on value judgementseg: “the government should increase taxes”
What is the role of value judgements?
economists use positive statements to back normative statementseg: N, “government should increase taxes”, becauseP, “inflation rate is at 5%”
what does a production possibility frontier show?
the maximum possible production of output of all goods and services with given factors of production
how do you show maximum potential of an economy?
any points on ppf curve [Image]
how do you show opportunity cost on a ppf?
2 points (A,B) the more you produce of good B and move more downwards the curve, the less of production of good A there is and vice versa
how do you show a growth or decline of an economy on a ppf?
curve shifts inwards or outwards
what causes a PPF to shift inwards?
decrease in Quantity and quality of factors of productionDecline in labour forceNatural disastersWar
what causes a PPF to shift outwards?
economic growth, Q2CELL has increased, economy can produce more of both goods, technological advancements
difference between a movement and shift in PPF
Movement: change in combination of goods producedShift: change in economy’s productive capacity
what is a free market economy?
An economy where resources are allocated through supply and demand with minimal government intervention.
what is a command economy?
An economy where the government makes all economic decisions and controls resources.
what are advantages of a free market economy?
1) efficient resource allocation - competition causes firms to be efficient2) consumer choice - More variety of goods and services3) innovation - profit motive encourages entrepreneurship
what are disadvantages of a free market economy?
1) Market failure - externalities, monopolies2)income inequality - no gov intervention,3)Lack of public goods - no incentive to provide essential services such as healthcare and education
what are advantages of a command economy?
1) prevention of market failure2)less inequality3) provision of public goods, merit goods
what are disadvantages of command economy?
1) inefficiency - no competition leads to less innovation and more waste2) Lack of choice - government decides what to produce3) Slower decision making, corruption4)less motivation
what is a mixed economy?
An economy that mixes elements of both free and command economy
what are advantages of a mixed economy?
1)balance between efficiency and equity2)provision of public goods3)encourages competition
which countries are examples of each economy?
Free market - Hong kong, singaporeMixed - UK, USACommand - cuba, north korea
