1.3.1 introductive concepts Flashcards
positive statement
based on facts, objective
normative statements
concerned with value judgements, subjective
scarcity
economic agents can only obtain a limited amount of resources at any moment
opportunity cost
the benefit lost from the next best alternative
arises because resources are limited but wants are infinite
economic goods
resources that are scarce and have an opportunity cost
free goods
resources that are not scarce and have no opportunity cost
- abundant in supply
- can be consumed as much as is required without reducing the availability to others
HOWEVER it may diminish over time and may need to be paid for and/or produced
—> becomes an economic good
factors of production
land, labor, capital, entrepreneur
land
land and all the natural resources below the earth
1. non renewable resource
2. renewable resource
non-renewable resource
once used cannot be replaced, non-sustainable, finite
renewable
can be replaced when used, infinite, naturally replenishes, can be used over and over
production possibility frontiers (PPF)
assumes that only 2 goods are produced in the economy
represents the production possibilities for a particular time period only
movement along the PPF
reallocation of resources from the production of one product to another
outside the PPF
unattainable as there are not enough resources
inside the PPF
the economy is producing less output than it is capable of
there is an unemployment of resources and/or productive inefficiency
wastage of resources
it is possible to produce more of one or both goods without opportunity cost
point on PPF
the economy is productive the greatest possible output
factors of production are being used to their maximum potential
output is produced at lowest possible cost = productive efficiency
law of diminishing returns
occurs because not all factor inputs are equally suited to producing items
inward shift of PPF
economic decline: decrease in productive potential of economy
- fewer factors of production available
- can produce fewer consumer and capital goods with the factors available
outwards shift of PPF
economic growth: increase in the productive potential of the economy
- more resources available for production
- quality of resources improves
actual output
point inside PPF
all economies have some unemployment of resources or productive inefficiency
capital goods
assets a company uses in the production process to manufacture goods and services that consumers will use later
consumer goods
any terms purchased to satisfy the wants and needs of the buyer
division of labor
occurs when the production process i s broker down into tasks and each worker specialises on 1 or small range of tasks
specialisation
the production of a limited range of goods by an individual, firm or country in co-operation with others
specialisation by individuals is called division of labor
improves our standard of living
advantages of division of labor
- workers get better by doing the same task repeatedly
- more productive
- every worker is very good at what they do - more cost efficient
- less wastage: workers are very good at what they do
- equipment and training only given to those who need it - time saving
- each worker remains at their post and less time is spent moving around - easier to identify problem areas in the production process
disadvantages of division of labour
- workers may not be motivated to complete their tasks well
- they may quit or not show up to work - when one part of the production process stops, the whole process could stop
- since the workers/ machines are specialists, no one can replace the - over-specialisation of workers may cause them to lack flexibility to do other jobs
- when their industry dies they won’t have other jobs = structural unemployment - machines can easily replace people
- may cause unemployment - not all companies can utilise this principle
- only some type of production processes can use it
how can the disadvantages of DoL be addressed effectively?
- job rotation policy: increases flexibility of workers
- pay workers well/ benefits: prevents them from quitting
function of money
money encourages trade and facilitates specialisation
1. medium of exchange
2. measure of value
3. store of value
4. method of deferred payment
financial markets
buyers and sellers trade services or assets that are monetary in nature, allows participants to invest & speculate and make financial gains
product market
buying and selling of physical goods or services
factor markets
buying and selling of land, labor, capital
roles of financial markets
- to facilitate saving, eg banks, stocks, property
- make funds available to businesses and individuals, eg banks, investors
- enable borrowing by firms and individuals to take place
- firms are able to buy capital goods and expand its output - to facilitate the exchange of goods and services, eg cash, bank cheques
- create payment systems for goods and services to be traded quickly - to provide a market for equities
- equity finance: issuing shares can enable companies to raise capital/ money to finance their expansion
- owners of shares benefit by owning a share of the profits of the company, being able to save and make financial gains, being able to buy and sell the shares and make a profit
- stock markets provide opportunities for buyers and sellers to exchange shares, encourages people to purchase new shares knowing that they can sell it later if they want - to provide forward markets in commodities and currencies
- prices of many commodities and currencies are subject to much fluctuation
- purchasing forward contracts involves agreeing on a future price today to reduce the risk
- increases certainty for firms by creating more predictable prices for goods to be traded on a future date
evaluation points of financial markets
- accumulation of debt
- levels of interest rates may be too low for savings
- transaction fees may be high
- volatile stock markets, fluctuating commodity markets
- moral hazard and market bubbles
free market economy
all resources are allocated through market forces of demand and supply with no intervention by the government
the price mechanism allocates resources through bringing together buyers and sellers who agree on a price for the product. service
command economy
all resources allocated through administrative decision, eg by the government
mixed economy
resources are partly allocated through the market and partly by the government
what does the government do in a mixed economy?
- provides welfare benefits
- provides healthcare
- provides education
advantages of free market economy
- more choices and lower prices for consumers
- higher quality and innovation of products because of competition and profuse incentives
- more efficient
- more economic growth: more output nad better resource allocation
- more inequality because only winners get rewards
- higher risk: there is no safety net if they fail
- more political freedom/ choice
advantages and disadvantages of command economy
- less choice as consumers
- lower quality because lacking profit incentive
- less efficient because there is no incentive to allocate resources efficiently
- more equal: more unemployment, welfare and education benefits
- less freedom, more government control
