4.1.1 Economic methodology and the economic problem Flashcards
What are market economies?
Use price mechanism to allocate scarce resources in the system of markets that make up the economy.
What are planned economies?
Use planning mechanism to allocate scarce resources to their final use. Gov decides: What, How, To Whom.
What is economic welfare?
Well-being of an individual or a group within society, or an economy. Satisfying peoples needs and wants means improving economic welfare.
What is the fundamental economic problem and why?
Scarcity.
- People have unlimited wants but there aren’t enough resources to supply all these wants.
- Occurs when there are finite resources available to supply infinite wants.
What is an economic agent?
- An entity that engages in economic activity
- Activity can be buying. selling, or producing goods and services.
What are the four main types of economic agents?
- Households or individuals
- Firms (businesses)
- Governments
- Central banks ( e.g. Bank of England)
What is an opportunity cost?
The benefit lost of the next best alternative that could’ve been chosen, e.g. should i buy pepsi or fanta.
What are the 3 different types of goods and what are they?
- economic goods- resources required which are finite or scarce (e.g. land, water, oil, e.t.c)
- free goods- resources which aren’t scarce, e.g. air (infinite). Therefore, they don’t have an opportunity cost.
- consumer goods- products that are purchased for consumption, e.g. iPhone’s, PS4s, sweets, e.t.c
What are the four factors of production- explain them.
- land - natural resource available for production.
- labour- human input into production process.
- capital- equipment/machinery that can produce other goods in the future.
- enterprise- entrepreneurship is the skills, ability and readiness to develop and run a business enterprise, together with being prepared to accept the risk of failure, in order to make a profit.
What is a production possibility frontier?(pff)
A graph that shows all the different combinations of output of two goods that can be produced using available resources and technology.
How are PPFs used to show concepts of trade-offs and conflicting objectives?
- trade-offs between competing uses occur as there is a choice as to how we utilise resources available.
- conflicting objectives might arise as there is an opportunity cost with what goods and services we decide to produce.
What are capital and consumer goods?
- capital goods are those that produce income in the future, e.g. machinery ( produce goods which will be subsequently sold)
- consumer goods are those that produce an immediate benefit to the consumer, e.g. a car for personal use.
Future generations will benefit from production of capital goods, whilst current generations will benefit from production of consumer goods.
What is marginal analysis?
- process of determining the optimal level at which to pursue an activity, by comparing its marginal benefits to its marginal cost, or cost of purchasing one more unit of activity.
- looks at opportunity cost between two goods shown on PPF
Why is there sometimes a shift in PFFs?
- when there is an increase in availabilty of resources, or improved efficiency in respect to both goods, PPF will shift to the right (outwards). Economic growth for whole economy
- when there is a reduction in resources available, will be a resulting reduction in production capacity. Causes PPF to shift inwards- to left. Could result in: emigration, civil unrest, obsolete equipment, e.t.c- for whole economy.
How can efficiency be measured?
- can be measured in terms of average output per unit of input ( unit of resource )
- in terms of calculating productivity output per unit of input
