4.1.1 Economic methodology and the Economic Problem Flashcards
What does Economics as a social science mean
It means we can never be sure how people and businesses will respond to the changing circumstances around them
What is a positive statement
Objective statements that can be tested
What is a normative statement
Are subjective statements
What are the 3 Economic agents
What do they wish for
Rational consumers - Wish to maximise satisfaction
Firms- wish to maximise profits
Governments- Wish to improve economic and social welfare of its citizens
Define Microeconomics
Is the study of economics at the level of the individual firm, industry or consumer
What are most economic decisions influenced by ?
Influenced by value judgements, which vary from person to person, causing debate
What is a value judgement
Is a judgement made on opinion
Define Equity
A way of considering fairness in the distribution of income and wealth in the outcome of economic activities
What are the four factors of production
Land- raw materials and resources available
Labour- people available to work
Capital- tools and machinery used in production
Enterprise- Investing in other production processes to make a profit
What are the rewards of the factors of production
Land- rent
Labour- wages
Capital- interest
Enterprise- profit
What are scarce resources
Goods and services which are scarce because of the limited availability of the factors of production
Define rationing
Is a way of allocating scarce goods and services when market demand outweighs the available supply
What are the ways of allocating scarce resources
Market price (main) Consumer income Assessment of need Education level Age
What are the types of market
Command economies (North Korea) Mixed economies (UK) Free market (USA)
Every market is regulated to some extent
Define the basic economic problem
Where finite resources are allocated to satisfy needs and wants
What does producing on the PPF curve mean
Productively efficient
Lowest possible unit cost
Waste is minimal
What does producing below the PPF curve mean
Inefficient use of resources (FOP)
More waste
What does producing above the PPF curve mean
Unattainable given resources
Can become attainable
What is opportunity cost
Give 4 examples
Measures the cost of a choice made in terms of the next best alternative foregone or sacrificed
Work leisure choices
Government spending priorities
Investing today for consumption tomorrow
Use of scarce farming land
What is economic investment and what is it needed for
Adds to the capital stock of the economy
Needed to continue to be productively efficient
What are capital goods
Used to make consumer goods and services
What are consumer goods
Satisfy are needs and wants directly
If the PPF line is straight what does it mean in terms of marginal opportunity cost
Switching resources between capital and consumer goods is constant
If the PPF line is concaved what does it mean in terms of marginal opportunity cost
Means changing production between goods is not easily substitutable
How does the law of diminishing marginal returns occur
Because not all factor inputs are equally suited to producing items, leading to lower productivity
What are the ways of increasing the PPF curve
Q2
Quality - better trained/motivated staff, better capital
Quality - More staff, land and capital
How can a reduction in the PPF curve occur
Capital depreciates over time. Not able to produce the quality of goods, consumer goods will decrease
What is the price mechanism
Market forces of supply and demand determine what is produced and sold at what price.
Determines the allocative efficiency
What is allocative efficiency
Efficient level of output is the combination of goods and services that best meets the needs and wants of society
What are the functions of the market (price mechanism)
They allocate resources The signalling function (following demand to generate most profit as possible) The rationing function (when a resource is scarce prices go up as it is rationed) Providing incentives (higher prices give businesses incentives to supply more)
What is a Production Possibility Frontier curve
A diagram that shows the different production combinations that can be produced given a fixed resource stock
What is a free good
Goods with no opportunity cost to producing and consuming them, e.g. air
What is imperfect information
Where consumers do not possess all the information required to make fully rational decisions
What is asymmetric information
A source of information failure where one economic agent knows more than another , giving them power in a market transaction.
What does allocative efficiency allow in terms economic value
Allocative efficiency allows the people who best see economic value and utility in something to pay for it.
Define Diminishing marginal return
As individuals consume more units of a good or service , the additional units give smaller increases in total satisfaction.
Define supply
Is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period
What is the basic law of supply and what are the reasonings for it
Is that as the price of a product rises businesses expand supply tl the market
Profit motive
Productions and costs
New entrants coming to the market
What is a a supply curve
What does it represent
Shows the relationship between market price and how much a firm is willing and able to sell (shows marginal cost curve)
Represents minimum price firms would accept to produce quantity of output
Define marginal cost
The additional cost of producing one more unit of output
What does a supply curve represent
The quantity of goods and services that can be sold in current market conditions . An increase or decrease in the supply curve can change price of output, it can change based on wants of people
What is the acronym for factors that can change supply
Productivity Indirect taxes (tax to produce) Number of firms in the market Technology Subsidies (money granted by government to keep price low) Weather/natural disaster/war Cost of production
