A Level Economics- Year 1: Nature Of Economics Flashcards
Define ceteris paribus
All other things remain the same
How is ceteris paribus used to make assumptions?
Allows economists to focus on particular changes without the interaction of other factors.
Define a social science
The study of people in society and how they interact with each other
How is economics different to other sciences?
The inability to make scientific experiments because other variables are always changing
What is the process of developing models in economics?
Putting forward a model, gathering evidence and then accepting, changing or disregarding the model
What is a positive statement?
A statement which is objective, based on value judgements and emotions and can be proven
What is a normative statement?
A statement which is subjective and based on opinion and cannot be proven or disproven
How do value judgements influence decision making?
Different economists may make different judgements from the same statistic
Define the basic economic problem
People have infinite wants and needs but resources are finite and scarce
How do economists solve the economic problem?
By working out what to produce, how to produce it and whom to produce for
Define renewable resource
Resource of economic value which can be replaced on a level equal to consumption
Define non-renewable resource
Resource of economic value that cannot be replaced on a level equal to consumption
Who are the economic agents?
Individuals, households, firms and government
Define opportunity cost
The next best alternative foregone when making a choice
How do consumers make choices?
Based on what gives them the greatest level of satisfaction
How do producers make choices?
Bases on what gives them the greatest level of profit
How do government make choices?
Based on what will maximise social welfare
What are the factors of production?
Land- all natural resources used in production
Labour- all productive human effort
Capital- all man-made resources used to produce goods and services
Enterprise- the willingness and ability to take risks of combining the other factors of production to make a product
What does a PPF show?
The maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology
Why is the PPF a curve?
The first resources switched from capital to consumer good production are resources that are not adding much to capital goods but will be much more productive in the production of consumer goods
How does the PPF help economists?
It gives no indication of which combination of goods is best and so countries have a choice of what to produce
How does economic growth on the PPF occur?
Increasing the quantity and/or quality of
resources.
How does economic decline on the PPF occur?
Natural disasters, natural resources running out, or a decrease in the quantity/quality of labour, due to
war, migration or a fall in spending on education.
When are all resources allocatively efficient?
At all points
When is production unobtainable on the PPF?
Beyond the PPF because there are not enough resources/technology to produce there
When is production inefficient on the PPF?
Within the PPF because out is not maximised
What does a movement along the PPF curve indicate?
A change in the combination of goods produced
What does a shift of the PPF curve indicate?
A change in the productive potential of the economy
Define consumer goods
Goods that are demanded and bought by households and individuals
Define capital goods
Goods that are produced in order to aid the production of consumer goods in the future
Define specialisation
The production of a limited range of goods by a company/individual/country
Define division of labour
When labour becomes specialised
What are the advantages of specialisation?
.Enables labour productivity to be increased
.Leads to a higher quality of goods/services
.Develop specialist tools
.Trade
What are the disadvantages of specialisation?
.Over Specialisation leads to vulnerability
.Exhausted resources
What are the advantages of division of labour?
.Decrease in the cost per unit
.Increased productivity
.Cheaper for consumer
.Workers trained faster
What are the disadvantages of division of labour?
.Increased boredom
.Lack of productivity
Name the functions of money
.A medium of exchange
.A measure of value
.A store of value
.A method of deferred payment
What does a medium of exchange mean?
It can be used to buy and sell goods and services and is acceptable everywhere
What does a measure of value mean?
It can compare the value of two goods
What does a store of value mean?
It is able to keep its value for a long time
What does a method of deferred payment mean?
It can allow for debts to be created so people can pay without having money in the present
What is a barter economy?
An economy where people exchange goods and services for other goods and services in return
What are the problems with a barter economy?
.The double coincidence of wants-
.Non-divisibility of certain goods
What the benefits of a free market economy?
.Individuals are free to make their own choices
.Profit is the main motive for businesses- creates competition
.Producers can produce what they want
What are the problems of a free market economy?
.Inequality
.Monopolies- exploit the market with high prices
.Overconsumption of demerit goods- negative externalities
.Public goods are not provided
Which economists agreed with the free market economy?Why?
.Adam Smith- Smith’s famous theory of the invisible hand of the market can be applied to free market economies and the price mechanism, which describes how prices
are determined by the ‘spending votes’ of consumers and businesses.
.Friedrich Hayek- Hayek argued that government intervention makes the market worse.
Define a command economy
An economy where the government allocates all resources
Which economist agreed with the command economy?Why?
Karl Marx- saw the free market as unstable, he saw profits created in the free market as coming from the exploitation of labour, and by not paying workers to cover the value of their work.
What are the benefits of a command economy?
.Monopoly power is prevented
.Inequality reduced
.Ensures basic necessities
What are the problems of a command economy?
.May not meet consumers preferences
.Limits personal freedom
Define a mixed economy
An economy where resources are allocated both by the government and economic agents
Which economists agreed with the mixed economy?
John Maynard Keynes
What are the benefits of a mixed economy?
.The government provides public goods
.Personal freedom
What are the problems with a mixed economy?
.Monopolies
Section 2
Section 2
Define demand
The willingness and ability of a consumer to buy a good at a given price and time
What factors cause a movement along the demand curve?
Change in price of a good- decrease causes an extension and an increase causes a contraction
What factors cause a shift in the demand curve?
.Population .Advertisement .Substitutes .Income .Fashion/trend .Interest .Complementary goods .External shocks .Speculation
Why is the demand curve downward sloping?
Diminishing marginal utility- the more we consume, the less satisfaction gained
Define the theory of demand
States that as the price of a good rises, the quantity demanded of the good will fall, vice-versa
How does the law of diminishing marginal utility influence the demand curve?
.Income effect- when the price of a good increases, people can afford less so demand less
.Substitution effect- when the price of a good increases people switch to alternative goods
What equation is used to calculate Diminishing Marginal Utitlity?
DMU = ^Utility
_______
^Quantity
Define price elasticity of demand
Measures the responsiveness of quantity demanded to a change in price
What is the equation to calculate the PED?
PED = %change in quantity demanded
%change in price
What is the PED value and description of a perfectly inelastic good?
PED = 0 - Because a change in price has no effect on output so demand is completely unresponsive to price
What is the PED value and description of a relatively inelastic good?
PED = <1 - Because quantity demanded changes by a smaller percentage than price so demand is relatively unresponsive to price
What is the PED value and description of a unitary elasticity good?
PED = 1 - Because quantity demanded changes by exactly the same percentage as price
What is the PED value and description of a relatively elastic good?
PED = <1 - Because a change in price means that quantity falls to 0 and demand is very responsive to price
What is the PED value and description of a perfectly elastic good?
PED = infinity = Because quantity demanded changes by a larger percentage than price so demand is relatively responsive to price
What factors influence PED?
.% of income spent .Brand loyalty .Addictiveness .Necessity vs luxury .Time period .Substitutes
Define revenue
Income earned from selling goods and services
What equation is used to find revenue?
Revenue = Price of good x Quantity sold
What equation is used to find revenue?
Revenue = Price of good x Quantity sold
