Chapter 1 Flashcards
What does ceteris paribus mean in economics?
Other things are being held equal or constant, so nothing else changes.
Why do economists need to make assumptions?
Because they cannot conduct scientific experiments like in the natural sciences.
What do economists use to build their models?
Real-life scenarios.
What are positive statements?
Objective statements that can be tested with factual evidence.
Identify key words that indicate a positive statement.
Will, is.
Provide an example of a positive statement.
‘Raising the tax on alcohol will lead to a fall in the demand for alcohol.’
What are normative statements based on?
Value judgements and opinions rather than factual evidence.
Identify key words that indicate a normative statement.
Should.
Provide an example of a normative statement.
‘The government should increase the tax on alcohol.’
How can value judgements influence economic decision making?
They can lead to different judgments from the same statistic.
What can the rate of inflation lead to?
Different conclusions among economists.
True or False: Positive statements can be rejected or accepted based on evidence.
True.
Fill in the blank: Normative statements suggest one action is ______ than another.
more credible.
What is the purpose of economic activity?
To produce goods and services which satisfy consumer needs and wants.
Economic activity involves the use of resources to create outputs that fulfill demand.
What are the inputs in the production process referred to as?
Factors of production.
These include resources such as land, labor, capital, and entrepreneurship.
What key decision must economists make regarding scarce resources?
How to use scarce resources.
This includes determining what goods to produce, how to produce them, and who will benefit from them.
What is the first question regarding production that must be addressed?
What is to be produced?
This involves decisions made by both the government and private sector.
What is the significance of opportunity cost in economic decision-making?
It requires careful consideration of the decisions made.
Opportunity cost refers to the value of the next best alternative that is forgone when making a choice.
What does ‘how should it be produced’ refer to?
The distribution of goods and services produced.
This includes considerations of efficiency and cost minimization in production.
What are firms aiming to achieve in the production process?
Minimise costs and maximise profits.
Firms analyze the cost and productivity of each factor of production to enhance efficiency.
What are the two types of production methods firms consider?
Labour intensive production and capital intensive production.
The choice depends on the costs and productivity of labor versus capital.
Who benefits from the goods and services produced?
Consumers who have purchasing power.
Those willing and able to pay the price charged for goods or services will receive them.
Fill in the blank: The rewards from each factor of production are considered in determining _______.
how the goods and services produced will be distributed.
What are the factors of production?
Land, labour, capital, and enterprise
These are also known as CELL.
What does ‘capital’ refer to in the context of factors of production?
Physical goods used in the production process, including fixed and working capital
Fixed capital includes machines and buildings, while working capital includes finished or semi-finished consumer goods.
What is the role of entrepreneurship in production?
Managerial ability that involves taking risks, innovating, and using factors of production
Entrepreneurs are key in drawing resources together into the production process.
What is meant by ‘land’ in the context of economic resources?
Natural resources such as oil, coal, wheat, and water, as well as physical space for fixed capital
Land represents the natural resources available for production.
What is ‘labour’ in economic terms?
The workforce of the economy, also known as human capital
Labour is compensated through wages.
What is the reward or incentive for capital in production?
Interest from investment
This is the return on capital invested in the production process.
What is the reward for entrepreneurship?
Profit
Profit serves as an incentive for entrepreneurs to take risks.
What are renewable resources?
Resources that can be replenished, maintaining stock levels over time
Examples include oxygen, fish, and solar power, provided consumption rates do not exceed replenishment.
What happens if renewable resources are consumed faster than they are replenished?
The stock of the resource will decline over time
This is a critical concern in environmental economics.
What is a significant prediction made by the Worldwide Fund for Nature regarding resource consumption?
Two planets will be required to meet global demand by 2050 if current consumption continues
This highlights the urgency of sustainable resource management.
What are non-renewable resources?
Resources that cannot be renewed, such as fossil fuels
Examples include coal, oil, and natural gas.
What is a consequence of consuming non-renewable resources?
The stock level decreases over time as it is consumed
This necessitates methods like recycling and finding substitutes to mitigate resource depletion.
What is the basic economic problem?
Scarcity
Wants are unlimited while resources are finite, leading to the need for choices.
What does scarcity mean in economics?
Limited resources versus unlimited wants
Scarcity requires optimal use and distribution of resources.
What is opportunity cost?
The value of the next best alternative forgone
It reflects the cost of a foregone choice.
In the example of choosing between a chocolate bar and a packet of crisps, what is the opportunity cost if crisps are chosen?
The chocolate bar
Opportunity cost is the value of what is not chosen.
If a car was bought for £15,000 and depreciates by £5,000 after 5 years, what is the opportunity cost of keeping the car?
£5,000
This is the potential gain from selling the car.
Why is opportunity cost important to economic agents?
It influences choices made by consumers, producers, and governments
These agents must allocate finite resources effectively.
What choices might producers face regarding opportunity cost?
Hiring extra staff or investing in a new machine
Producers must decide where to allocate resources.
What choices might a government face regarding opportunity cost?
Spending more on the NHS or spending more on education
Governments must prioritize due to limited resources.
Fill in the blank: The basic economic problem is _______.
scarcity
True or False: Opportunity cost only applies to financial decisions.
False
Opportunity cost applies to all choices, not just financial.
What do production possibility frontiers (PPFs) depict?
The maximum productive potential of an economy using a combination of two goods or services when resources are fully and efficiently employed.
What do PPF curves illustrate regarding scarce resources?
The opportunity cost of using the scarce resources.
What is the opportunity cost incurred when producing more yoghurt than cheese at point B?
The lost units of cheese that could have been produced.
What does the law of diminishing returns state about producing more yoghurt?
The opportunity cost of producing more yoghurt increases in terms of the lost units of cheese.
What does producing at points C or D on the PPF indicate?
Inefficiency, as resources are not used to their full productive potential.
What is the potential outcome of using resources more efficiently in relation to the PPF?
Shifting production closer to the curve.
Fill in the blank: Producing at points C or D indicates the _______ of economic resources.
unemployment
