Chapter 1 - 4 Flashcards
- PPF -CELL -economic data -economic problem
The scientific method
- postulates a theory
- gathers evidence to support or refute the theory
- accepts, modifies or refutes the theory
Simplification
- economic theories + models are unrealistic
- however it must be so if it is to be useful
What is ceteris paribus?
- all other things being equal
eg. only change one factor such as price + keep income or price of other goods constant
What is a positive statement
- can be proven to be true or false (can be supported or refuted by evidence)
eg. the service sector will grow by 30% in size over the next 5 years
What is a normative statement?
- valued judgement (opinion)
- statements that can’t be supported or refuted
eg. the gov should increase the state pension
Why do economists collect data? (2)
➜ scientific method requires that theories be tested
-used to gather data to support or refute hypothesis
➜ provide support for particular policies
- unable to make policy recommendations without data
➜ difficult to collect data
What measures inflation?
➜ Consumer Price Index (CPI)
What measures employment + unemployment?
➜ Labour Force Survey
What is the CPI and Labour Force Survey based on?
➜ surveys: only reliable if there is accurate sampling + measuring and rarely as accurate as a complete count
Nominal values
➜ values unadjusted for inflation
- expressed at current prices
Real values
➜ values adjusted for inflation
- constant prices
- use a base period
What is the basic economic problem?
➜ finite/scarce resources and infinite wants
What are economic goods?
➜ resources which are scarce
What are free goods?
➜ resources which are not scarce
- eg. air
What is scarcity?
➜ limited amounts of land, oil, good, water + other resources
What is economics?
➜ study of allocating scarce resources
What is opportunity cost?
➜ the benefit lost from the next best alternative
-eg. for producer, the opp cost of buying a machine might be the wage of 4 workers for 3 years
What is the advantage of free goods?
➜ no opportunity cost
- no resources need to be sacrificed when someone breathes the air or swims in the sea
What are the 3 parts of the economic problem?
➜ What is to be produced?
➜ How is production to be organised?
➜ For whom is production to take place?
What are the factors of production?
➜ Land
➜ Labour
➜ Capital
➜ Enterprise
Land
➜ not just land but natural resources, the sea, rainwater, natural forest
Non-renewable resources
➜ coal, gold, copper (land)
➜ once used will never be replaced
Renewable resources
➜ used + replaced
➜ fish stocks, forests, water
Sustainable resources
➜ can be exploited economically
➜ will not diminish/ run out
➜ eg. a forest can be if it survives over time despite economic activities like farming
Non-sustainable resources
➜ diminishing resources over time due to economic exploitation
eg. oil is a non-sustainable resource as it is not replaceable
Labour
➜ workforce of an economy
eg. doctors, vicars, ministers
- each worker has a unique set of inherent characteristics incl. intelligence + product of education and training
What is human capital?
➜ value of a worker
- education + training will increase the value of that human capital, enabling the worker to be more productive
Capital
➜ manufactured stock of tools, machines, factories, offices, roads and other resources which is used in production of goods and services
➜ 2 types: working capital and fixed capital
Working capital
➜ stocks of raw material, semi-manufactured + finished good waiting to be sold
➜ stocks circulate through the production process till they are finally sold
Fixed capital
➜ stock of factories + offices, plant and machinery
➜ it will not be transformed into a final product as working capital will
➜ used to transform working capital into finished products
Enterprise
➜ seeking out profitable opportunities for production + taking risks in attempting to exploit these
➜ individuals organise production, take risks
Rewards to factors of production
➜ receive payments when they allow other economic agents to use them for a period of time
eg. reward for labour is wage
- rent/profit
The problem of scarcity
➜ resources are scarce + only a finite amount produced
PPF
➜ production possibility frontier
➜ shows the different combo of economics goods which an economy is able to produce if all the resources in the economy are fully + efficiently employed
➜ there’s an opportunity cost
Economic growth
➜ curve shifts right -> shift outwards of the PPF for an increase in productive potential
➜ quantity of resources available for production ⇡ eg. new factories + more workers
➜ increase in the quality of resources - education makes workers more productive, technical progress allows machines and production processes to produce more with the same amount of resources
Economic decline
➜ PPF shift inwards
- war
- high levels of unemployment
Capital goods
➜ goods that are used in the production of other goods
➜ factories, offices, roads, machines and equipment
Productive efficiency
➜ curve which shows the max potential level of output of 1 good given a level of output for all other goods in the economy
➜ production takes place at lowest cost
- given set of resources produces the max number of goods
➜ all points on the PPF are productively efficient
Allocatively efficient
➜ social welfare is optimised
Consumer goods
➜ goods + services that are used by people to satisfy their needs and wants
➜ eg. food, holidays
