Comprehensive Micro Year 1 Flashcards
What is the economic problem?
Humans have unlimited wants and needs but limited resources.
What is an economic good?
There is a limited supply. These goods are scarce.
What is a free good?
This is not usually seen as limited in supply
Give an example of a free good.
Air
What are the three questions of the economic problem?
What should be produced?
How should it be produced?
For whom should it be produced?
What is microeconomics the study of?
The study of the behaviour of individuals, firms and governments in relation to the allocation of products and/or resources.
What is scarcity?
When there is a limited amount of something
Macroeconomics
The study of the behaviour and performance of the economy as a whole?
What is a positive statement?
A factual statement which can be tested.
What is a normative statement?
An opinion based statement.
What are economic agents?
Key groups involved in the economic problem- e.g. government, firms and households.
What are the two key roles of households in the economy?
Consumers
Providing labour or a workforce.
What are the two key roles of firms in the economy?
Producers of goods and services.
Purchasers of goods and services in the production process.
What is the role of the Government in the economy?
Taxation
Spending
Social Welfare
BUT the role of the government depends on the political party
What is rationality?
The assumption each economic agent (firms, households and governments) act in their own best interests:
Households maximise utility
Firms maximise profit
Governments maximise welfare.
What are the factors of production?
Land, labour, capital and enterprise.
What do the factors of production do?
They are the building blocks to produce goods and services.
What is a the reward of a factor of production?
The return for the use of a factor of production (by firms)
What is the reward for land?
Rent
What is the reward for labour?
Wages and salaries
What is the reward for capital?
Interest
What do economists mean by land?
The area of the earth’s surface and the raw materials within it e.g. soil, coal, fish.
What is the reward for enterprise?
Profit
What do economists mean by labour?
The mental and physical effort of people
What do economists mean by capital?
Buildings, machinery, vehicles and money
What do economists mean by enterprise?
The entrepreneur who takes a risk and organised the other factors of production.
Exam question: Explain the concept of rationality (4)
Rationality in economics is the main assumption made about the key agents in economic systems. Firstly, it assumes agents seek to maximise one goal in line with their preferences. For consumers this is utility, for firms it is profit and for governments it is the level of welfare in society. Rational behaviour is based on the assumption of access to perfect information and the agent is able to weigh up all the options before making the decision. It assumes agents are not influenced by emotions, morals or psychology and form decisions using logic.
What is resource allocation?
How the factors of production are shared out amongst different uses.
Capitalism
A system of production where there is private ownership of productive resources. Individuals can pursue their preferences. Government doesn’t interfere.
Adam Smith
Economist and Philosopher known as the father of Economics. He wrote the Wealth of Nations in 1776 and is seen as the founder of classical economics.
‘Invisible hand’
Concept introduced by Adam Smith that by acting in self interest, agents help to allocate resource efficiently through the market mechanism.
Free market economy
Market forces between consumers and firms guide the allocation within a society. Government has role of protecting property rights.
Command Economy
Where the government decided what is produced, how much is produced and the price. Government departments set targets for firms.
Karl Marx
Historian who developed the idea of Communism. He criticised private ownership of productive resources. His ideas resulted in centrally planned economies.
Mixed economy
An economy which has some free market forces and government intervention.
Government intervention
When the government passes laws to tax or spend to provide goods, influence a market or regulate behaviours.
Behavioural Economics
A field of economics which has developed since the 1970s looking at the psychology of decision making.
Rational agent
This is the belief in classical economics that agents will make decisions to maximise utility, profit or social welfare.
Rational decision making
based on perfect information, stable preferences, independent choices, maximising objectives.
Bounded rationality
Economic agents are restricted by bias, lack of information, heuristics, cognitive processes so make the best decision they can.
Heuristics
Short cuts economic agents use to find the ‘good enough’ outcome.
Advantages of free market systems
Efficient allocation of resources, high quality goods, range of goods, innovation.
Disadvantages of free market systems
Underprovision of some goods e.g. health care, education and inequality.
Advantages of Command Economies
Socially optimal provision of education, health care. More equal distribution of wealth.
Disadvantages of Command Economies
Inefficient allocation of resources, lack of innovation, low freedom.
