Definitions of the nature of economics Flashcards
Economic model
these seek to derive verifiable implications about economic behaviour
Social science
concerned with society and the relationships among individuals within society
Positive statements
positive statements are value-free, objective and testable
Normative statements
normative statements are subjective, non-testable, value judgements
Scarcity
scarcity results from finite resources being unable to produce enough to fulfil infinite wants
Opportunity cost
This is the next best alternative which is foregone whenever an economic decision is made
Renewable resources
Resources that are replenished by natural processes at a rate comparable or faster than its rate of consumption by humans or other uses
Land
Natural resources: that is any free gift of nature e.g. coal reserves or fish in the sea. Its reward is rent
Labour
The mental or physical effort of humans in the production processes for which they are paid. Its reward is wages
Capital
Producer goods that only indirectly satisfy wants e.g. machinery and factories. Its reward is interest
Consumer goods
Goods that directly satisfy wants
Enterprise
Organises and controls the other factors and takes the risks in the production processes. Its reward is rent
Production possibility frontier
A curve showing the maximum possible alternative combinations of two goods eg capital and consumer goods that an economy can produce using all the available factors of production efficiently. Moving from one point on the curve to another indicates the opportunity cost of increasing one items production in terms of the units of the other forgone
Productive efficiency
Producing the greatest value output of the least value inputs. For a firm it means producing at the lowest average total cost ATC
Allocative efficiency
Producing the correct bundle of goods to maximise welfare, For a firm it means producing where price = marginal cost
Division of labour
The separation of tasks in the production process and their allocation to different groups of workers.
Diminishing Marginal Returns DMR
The idea that as successive units of a variable factor are added to a fixed factor that each extra unit of the variable factor adds less output than the one before it
Short run
The time period in which at least one factor of production is fixed
Long run
The time period in which all factors are variable
Market economy
An economy based on competition, the private ownership of factors, little government intervention and where the price mechanism determine the allocation of scarce resources through the market forces of supply and demand,
Command/control economy
A type of economic system where the resources are state owned and their allocation and use is determined by the centralized decisions of a planning authority e.g. North Korea
Mixed economy
An economic system which is a combination of market and command economic systems where market forces control the allocation of some resources, but also government’s intervene in the allocation to try correct market failures.
Transition economy
This is an economy which is changing from a planned economy to a free market. This economic change (letting market forces set prices, lowering trade barriers, and moving from public to private ownership of resources) often leads to initial high inflation and may lead to increased inequality of incomes and wealth.
Competitive markets
Characterised by large numbers of buyers and sellers, freedom to enter the exit the market and a homogenous product
Why is it harder to do experiments in economics than pure science
Because you cannot control all the variables as it is based upon human actions and so is uncontrallable
The underlying assumptions of ratioanl econonomic decision making is that
Consumers aim to maximise utility (sometimes dont due to information failures of costs)
Firms aim to maximisee profits (and so their utility)
What is profit
Revenue minus costs
Ceteris paribus
All things equal
