E - 1) The economic problem and economic methodology Flashcards

1
Q

What is the purpose of economic activity?

A

To produce goods and services to meet our needs and wants

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2
Q

What are needs?

A

Things you must have to survive

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3
Q

What are wants?

A

Things you desire but are not essential

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4
Q

What is the basic economic problem?

A

There are infinite wants yet finite resources. Resources are scarce in relation to wants

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5
Q

What choices need to be made about the allocation of resources?

A
  • What to produce?
  • How to produce?
  • For whom to produce for?
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6
Q

What are the factors of production?

A
  • Land: natural, physical resources
  • Labour: human input
  • Capital: man-made resources, e.g. machinery
  • Enterprise: the ability and willingness to organise, coordinate and take risks in the production process
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7
Q

What are the rewards for of the factors of production?

A
  • Land: rent
  • Labour: wages
  • Capital: interest
  • Enterprise: profit
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8
Q

What is the difference between microeconomics and macroeconomics?

A
  • Microeconomics studies the behaviour of individuals and firms in the market
  • Macroeconomics considers the economy as a whole
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9
Q

What do rational economic agents aim to maximise?

A
  • Consumers: total utility
  • Workers: wages and benefits from work
  • Producers: profit
  • Government: social welfare
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10
Q

What is opportunity cost?

A

The value of the next best alternative forgone when a choice is made

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11
Q

What are positive statements with an example?

A

They describe the world as it is, without making any value judgments. They are based on objective facts and can be proven or disproven
Example: a rise in minimum wage decreases employment

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12
Q

What are normative statements with an example?

A

They express an opinion about what ought to be. They are subjective statements that carry value judgments
Example: the government should increase spending on healthcare

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13
Q

What are production possibility frontiers (PPFs)?

A

Diagrams that shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed

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14
Q

What do PPF diagrams look like?

A
  • Capital goods on the y-axis and consumer goods on the x-axis
  • Curved due to the law of diminishing returns - the marginal extra output of consumer goods diminishes as more factor resources are allocated to it
  • Any point on the curve is productively efficient - all resources are fully employed
  • Any point inside the curve is productively inefficient - some resources are unemployed
  • Any point outside the curve is unnatianable - cannot be produced with current resources and state of technology
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15
Q

What is movement along the PPF curve?

A

The opportunity cost of producing more of one good which forgoes production of the other (a trade-off). The higher the change in production, the higher the opportunity cost

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16
Q

What are shifts in the PPF curve?

A
  • Inward shifts: less resources available to produce with - production possibility decreases
  • Outward shifts: more resources available to produce with - production possibility increases
17
Q

What causes inward shifts in the PPF curve with examples?

A
  • Decrease in the quantity of factors of production. Examples: war, conflict, natural disasters
  • Decrease in the quality of factors of production. Examples: capital scrapping, labour hysterisis (loss of workers’ skills) in a prolonged recession
18
Q

What causes outward shifts in the PPF curve with examples?

A
  • Increase in the quantity of factors of production. Example: discovery and extraction of new natural resources
  • Increase in the quality of factors of production. Example: increase in labour productivity due to better management
  • Advancement in technology. Example: a new innovation in resource use
19
Q

What are non-parallel shifts in the PPF curve?

A

When one of the causes of a shift happens, that only affects one of the goods. The production of one good increases/decreases but the other good stays the same

20
Q

What do straight line PPF curves indicate?

A

Resources are equally efficient at producing both goods - opportunity cost is constant