Introduction to Economics Flashcards
What is the economic problem?
Limited resources in an economy/society which leads to fundamental problem of scarcity.
- Scarcity arises in the face of unlimited wants and limited resources therefore choices must be made on how to allocate the resources
What is scarcity?
A situation that arises because people have unlimited wants in the face of limited resources, therefore choices must be made.
4 Factors of Production
Land
Labour
Capital
Enterprise
Free and Economic Goods
Free Good - a good with zero opportunity cost (not scarce)
Economic Good - a good with an opportunity cost (scarce)
Positive Statement
a statement about what is e.g. about facts
Main Economic Agents
Households
Firms
Governements
Households (consumers)
make choices about their expenditure and where to supply labour (where to work)
objective - to maximise utility from expenditure
Normative Statement
a statement involving a value judgement that is about what ought to be
Firms
make choices about which goods and services to produce
objective - maximise profit
Governments
make choices about types of taxation and how much to tax
objective - maximise welfare (well-being) for society
What is Opportunity Cost?
The benefits forgone of the next best alternative.
What is a centrally planned economy?
An economy where the only the government decides how best to allocate the scarce resources
Advantages of a planned economy
Abuse of monopoly power is prevented
inequality in society is reduced
will ensure that everyone can access basic necessities
Disadvantages of a planned economy
May not be allocatively efficient
limits democracy
may not meet consumer preferences
What is a free market economy ?
This is an economy where the government leaves the market to its own devices
There is no government intervention
Advantages of a free market ?
firms are efficient as they provide goods and services demanded by consumers
- Can be both productively and allocative efficient due to competition
Disadvantages of a free market
- Merit goods are underproduced and public goods are not produced
- No social security payments for those on low income
- ignores inequality
- could be monopolies which could lead to an exploitation of the market
What is a mixed economy ?
It has features of both a planned and free market economy
Market is controlled by both the government and forces of supply and demand
What is market failure
when a free market fails to allocate resources in the most efficient way
What is productive efficiency ?
production of goods and services by firms is achieved at the lowest possible average total cost, choosing an appropriate combination of inputs and producing the maximum output from those
What is allocative efficiency ?
The right amounts of the products and services are produced where consumer satisfaction is maximised
What is opportunity cost ?
The benefits forgone of the next best alternative when a choice is made
What is a production possibility curve
This shows the maximum quantities of different combinations of output of two products, given current resources and the state of technology
What are capital goods?
Goods used to increase the future of the economy
What is the reward for land?
Rental income
What is the reward for labour?
Wages and employment
What is the reward for capital?
Interest
What is the reward for enterprise?
Profits
What is an incentive?
Something that encourages an individual to partake in a course of action
What is economic efficiency?
Where both allocative and productive efficiency are achieved
What is a PPC?
Shows the maximum quantities of different combinations of output of two products given current resources (FOP)
What is trade-off?
The calculation involved in deciding on whether to give up one good for another
