LS1 - LS10 Flashcards
Economics
The study of the economy
An economy is?
All the goods and services produced in an area
Difference between a good and service
Goods are tangible and services are intangible
Name the 4 factors of production?
Capital
Enterprise
Land
Labour
What is capital?
used to make goods and services - such as machinery and automation
What is enterprise?
The willingness of people in business to take risks to make a profit
What is land?
Refers to the natural resources such as oil, forests, and the land itself
What is labour?
All of the work done by humans in production
What is the economic problem?
How to use the available scarce resources to satisfy people’s infinite needs and wants as effectively as possible
Three key questions?
What to produce?
How to produce it?
Who to produce it for?
What are economic agents?
Groups that participate in the economy
What is a producer?
Who produces goods and services
Another term for a business?
Firm
Role of the government?
Sets rules that other economic agents must follow.
They also produce some goods and services such as roads, health care and education.
Who are consumer?
They buy goods and services made by firms.
Individuals and firms can be consumers - such as supplier to firms
How do economists explain how the economy works?
Via developing models
How do economists explain and predict economic phenomena?
Using data and assumptions to make models
What is ceteris paribus?
Meaning “all other things being equal” - showing the indication of the effect one economic variable has on another, provided that that all variables are constant
What is the opportunity cost of a decision?
Is the value of the next best alternative forgone (as a result of the choice made)
What are the uses of opportunity cost?
Consumers uses it to decide what to spend their incomes on
Producers use to decide what and how to produce goods and services
Governments use it to decide what policies to choose
Empirical models?
Models based on economic data - using facts, statistics and numbers
Theoretical data?
Models based off theoretical data such as theory/hypothesis
Why do economists use the ceteris paribus assumption?
It is used to isolate the variable and make decisions and predictions.
What is a PPF?
Production possibility frontier
It shows the maximum potential output of a combination of two goods or services an economy can achieve when all of its resources are fully and efficiently used/employed, given the current level of technology.
If a point on the PPF shifts outwards…?
It is undergoing economic growth, meaning quality and quantity of goods and services had increased due to efficient use of factors of production.
If a point on the PPF shifts inwards…?
It is undergoing a decline in economic growth as there is a decrease in quality of quantity of goods and services - due to inefficient use of factors of production
What is economic growth?
Increase in the production of goods and services in an economy
What is negative economic growth?
Decrease in the production of goods and services in an economy
List three economic agents?
Consumers, producers, the government
Point E on a PPF?
Under-utilisation or underemployment of allocation of resources - machinery and labour not being used, entrepreneurship not being encouraged - inefficient use of factors or production
The curve/arc of the PPF shows…
The maximum amount of output a economy can produce
Consumer goods?
Goods which do not produce other goods
What are consumer goods for?
Used by people to satisfy their wants and needs
Capital goods?
Goods which are used to produce other goods and services
If an economy is at any point on the PPF…
There is an efficient allocation of resources, since none are being under-utilised or wasted
What are positive statements?
Economic statements that can be proven true or false - they are objective
What are normative statements?
Economic statements express opinions and cannot be proven true or false - they are subjective
Words that indicate that an economic statement is normative….
Fair
Unfair
Should
Ought
Better/worse
In decision making, governments….
Make valued judgements on economic issues
Use positive analysis to help them make decisions
What is specialisation
Occurs when an individual, firm, region or countries concentrates on the production of a limited range of goods and services
What is division?
The specialisation of workers on specific tasks in the production process
What is productivity?
The effectiveness of productive effort - usually measured in terms of the rate of output per unit of input
Increased productivity leads to…
Higher output and higher quality
Higher standard of living
More efficient use of resources
Advantages of division of labour
Works become more skilled though repetition of tasks
Productivity rises so output rises
Time is saved by workers focussing on a narrow range of tasks
Workers are easier and cheaper to train
Overall benefit for firms as a result of increased productivity?
Greater quantity and higher quality of output
Overall benefit for workers as a result of increased productivity?
Higher skill levels and potentially higher wages
Repetition of tasks can lead to?
Boredom - leading to quality and morale to drop
Simplified job roles can reduce what in workers?
Pride in which workers feel in their jobs
Advantages of specialisation?
Better quality and higher quantity of products
More efficient use of scarce resources
Higher trade with other countries
Higher economic growth —> higher standards of living
Overall benefit for the economy as a result of specialisation?
Higher growth and standard of living
Disadvantages of specialisation?
Over reliance on a few industries is risky
Increased interdependence reduces self-sufficiency
2 methods of trading?
Bartering
Money
2 functions of money?
Medium of exchange
Measure of value
What is medium of exchange
Something commonly accepted in exchange for goods and services
What is measure of value?
The price of a food reveals its value
What is store of value?
Value is maintained and can be kept for a long time
Method of deferred payment
Allows debts to be created
What does planning refer to?
Refers to the process by which a government allocates resources - funded by taxation
What is a market?
Where buyers and sellers exchange goods and services - physical or digital
What is price mechanism?
The process by which the market allocates resources
Public sector =
Providing services for the welfare of society
Public sector is known as?
Command market
Private sector?
Individual groups of individuals such as sole proprietors, partnerships, franchises (that provide goods or services)
Private sector is known as?
Free market
A mix of both public and private is called?
Mixed economy
Examples of command market?
Government providing healthcare and roads
Command economy?
In which resources are allocated solely by the public state
Mixed economy?
In which resources are allocated by the state and the price mechanism (private sector)
Firms have a…
Profit motive in free market and mixed economies.
Firms having a profit motive leads to…
Wider choice because thus incentivises..
Firms to develop new products
Firms to meet consumer demands
Profit motives are absent in…
Command economies because firms are told what to produce
Firms in command economies who are told what to produce lead into…
Limited choice for consumers
What can limit choice in free market and mixed economies?
Concentrated markets and monopoly
What are concentrated markets?
Whole industry made up of a few supplies —> leading to more competition
What is monopoly?
Those that legally own more than 25% of the market - top firms that are currently dominating (Tesco’s etc)
Quality and innovation is higher in….
Mixed and free market economies
Why is quality and innovation higher in mixed/free market economies?
Both competition and profit motive are present in these types of economies
Competitions pushes businesses to…
To make more better and innovative ideas/products
Efficiency is linked with…
The optimal production and distribution of these scarce resources
Why are mixed/free market economies more efficient than command economies?
Command economies lack competition and profit motive.
Free market have a less _______ than command economies
Less equitable distribution of income and wealth
Why do free market/mixed economies have less equitable distribution of wealth and income compared to command economies?
Owners of capital and land accumulate wealth over time and pass privilege onto their children through: property, private education and social networks
Command economies can still lack _____?
Equitability in terms of opportunity and access to public services
Example: in communist countries, they have access to the best school and health care
A state is made up of?
Territory
Citizens - population
Government
What’s the role of a government
They rule over a state at a given time
Difference between state and government?
State is permanent/ gov is not
State is made up of all citizens/ gov is not
Role of state in mixed economies?
It allocates resources through planning
It redistributes incomes through welfare spending
It regulates consumers and firms
Two approaches from making assumptions
Induction - collecting evidence
Deduction - starting with a hypothesis
Decision makers are assumed to be?
Rational
How are consumers rational?
By buying products that maximise utility
What is utility?
The satisfaction or benefit derived from consuming a good
Utility for firms is taken to be…
Profit
How is profit maximised
By producing as efficiently as possible and making things that consumers both want and can afford
To make rational decisions, economic agents require?
Time
Information
Ability to process information
What is behavioural economics?
School of economic thought based on evidence and observations to develop assumptions of economic decision making
What does behavioural economics assume?
That individuals have bounded rationality - they wish to maximise utility but are not able to
Several aspects of human behaviour prevent rational decision making?
Habitual behaviour
Consumer inertia
Influenced by the behaviour of others
Consumer weakness at computation
What is demand?
Quantity of a good or service purchased at a given price over a given time period
How to explain changes in the prices of goods and services?
Develop a model that brings together the two fundamental economic agents that determine rhe price of a good - consumers and producers
Law of demand: as the price of a good increases…
Quantity demanded decreases
Law of demand: as the price of a good decreases…
quantity demanded increases
A decrease in price results in….
An extension/expansion in demand
Increase in price results in….
A contraction in demand
Quantity demanded?
Varies inversely with price
What are substitute goods?
Two alternative products that could be used for the same purpose
What are complement goods?
Products that are bought/used together
What can change/affect demand?
Change in the age structure
Changes in incomes…
Affect demand
Increase in income leads to….
Rise in demand
Change in consumer tastes/preference leads to…
Can also affect demand
What is revenue?
The income that a government or company receives
Total revenue =
Price x quantity
What is supply?
The quantity of goods and services that firms are Willian to sell at a given price over a given period of time.
Law of supply: as price of good increases….
Quantity supplied increases
Law of supply: as the price of a good decreases…
Quantity of supply decreases
An increase in price in law of supply results in…
An extension/expansion in supply
Law of supply: a decrease in price results in….
Contraction of supply
Supply diagram assumes?
Firms are motivated to produce by profit
The cost of producing an unit increases as output increases
What is excess demand
Price of good is lower than the equilibrium price - meaning more consumers will want to buy the goods than suppliers are willing to sell
What is excess supply?
Where the market support of a commodity is greater than the market demand for it, causing its market price to fall
What is the equilibrium price?
When supply of goods matches demand
Cons of bartering system?
Time and effort to find traders to barter with
