Micro 1 - 5 Flashcards
Why is economics a social science?
Economics is unpredictable, therefore being a social science
What is a model?
A model is a simplified representation of reality, and includes basic assumptions
Why do economists make models?
Economists make models to understand how people behave and make predictions about the future
What is Ceteris Paribus?
‘all other things remaining equal’.
What is the scientific methodology of an economist?
- Observe people’s behavior in response to something
- Create a hypothesis based on that thing
- Test the hypothesis
- If the evidence doesn’t support the hypothesis, change the hypothesis so it better fits the evidence
What is a positive statement?
A statement that can be tested
What is a normative statement?
A statement that cannot be tested?
What is the basic economic problem?
Unlimited wants and needs, but limited resources
What is opportunity cost?
The next best alternative forgone.
What are free goods?
No opportunity costs as it is unlimited like air
Economic goods?
Limited goods - so they have an opportunity cost
4 factors of production
Land
Labour
Capital goods
Enterprise
What is a factor of production?
The inputs to produce goods and services.
Define and state the reward of the land factor of production
Natural resources like trees or fossil fuels
Reward: Rent (of the land)
Define and state the reward of the Labour factor of production
Human input into the production process like workers
reward: Wages
Define and state the reward of the Capital goods factor of production
A physical resource and a man-made aid for production of consumer goods. (infrastructure)
Reward: Interest
Define and state the reward of the enterprise factor of production
The entrepreneur who brings all of the factors of production together
Reward: Profit
Give 3 examples of infrastructure
Railways, ports, roads
Production possibility frontier
A curve that shows the maximum combination of goods and services that can be produced in a given time period using limited resources.
Productive efficiency definition
When it is impossible to produce more of one good without producing less of another
What 3 things do points on the PPF curve show?
- Full employment
- Potential output
- Productive efficiency
Potential output
Potential output is the maximum amount of goods and services that are being sold to buyers
What does any point within the PPF curve show?
Productive inefficiency
What does any point on the PPF curve show?
Any point on the curve represents the maximum productive potential of the economy,
the most that the country can produce.
What could cause a PPF curve to shift to the right
(reach a previously impossible point)
Increase in productive capacity
Examples of how long run economic growth can be achieved
Invasions and immigration
what are consumer goods?
Are goods that are demanded and bought by households and individuals
what are capital goods?
Are goods that are produced in order to aid the production of consumer goods in the future.
Some goods can be both consumer and capital goods, for example computers.
Specialisation definition
When individually, firms, or countries concentrate on the production of one product or task
Why are economists interested in specialisation?
It allows us to allocate our scarce resources better
What are the 2 types of specialisation?
- Specialisation by product E.g BMW
- Specialisation by Process
What levels can specialisation occur on?
- Individual
- Firm
- National
Neo classical economist
Revised adam smith’s ideas of anti-government
Keynesians
Pro government, revised ideas of John Maynard Keynes
3 Advantages of specialisation
- Efficiency - more output using less input.
- More profits
- Lower wages
3 Disadvantages of specialisation
- Bored employees
- People become deskilled, capital could replace workers
- Over - interdependence
What is the 4 functions of money?
- Store of value
- Medium of exchange
- unit of account
- Standard of deferred payment
What is store of value
It can be used for future transactions without the fluctuation in it’s monetary worth
What is medium of exchange?
Accepted by other people
What is unit of account
Tells us how much the note or cash is worth
What is standard of deferred payment?
Money is used to express debt
What are the objectives of economic agents?
To determine how resources are allocated
What are the 3 economic agents?
Consumers
Producers
Government
What is the role of consumers in economic agency?
To maximise utility (Satisfaction)
What is the role of Producers in economic agency?
To maximise profits
What is the role of Government in economic agency?
Claim tax, economic growth and stability
what is a free market economy?
Individuals are free to make their own choices and own the
factors of production without government interference. Resources are allocated through
the price mechanism.
how many countries have a full free market economy?
There are no completely free markets in the world today ,
because the government has to intervene at least to an extent, for example by issuing
money, and breaking up monopolies. Without this, the market mechanism could not work.
adams smiths believes of the free market.
believed in the free market economy approach by governments. He explained how there was an ‘invisible hand’ in the market which allocated resources to everyone’s advantage. He believed competition in the market caused lower prices as
firms wanted to be competitive and so this benefits the consumer as they can get goods
cheaply.
advantages of a free market:
The system is automatic due to the invisible hand; resources are moved out of production when people stop wanting a good or costs are too high.
There is high motivation as people know working hard could lead to high potential
rewards, creating conditions where initiative and enterprise flourish.
disadvantages of a free market:
There tends to be high levels of inequality, since the rich own more factors of production and so can grow richer.
There is the problem of externalities.
what is a command economy?
All factors of production, except labour, is owned by the state and labour is directed by the state. Resource allocation is carried out by the government, rather than the price mechanism.
karl max’s believes:
Karl Marx believed in the command economy and criticised capitalism. Marx believed that capitalist’s profit came from exploiting labour as they underpaid workers for the
value that they actually created.
advantages of a command economy.
The state provides a minimum standard of living , ensuring no one is extremely poor as there is less inequality.
There is less wastage of resources as there is no need for competitive services nor
advertising, which is very expensive.
disadvantages of a command economy.
It is impossible for the state to make so many decisions correctly, which could lead to
over or under supply and a waste of resources.
Decision making will be slow as it has to go through various stages and there could
be an increase in bribery and corruption.
what is a mixed economy?
This is an economy where both the free market mechanism and the government planning
process allocate a significant amount of the total resources in the country
what is the governments role in a mixed economy?
- They prevent the abuse of monopolies, They can protect customers as they pass a
large amount of consumer protection laws to protect the consumers from poor quality
products or services. - They produce public and merit
goods, such as emergency services and transport, and limit the production of demerit
goods. - They move income from one group of people to another,
from the rich to the poor. They use tax, such as income tax, to take money away from
one group then give the money to the poor. - attempt to manage the level of
demand in the economy to prevent extremes of too much or too little demand.
