Micro 1.1 Flashcards
What does ‘ceteris paribus’ mean in economics?
‘All other things remaining equal’
It allows economists to simplify problems by isolating variables.
What is the difference between a theory and a model in economics?
Theories can be expressed in words, while models are expressed in mathematical terms
Both aim to explain economic phenomena.
What is the basic problem of economics?
Scarcity
People have finite needs but infinite wants.
Define a positive economic statement.
An objective statement that can be tested to be proven or disproven
Example: ‘Raising taxes will lead to an increase in tax revenue.’
Define a normative economic statement.
A subjective statement based on opinion that cannot be proven or disproven
Example: ‘The free market is the best way to allocate resources.’
What is opportunity cost?
The cost of one thing in terms of the next best option that has been given up
Example: Choosing a chocolate bar over crisps means the opportunity cost is the crisps.
What distinguishes renewable resources from non-renewable resources?
Renewable resources can be replenished, while non-renewable resources cannot
Examples: Renewable - solar power; Non-renewable - fossil fuels.
What does a Production Possibility Frontier (PPF) illustrate?
The maximum possible combinations of capital and consumer goods that an economy can produce
It shows efficiency and opportunity costs.
What is economic efficiency?
When resources are used for their best use
At all points on the PPF, resources are allocated efficiently.
What is specialisation in economics?
The production of a limited range of goods by a company, individual, or country
It increases efficiency and productivity.
What are the advantages of the division of labour?
- Increases labour productivity
- Workers become more skilled
- Reduces time wasted moving between jobs
Adam Smith demonstrated this with the pin-making process.
What are the disadvantages of specialisation?
- Boredom leading to poor quality work
- Risk of structural unemployment
- Over-dependence on specific tasks
Delays in one process can halt the entire production line.
What is the theory of comparative advantage?
Countries should specialise in producing goods where they have a lower opportunity cost
This boosts global output.
What are the four key functions of money?
- Medium of exchange
- Unit of account
- Store of value
- Standard of deferred payment
Developed to solve problems associated with barter.
True or False: In a free market economy, resources are allocated through government intervention.
False
Resources are allocated through the price mechanism.
Fill in the blank: The opportunity cost of producing 1 consumer good is ____ capital goods.
3
This is derived from the ratio of capital to consumer goods production.
What is the impact of economic growth on the PPF?
Shifts the curve outward
Indicates an increase in productive potential.
What does a movement along the PPF indicate?
A change in the combination of goods produced
The same resources are allocated differently.
What is the earliest method of exchange before money was developed?
Barter
Barter involved trading goods directly without the use of money, but it had limitations.
What are the four key functions of money?
- Medium of exchange
- Measure of value
- Store of value
- Method for deferred payment
Define ‘free market economy’.
An economy where individuals make their own choices and own the factors of production without government interference.
How are resources allocated in a free market economy?
Through the price mechanism.
What determines what is produced in a free market economy?
Consumer willingness to spend money on goods.
True or False: There are completely free markets in the world today.
False
Governments intervene to some extent in all economies.
What does Adam Smith refer to as the ‘invisible hand’?
The market mechanism that allocates resources to everyone’s advantage.
What is a command economy?
An economy where all factors of production are owned by the state and resource allocation is managed by the government.
List two disadvantages of a command economy.
- Slow decision-making
- Lack of motivation due to equal wages
What is a mixed economy?
An economy that combines both free market mechanisms and government planning.
What did Friedrich Hayek argue about state control of the economy?
It leads to the loss of freedom.
Fill in the blank: Karl Marx believed that capitalist profits came from _______.
[exploiting labour]
What are merit goods?
Goods considered as intrinsically good, which are encouraged in a command economy.
What is consumer sovereignty?
The freedom of consumers to choose what to purchase.
What is the role of government in a mixed economy?
- Create a framework of rules
- Supplement and modify the price system
- Redistribute income
- Stabilize the economy
What is one advantage of a command economy?
Provides a minimum standard of living.
What happens to resource allocation in a command economy?
It is carried out by the government rather than the price mechanism.
List two advantages of a free market economy.
- High motivation due to potential rewards
- Political freedom
What is the definition of a monopoly?
A company with more than 25% of market share that can charge higher prices due to lack of competition.
True or False: In a command economy, everyone is assumed to be selfless.
True
What does a government do to prevent the abuse of monopolies?
Pass consumer protection laws.
What is the impact of government intervention on the production of demerit goods?
Limits their production.
