micro 1.1 - nature of economics Flashcards
economic models?
why do economists develop models?
- Economists develop models/theories to explain how the economy works e.g. demand and supply diagrams or the circular flow of income
how are models developed in economics?
- They are developed by putting forward a model, gathering evidence and then accepting, changing or disregarding the model
why are assumptions made when creating economic models?
- There are too many variables which can change within an economic model and so assumptions must be made like ceteris paribus
positive and normative statements and value judgments?
Positive statement- A positive statement is objective. They can be tested to be proven or disproven e.g. “raising tax will lead to an increase in tax revenue”
Normative statement- A normative statement is subjective and based on opinion, so cannot be proven or disproven e.g. “the government should increase taxes”
Value judgement- an evaluative statement of how good or bad you think an idea or action is
ceteris paribus, basic economic problem and opportunity cost?
ceteris paribus- all other things remaining the same
basic economic problem- infinite wants and scarce resources
opportunity cost- the value of the next best alternative foregone
renewable and non renewable resources?
renewable resources cannot be depleted over time e.g. wood, solar and wind
non renewable resources deplete overtime e.g. coal oil and gas
4 factors of production
capital- things that man has made to allow for greater production of goods and services e.g. machinery
enterprise- the ability to bring all the factors of production together and take a risk in return for profit
land- natural resources but it can also be a physical space for machinery
labour- workers that can produce goods and services
productive possibility frontier (PPF)?
PPF —> shows the maximum combination of goods that can be produced in a given period with a given set of resources
- points along PPF curve—> efficient use of resources
- points inside PPF curve —> inefficient use of resources
- points outside PPF curve —> producing it is unattainable with current resources
shift - a shift of the curve indicates economic growth or decline
- PPF shifts outwards —> economy has grown because it can produce more of both goods —> growth from increasing the quantity/quality of FOP
- PPF shifts inwards —> economy is declining because it can produce less of both goods —> decrease in the quantity/quality of FOP
movement - a movement along the curve indicates a change in the combination of goods produced —> the same amount of resources are used but they’re allocated amongst the two goods differently
- point on x or y axis —> economy uses all its resources to produce good A or good B// consumer goods and capital goods
changes in production —> e.g. fall in capital production but no change in consumer production —> curve stays same for consumer goods but curve shifts inwards for capital goods and visa versa
- opportunity cost PPF —> the opportunity cost of producing more of 1 good is the amount of the other good that must be given up
- macro PPF labelling —> consumer goods + capital goods// goods + services
- micro PPF labelling —> 2 specific goods e.g. laptops and tablets
specialisation and division of labour?
specialisation —> concentration of production on a narrow range of goods and services which means that trade is essential as it is the only way they are able to access all that they need
who came up with specialisation/division of labour? and what did he say?
- adam smith
division of labour —> production process being broken down into separate specialised tasks
advantages:
- focusing on a particular stage —> workers become highly skilled and more efficient —> more productive —> lowers unit costs for firms —> lower costs can be passed onto consumers in the form of lower prices —> demand increases —> profit increases —> higher wages for workers
- workers only need to be trained to do 1 specific task —> saves time and money
- time is not wasted moving between jobs and getting tools out etc
disadvantages:
- task repetition leads to boredom —> lower motivation —> poor quality work (evaluation- firms can take some action to reduce this e.g. by playing music) —> demand decreases due to poor quality —> profit decreases
- task repetition leads to boredom —> worker turnover rates increase (employees that leave the company) —> recruitment cost increases// however it’s difficult to find a job as they’re only trained in 1 skill —> structural unemployment
- if there’s a problem in the production process —> every other task has to stop until that problem is solved e.g. staff absenteeism may increase due to task repetition —> difficult to cover for absent workers —> every other task has to stop
advantages of specialisation in trade?
- high labour productivity lowers unit costs for firms —> exports are more internationally competitive —> demand for exports increases —> export revenue increases —> increased exports can result in economic growth —> economic growth usually leads to higher income and a better standard of living
- income gained from exports can be used to purchase other goods from around the world (imports) —> this increases the variety of goods available in a country
disadvantages of specialisation in trade?
- countries may become over-dependent on 1 particular export that they specialise in and if this fails their economy may collapse
- specialisation creates over dependency on other countries’ resources —> may cause problems if conflict arises e.g. europes reliance on russian natural gas during the ukraine crisis
- specialisation increases the rate of resource depletion —> if these resources run out then this results in a huge loss of income for that country
functions of money?
how did people trade prior to money and cash?
- bartering —> exchanging goods or services for other goods or services without the use of money
why would bartering not work today?
- as firms specialise, they don’t make a good/service in its entirety so they have nothing to barter with —> led to development of money
a medium of exchange:
- money can be used to buy goods and services and is acceptable everywhere as people know that they can use it to buy what they want
- the problem with bartering was that people could only trade if there was a double coincidence of wants where both parties want the good the other party offers
a measure of value:
- money allows us to compare the value of two goods/services
a store of value:
- it able to keep its value and can be kept for a long time (evaluation - inflation means that this is not always true) —> with bartering, goods such as fruits often went out of date and so could not keep their value
a method for deferred payment:
- money can allow for debts to be created —> people can buy things without having money in the present, and can pay for it later
free market economy?
free market economy- individuals are free to make their own choices and own the factors of production without government interference
what to produce- determined by what the consumer prefers
how to produce- producers decide how to produce it —> they seek profit
who to produce to- whoever has the greatest purchasing power and is able to buy the good
why are there no pure free markets in the world today?
- the government has to intervene at least to an extent e.g. protecting property rights
advantages:
* There is high motivation as people know working hard could lead to high potential rewards —> better products for consumers
* Because firms are in competition, they will produce goods at the lowest cost they can, ensuring productive efficiency —> likely to make better use of scarce resources
* In generals free market economies tend to have higher growth
disadvantages:
- inequality because some people are owners but some are workers
- there may be a lack of merit goods (goods considered as intrinsically good) and little control of demerit goods (intrinsically bad)
- monopoly power
what did adam smith believe
He believed in the free market economy
He explained how there was an ‘invisible hand’ in the market —> special functions/forces return market back to equilibrium so supply = demand
However, he did argue that the state needed to provide goods/services which free markets wouldn’t such as the laws, property rights and goods such as bridges and roads.
what did friedrich hayek believe?
He believed in the free market economy
Friedrich Hayek argued that government intervention makes the market worse
Hayek believed that individuals know what they need in their own situation e.g. a consumer knows how much bread they need and a manager knows how many raw materials they need
command economy?
a command economy is when the government controls all resources
what to produce- determined by what the government prefers
how to produce- governments decide how to produce it
who to produce to- who the government prefers
advantages:
- market failures (when social benefit is less than your private benefit) and inequalities shouldn’t exist —> the state provides a minimum standard of living, ensuring no one is extremely poor
- monopoly power don’t exist
- unemployment shouldn’t exist
- standard of living should be high
- merit goods are encouraged and increased whilst demerit goods aren’t produced
disadvantages:
- government have poor info about what to produce —> waste of resources
- less incentive to work hard —> everyone receives the same wage so working harder will not increase their standard of living
- bureaucratic —> have to ask everyone for their opinion/permission —> decision making will be slow
- price controls —> lead to excess/shortage in demand
what did karl marx believe?
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 —> He wanted remove the difference between the incomes of owners and workers
mixed economy?
mixed economy- economies in which resources are allocated partly through the price mechanism and partly through state intervention
what to produce- determined by both consumer and government preferences
how to produce- determined by producers making profit and the government
who to produce to- who the government prefers and the purchasing power of individuals
governments role in a mixed economy
creating a framework of rules:
- They prevent the abuse of monopolies (take advantage of their customers due to the lack of competition and charge higher prices/provide a poorer service).
- Large amount of consumer protection laws to protect the consumers from poor quality products or services. They protect property rights, ensuring whatever a person owns cannot be taken away by someone else. Also, they ensure safety standards, protecting employers and employees.
control what is produced:
- They produce public and merit goods, such as emergency services and transport, and limit the production of demerit goods like cigarettes.
control level of demand:
- The government will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand.
redistributes income:
- They move income from one group of people to another.
- They use income tax to take money away from one group then give the money to the poor.
- It also allows the poor to access services when they might not have been able to afford to.
