Micro Economics 1 Flashcards
definition of economics
economics is the study of how best to allocate scarce resources across alternative uses
What is a positive statement
They are objective statements and can be tested against evidence to see whether they are true or false
e.g. The earth is flat
What is a normative statement
They are subjective statements that contain value judgements and cannot be scientifically tested. They contain opinions and are lacking objectivity
e.g. crisps are tastier than chocolate
What statements to economists try to use
Positive
But in reality many of the more interesting questions are normative
What is economic activity
It refers to the use of scarce resources in production, exchange, distribution or consumption
What is production
It involves the conversion of scarce resources to finished goods and services
What is distribution
It is the movement of the raw resources or finished goods and services to points of production and consumption
What is exchange
It is any monetary or non-monetary transaction between a producer and a consumer
What is consumption
It describes the using up of a good or service by a consumer in order to gain satisfaction
What is primary sector activity
The extraction of resources in their rawest forms
What is secondary sector activity
The processing and manufacturing of these resources into goods and services
What is tertiary sector activity
The provision of services and the distribution and exchange of goods
What is the purpose of economic activity
It is the production of goods and services to satisfy the needs and wants of a nations citizens
What is a need
It is something that is necessary for survival e.g. food, shelter
What is a want
It is something that is desirable but not strictly necessary for survival
What is an economic good
It is a good or service that involves scarce resources
What is a free good
Any good that involves no scarce resources
What sub problems are there to resources scarcity
What to produce
How to produce
For whom to produce
What causes resource scarcity
Infinite wants and finite resources
What are resources
They are the input or factors of production that are used to produce finished goods and services
How are resources categorised
Land - any natural resource
Labour - any human input
Capital - any man made factor of production
Enterprise - The risk taker that organises the other factors of production
What is the factor reward for each factor of production
Land - rent
Labour - wages
Capital - interest
Enterprise - profit
What is the definition of scarcity
a situation in which there are finite resources but infinite wants
What is the definition of economic problem
How to allocate finite resources to meet infinite wants
What is Resource allocation
The placement of land, labour, capital and enterprise into competing areas of production in an attempt to maximise social welfare
What is opportunity cost
The opportunity cost of any decision is the next best alternative foregone
What is the PPF
The Production Possibilities Frontier
The line where points of maximum possible outputs lie given the current level of resources and the existing level of technology
What does it mean if production is below the PPF
There is less output and there is an under performance and they are being inefficient
What does it mean if production is above the PPF
More than the maximum output but it is impossible
How can the PPF be moved up
Increase resources or better the resources they have
Why would production be under the PPF
Because some resources are unemployed and the economy is not producing to its full potential
What is the opportunity cost of producing more of one item
It is the reduced ability to produce and consume the other item
Called a trade-off
Why is the PPF not straight
Because of the diminishing returns
What causes diminishing returns
Because as resources are shifted from one item to another there is a shift in efficiency because not all resources are as efficient at producing one thing as they are another
What is the position of the PPF determined by
The quantity and quality of the resources and the state of technology
What are the two types of economic efficiency
Productive efficiency
Allocative efficiency
What is Productive efficiency
It is when all of a countries resources are fully employed so that it is not possible to make more of any one good/service without having to produce less of another
What is Allocative Efficiency
It is when resources are used in a way that maximises consumer satisfaction
What is Pareto Efficiency
It is when a country is productive and allocative efficient
definition of resources
an asset used to produce goods and services that meet human needs and wants
Definition of Specialisation
It is when a factor of production concentrates on a particular activity on a repetitive basis in order to improve productivity and efficiency
Definition of Division of Labour
It is when work is split up into specialised tasks preformed by specialist workers
Definition on self-sufficiency
When groups of people try to meet all their economic needs through their own efforts rather than specialising in particular areas
Who observed the idea of division of labour
Adam Smith
What book did he write about division of labour
The Wealth of Nations in 1776
How is productivity measured
It is measured by output per worker or per unit of time
What are the downsides of division of labour
Specialising narrow areas of activity work may become repetitive and boring for individual workers
It also makes workers vulnerable to unemployment if the demand for their skills disappears
What will an economic system need if people are specialising
A mechanism for individuals to exchange their specialist output which is conducted in a market
A system that allows individuals to place relative values on goods and services that are exchanged. This is best done by introducing a monetary unit or currency
What is the market mechanism
It is a mechanism for individuals to exchange their specialist output. This is conducted in a market
What are the two main things an economic system will need that is based on division of labour
Markets
Money
