Micro Intro Flashcards
What is the Economic problem?
Finite resources, Infinite wants, we have to make choices.
What are the 4 factors of production?
Land, Labour, Capital, Enterprise
What is Opportunity Cost?
The benefit of the next best alternative forgone
What are the 3 economic agents and what do they want to maximise?
Producers - maximise profit
Consumers - maximise utility
Governments - maximise welfare of citizens
What are 3 benefits of a free market?
Cheaper and quicker for firms, more innovation, consumers drive choice
What are 3 drawbacks of a free market?
Limited products (if too costly for firms), ethics compromised for profit, risk of market failure.
What are 3 benefits of a mixed economy?
Efficiency (low costs & innovation), less market failure (gvt can tax & sub), less inequality (eg. min wage)
What are 2 drawbacks of a mixed economy?
Politics can influence gvt decisions, free market can cause inequality.
What are 3 benefits of a command economy?
Less inequality, less u/e (gvt creates job opportunities), gvt puts common good over firm profits.
What are 2 drawbacks of a command economy?
Less innovation (due to less profit motive), Inefficiency (gvt slow to respond, lots of admin).
Define utility, marginal utility and total utility.
Utility - satisfaction derived from consuming a product.
Marginal - utility derived from an additional unit
Total - utility derived from all units
What is the law of diminishing marginal utility?
As consumption increases, marginal utility for additional units decreases.
What are positive and normative statements?
Positive - based on facts, can be proved, not debateable.
Normative - allows for views & opinions, may be based on facts, are debateable.
What do production possibility frontiers (PPFs) show?
PPFs show all combos of 2 goods that can be produced w/ given resources.
What does it mean if you are inside, outside or on the PPF line?
Inside - doesn’t use all resources efficiently
Outside - impossible given current resources
On - efficiently uses all available resources
How is opportunity cost created on the PPF?
Movement along the line can increase the production of one good at the expense of another good, thus creating opportunity costs.
How may the PPF shift outward/ inward?
Outward - increase in quality/ quantity of FoPs (eg. better tech)
Inward - decrease in quality/ quantity of FoPs (eg. natural disaster)
What is the difference between consumer and capital goods?
Consumer goods - products that satisfy people’s wants and needs
Capital goods - products used in production of other goods (eg. machines)
Why may capital goods be increased on the PPF?
Increasing capital goods increases future potential o/p but comes at a short term cost.
What is the difference between productive and allocative efficiency?
Productive efficiency - production at the lowest cost, max goods w/ given resources. All points on PPF.
Allocative efficiency - combination which maximises welfare in society. One point of PPF.
What is specialisation and division of labour?
Specialisation - someone becomes an expert at a skill/ job.
Division of labour - assigning workers to their best job to increase efficiency.
What are 2 benefits and 2 drawbacks of specialisation?
Saves costs (don’t need all equipment for everyone), saves time.
BUT: can be boring/ monotonous, workers take less pride in job
Describe the 3 sectors of the economy.
Primary sector - extracting raw materials from the earth (eg. farming, mining)
Secondary sector - converting materials into products (eg. building, working in factory)
Tertiary sector - provision of services (eg salesman, accounting)
What are chains of production?
The path that manufactured goods go from raw materials to finished product. (eg, tree farm -> factory -> Ikea)
