Micro L1 - 6 Flashcards
Economy
All the good + services produced in an area
Factors of production and what they can be split into:
- Land
- Labour: Renewable and Non-renewable
- Enterprise
- Capital: Machinery and Tools
What is the economic problem?
How to use the available scarce resources to satisfy people’s infinite needs as effectively as possible
What are the two types of models, what are they and why are they developed?
- Theoretical model –> Qualitative and based on theory
- Empirical model –> Quantitive and based on data
They are developed to explain and predict economic phenomena, since scientific experiments cannot be conducted
What is ceteris paribus and why is it used?
If all other factors do not change/ are equal
This is used to overcome the problem of multiple factors affecting economic activity, which is why scientific experiments cannot be conducted
What is an opportunity cost?
Value of the next best alternative
What is a PPF
Production possibility frontier, which is the max potential output of a combo of 2 goods/services an economy can achieve
What causes economic growth?
- An increase in the quality of the factors of production
- An improvement in the quantity of the factors of production
- A combo of the two
How is economic growth and negative economic growth shown on a PPF?
If the curve shifts outward then there is economic growth.
If the curve shifts inward then there is negative economic growth
What does it mean when an economy is below the PPF curve?
There is a misallocation of resources which could be:
- inefficient use
- underutilisation
What are consumer goods?
Goods that do not produce other goods that are present to satisfy needs and wants
What are capital goods?
Goods that produce other goods and services
What will an increase in capital goods result in?
A long term increase in PPF
Positive economic statement:
- Can be proven true/false
- Objective
- Based on facts
Normative economic statement:
- Cannot be proven true/false
- Subjective
- Based on feelings
Duty:
Tax on imported goods
Specialisation:
Individual/firm concentrates on production of limited range of goods + services
Division of labour:
Specialisation of workers on specific tasks
How does division of labour increase productivity?
They are more skilled due to repetition of tasks so there is higher productivity ( better quality + greater quantity) and therefore greater output
Why does capital tend to increase labour productivity?
Automation has zero human error so it is more effective, leading to an increase in productivity
What does increased productivity lead to?
- Higher output
- Higher living standards
Productivity equation:
Productivity = output produced/ total inputs used
Advantages of division of labour:
- Cheaper to train workers
- Increased efficiency (time is saved)
- Increased productivity
- Workers more skilled
Disadvantages of division of labour:
- Repetitive tasks can lead to boredom, poor morale and therefore poor quality
- Simplified job roles can lead to little pride in job
Specialisation advantages:
- Better quality + higher quantity
- More efficiency
- Higher trade w/ other countries
- More economic growth so better living standards
Specialisation disadvantages:
- Over-reliance on few industries is risky
- Increased interdependence leads to reduced self-sufficiency
Methods of trading and what they are:
- Barter –> exchanging goods
- Money –> recognised currency
Functions of Money and what they are:
- Medium of exchange –> smth commonly accepted in exchange
- Measure of value –> price shows a good’s value
- Store of value –> value is maintained and can be saved for a long period of time
- Method of deferred payment –> allows debt to be created
Why can division of labour result in lack of pride?
They may feel they are not developing their skills
Planning:
Government allocates resources w/ funding from taxation
Market:
Anywhere where buyers + sellers can exchange goods and services
Price mechanism
The process by which market allocates resources
Command economy:
Economy where resources are solely allocated by state
Free market economy:
Economy where resources are solely allocated by the price mechanism
Mixed economy:
- Economy where resources are allocated by both price mechanism and state
Public sector:
The part of an economy controlled/owned by gov
Private sector:
The part of an economy that is not controlled/owned by gov
What is the aim of the public sector and private sector respectively?
- Public sector aims to provide the services that consumers need
- Private sector aims to maximise profit/raise awareness
Why is there a wider choice in free market and mixed economies?
There is a profit motive, which incentivises them to develop new products and meet consumer demand
Why may there possibly be limited choice in free market and mixed economies?
This may be due to concentrated markets and monopolies
Monopoly:
More than 25% market share
What are the effects of competition and profit motive in free market and mixed economies?
- Higher quality
- Higher innovation
- Higher efficiency
- Wider choice
Why is there limited choice in command economies?
They have no profit motive and are told what to produce so there is no incentive to develop new products
Efficiency:
Optimal production and distribution of scarce resources
