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Microeconomics 1.1 Flashcards

1
Q

Definition of economics

A

Economics is the social science that studies the choices that individuals, businesses, governments and societies make as they cope with scarcity.

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2
Q

Definition of an economic model

A

An economic model is a simplified description of reality used by economists to help them understand real life scenarios.

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3
Q

How is economics a social science

A

Economics is a social science as it studies human behaviour and human behaviour cannot be reduced to scientific law as we can never be sure of the way in which people and businesses will respond to changing circumstances around them.

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4
Q

Definition of assumptions

A

Economists use the logical device called ceteris paribus or “all other things being equal” to assume

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5
Q

Difference between microeconomics and macroeconomics

A

Microeconomics focuses on individuals and businesses where as macroeconomics focuses on the national and global economy

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6
Q

What does the government want

A

Government wants to maximise welfare of citizens

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7
Q

What do consumers want

A

Consumers want to maximise their satisfaction

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8
Q

What do producers want

A

Producers want to maximise profits

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9
Q

What are positive statements

A

Statements of facts that can be tested as they are not influenced by the opinion or prejudice of people

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10
Q

What are normative statements

A

Statements of opinions that can’t be tested as they are subjective and carry value judgments.

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11
Q

Definition of the ‘economic problem’

A

The ‘economic problem’ occurs when there are finite resources available to supply infinite or unlimited wants therefore choices have to be made about how to use these scarce resources.

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12
Q

Definition of opportunity cost

A

Opportunity cost can be defined as the benefit lost or the alternative forgone when making a choice. As all resources are scarce we must make choices in order to allocate these resources.

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13
Q

Definition of factors of production

A

Factors of production are the inputs available to supply goods and services in an economy

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14
Q

What are the factors of production

A

Land - natural resources available for production
Labour - The human input into the production process
Enterprise - Entrepreneurs organise factors of production and take risks
Capital - Goods used in the supply of other products

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15
Q

Rewards of the factor of production

A

Land - rental income to owners of land
Labour - Wages and salaries from employment
Capital - Return on investment (R.O.I)
Entrepreneurs - Profit

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16
Q

Definition of renewable resources

A

Resources that can be replenished

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17
Q

Definition of non renewable resources

A

Resources are in finite supply and therefore will run out

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18
Q

Defintion of sustainable resources

A

Resources that are being used for economic activities in such a manner they will not run out

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19
Q

Definition of free goods

A

Free goods do not use up any factor inputs when supplied, they have zero opportunity cost

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20
Q

Definition of production possibility frontiers

A

A PPF shows alternative combinations of two goods or services attainable when all resources are fully and efficiently employed

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21
Q

What does the PPF illustrate the problem of

A

The PPF illustrates the problem of choosing how to use scarce resources when producing goods and services

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22
Q

What does it mean if a point is inside the curve in a PPF

A

If a point is inside the curve it is inefficient as nit all resources are being used

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23
Q

What does it mean if a point is outside the curve in a PPF

A

If a point is outside the curve these are not enough resources to produce this level of output - unobtainable

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24
Q

When does economic shrinkage occur and how does this relate to a PPF

A

Economic shrinkage occurs when there is a reduction in an economy’s production capacity. This will cause the PPF to shift inwards and to the left.

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25
Q

Possible causes of an inward shift in a PPF

A
  • Natural disasters
  • Civil unrest
  • Emigration
  • Ageing population
26
Q

Possible causes of an outward shift in a PPF

A
  • Higher productivity/ efficiency of factor inputs
  • Better management of factor inputs
  • Increase in the stock of capital labour supply
  • Discovery/ extraction of new resources
27
Q

Definition of specialisation

A

Specialisation occurs when economic units concentrate on producing specific goods or services. Specialisation is likely to lead to increases output per worker (productivity) as the workforce have a better understanding of their job role

28
Q

What is the Division of Labour

A

The division of labour occurs when production is broken down into many separate tasks within an organisation

29
Q

How does specialisation help to address the problem of scarcity

A

There will be greater supply of goods and services to meet unlimited wants

30
Q

How does specialisation increase output

A

Economic units become more effective and efficient in what they produce due to:
- a greater understanding of the requirements of production
- Efficient use of time as there is no switching between tasks
- The increased output can be exchanged for other goods and services that the economic unit is not as good at producing
- Specialisation allows for the exchange of goods and services between the economic units

31
Q

Why is the division of labour an attractrive idea

A
  • Division of labour can raise output per person as people become proficient through constant repetition of a task(learning by doing)
  • Less wastage as workers become more skilled at their particular task they make less mistakes as well as less time
32
Q

Disadvantages of specialisation and division of labour

A
  • Unrewarding, monotonous work requires little skill and can lower motivation and eventually cause lower productivity
  • Flexibility of the work force is reduced
  • Many people choose to move to less boring jobs creating a problem of high worker turnover for businesses
  • May cause structural unemployment/ occupational immobility
  • Mass- produced standardised goods lack variety for consumers
33
Q

What are the four functions of money

A
  • A medium of exchange
  • A store of value
  • A unit of account
  • A standard of deferred payment
34
Q

How is money a medium of exchange

A
  • Money enables goods and services to be exchanged, transaction to be settled and debt to be paid
  • Avoids the problem of barter
  • Serves as an intermediary between 2 parties when buying and selling
35
Q

How is money a store of value

A

Money acts as a store of value over time - can be kept for future use
Enables individuals to transfer spending to future

36
Q

How is money a unit of account

A

Allows us to measure the value of goods and services in units
As a unit of account money serves as the common base of comparison that people use to present prices and record debts

37
Q

How does money act as a standard of deferred payment

A

Allows us to pay for goods and services provided now at a later date
Enables borrowing and lending into the economy
Money allows individuals to pay for goods and services later, despite their consumption taking place now

38
Q

Issue with bartering

A

Lack of double coincidence of wants

39
Q

Who decides what is produced

A

What is produced is determined by consumers (demand)

40
Q

Who decides how to produce a product

A

How to produce is determined by producers (supply)

41
Q

Who decided for whom to produce a product

A

For whom to produce is determined by personal wealth

42
Q

Whta is an economic system

A

An economic system is a network of organisations used by a society to resolve the basic problem of what, how much and for whom to produce (allocate scarce resources)

43
Q

What are the types of economic systems

A
  • The free market economy
  • The mixed economy
  • The command economy
44
Q

How does a free market economy solve the basic economic problem of what to produce, how to produce and for whom to produce for

A
  • Through market forces - this means that the forces of supply and demand work together to determine what price and quantity of goods and services are supplied.
  • Businesses will supply what is demanded at a price that allows them to make profit.
  • Customers will demand what is supplied if it is at a price they can afford.
  • This is known as the market mechanism
45
Q

How will free market stakeholders act

A

Consumers will act to maximise their personal welfare
Producers will act to maximise their profits
Owners of factor inputs will act to maximise their personal gain
Governments will act to maximise the benefits to society

46
Q

Free market characteristics

A
  • Private sector ownership
  • Free enterprise i.e. demand and supply is determined by the market mechanism
  • Limited government intervention
  • Firms compete for market share
  • Society competes for employment and salaries
  • Allocation of rewards is determined by market forces
47
Q

Advantages of free market economy

A
  • Competitive market
  • Consumer choice
  • Rewards entrepreneurship
  • Encourages innovation
  • Productive efficiency
  • Economic growth
48
Q

Disadvantages of free market economy

A
  • Inequalities in wealth
  • Little regulation
  • Provision of demerit goods
  • Little control of negative externalities
49
Q

What is a demerit good

A

A demerit good is one that is deemed to be bad for society but is over provided by the market

50
Q

What are externalities

A

Externalities are the costs and benefits to a third party created by economic agents when undertaking their activities

51
Q

What is a merit good

A

A merit good is one that is deemed be good for society but is under provided by the market

52
Q

Who is Adam Smith

A

18th century philosopher and pioneer of political economy

53
Q

Adam Smith’s belief on the ‘Invisible Hand’

A

Believed in free market economies
Individuals seeking to maximise personal gains will lead to efficient allocation of resources although Adam Smith saw a role for government intervention in money markets and financial markets

54
Q

What did Friedrich Hayek believe

A

Economist who argued that the more control the state had the more individuals lose their freedom. The involvement of government meant a small group of people, normally rich, will be able to impose their wills on society

55
Q

What happens in a planned/ command economy

A

The government/ state owns the scarce resources. The state allocates resources and sets production targets and growth rates according to its own view of people’s wants.
Market prices play little to no part in informing resource allocation decisions

56
Q

Characteristics of a command economy

A
  • Rationing and planning takes place
  • State decides what, how and for whom to produce
57
Q

Advantages of command economy

A
  • Greater equality - resources are shared equally
  • Removal of demerit goods
58
Q

Karl Mark economic belief

A

Noticing the big gap between the rich and the poor in the 19th century, proposed a violent revolution to create a system whereby all the resources were owned collectively by everyone, through the government this would get rid of inequality

59
Q

How are resources allocated in a mixed economy

A
  • Resources are allocated by a combination of both the market mechanism (free market economy) and the government (command economy)
  • Enterprise is actively encouraged by the government who will also play their part
60
Q

Advantages of mixed economy

A
  • Reduce negative externalities
  • Provide public goods
  • Control demit goods
  • Supply merit goods
61
Q

Role of government in a mixed economy

A
  • Provide public goods
  • Control demerits
  • encourage merit goods
  • control macroeconomic variables (inflation)
  • Reduce negative externalities
  • Provide a legal framework
  • Encourage free trade
62
Q
A

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