nature of econ Flashcards
What is the basic economic problem
We have infinite wants and needs but have scarce resources
Define opportunity cost
Measure the cost of a choice made in terms of the next best alternative forgone
what does PPF stand for
Production Possibility Frontier
what does ppf mean
it is the maximum potential output of an economy producing a combination of 2 goods that can be produced with all the factor resources being used efficiently
what part of the ppc would you see opportunity cost
the top block, there will be less capital goods
what part of the ppc would you see gain
the side block, more consumer goods
what does a point not being on the actual curve mean
that resources are unemployed
what does it mean when the ppc shifts outwards
there’s economic growth (increase in gdp)
what does it mean when the ppc shifts inwards
there’s economic loss (decrease in gdp)
what causes the ppc to shift outwards
increasing size of production, increasing quality, increasing labor force by migration or training or more
what causes the ppc to shift inwards
mass loss of life such as natural disaster or pandemic, migration out of the country, less demand, less labor force ect
when the point is inside the curve rather than on the curve what does this mean
there is an insufficient use of resources which could be cause by unemployment, IDLE factories and more
what does a curved ppc show
that the opportunity cost rises as you move around the ppf because as resources get reallocated they become less suitable for the production of other goods
what does a straight line ppf show
that the output of capital good is directly proportional to the output of consumer goods
how to work out opportunity cost per unit
opportunity cost/gain
define specialization
when people businesses or countries focus on one particular activity leading to improved productivity
define division of labor
the breaking down of a big task into smaller segments which people specialize in
what is a benefit of division of labor to firms
they have more efficiency in production and this allows quicker production so more sales, decrease cost per unit which increase prices
define productivity
how much of something that can be made with one unit of input
what is free market economy
it is an economy where there is a low amount of government intervention and the private sector dominates and they are driven by the profit motive
what is a mixed economy
it is an economy that has government intervention but also private ownership, mix of free economy and command economy
what is a planned economy
the economy which a centralized government controls the means of production and determines outputs
who is adam smith
he is the first official economist and he believed in free market and that there should be less state intervention
what are economic actors
consumers, employers, employees ect…
advantages of free market competition
efficient allocation of scarce resources, competitive prices, increased consumer choice, capital investment
what does resource allocation occur through
price mechanism
what is price mechanism
fluctuating in prices and it determines everything and is a signal for firms to supply less or more
what is market mechanism
the decision of what is need to be produced
what determines what needs to be produced
consumers who are in sovereign (leading)
what is the role of the government
establish public goods, issues of money,. law legal ownership, protect property and ideas, step in if markets fail
drawbacks of free market
income and wealth inequality, businesses have monopoly power which leads to higher prices, negative environmental impact and under or non-provision of public goods and services
what is a positive statement
can be proven with data and is a fact
what is a normative statement
value based judgment and isn’t based on data
what did karl marx believe
that equality is important as there is an unequal struggle between owners of capital and labor and that there is massive inequality in free market
what does karl marx say about all earning the same
that if we all earn the same there will be no incentive (use doctors and sales assistants as a comparative example)
benifit of karl max ideology
more equality of income, access to services not dependent on income and more strong public services
drawback of karl marx ideology
the state can suffer from information failures and corruption, problems in choosing prices or goods and services
what is the role of the state in a mixed economy
state owned industries and welfare state
what is public goods
causes market failure due to the problem of missing markets
what is non excludable
benifits derived from pure public goods cannot be confined sole to those who have paid for it (eg beaches, parks ect…)
what is non rivalrous
each partys enjoyments of using the goods or service doesn’t diminish others enjoyment (broadcast, sun ect…)
what is non rejectable
it cannot be rejected by people
what is free rider
where non payers can enjoy the benefits of consumption at no financial cost of themselves
