Nature of economics 1.1 Flashcards
What does ceteris paribus mean
Everything else remains equal.
This is the most important assumption for an economist to create functioning models
What is a positive statement
Positive statements describe the world as it is. They are objective statements that can be proved.
E.g the proposal of the new high speed rail HS2. If the exact benefits exceed the exact costs, you could say the project is worth doing. This is positive analysis. However, you may not always know costs & benefits perfectly.
What is a normative statement
Normative statements describe how the world should be. They are opinions that contain value judgements.
E.g imagine an economist argued for higher unemployment benefits during a recession, because a rich country should take care of its citizens. This is normative analysis.
What is a value judgement
Value judgments are often found in normative statements. They are judgements about society that cannot be quantified and tested.
E.g the homelessness problem in Oxford needs to be addressed and funds should be redistributed to do this. This judgement is within a normative statement.
Value judgements affect economic decision-making, so normative statements are important.
What is the economic problem
There are not enough resources on earth to satisfy humans’ unlimited wants and needs.
The basic economic problem involves working out how to allocate limited resources as effectively as possible to satisfy people’s unlimited wants and needs.
Define opportunity cost
The benefit Forgone of the next best alternative
People face a tradeoff when they make choices.
If you choose to buy a video game, you cannot spend that income on movies.
What you would use the money from the video game to buy instead.
Issues of opportunity cost
-Not all factors have alternatives.
-Some alternatives are unknown.
-Agents may lack information on alternatives.
-It can be difficult to switch some factors to another use.
What incentives do different economic agents base their decisions on
-For firms this might be profit maximisation.
-Producers must decide what products to make and the selling price of products.
-Consumers decide what products to purchase and how much they want to spend on products.
-Governments decide how much they should get involved in the production and consumption process.
What are the PPF details
The PPF shows economy at its maximum productive potential.
Society can choose any two goods on or inside the PPF.
The opportunity cost is the slope of the PPF.
The PPF is curved because of the law of diminishing returns.
As you increase units of one resource and keep other factors constant, the marginal benefit from the extra units will eventually start to decline.
What does it mean if an economy is operating inside and on the PPF curve
When an economy operates inside the PPF, it means that it is not utilizing all its resources efficiently.
When an economy operates on the PPF, it is producing at maximum efficiency. This means that all available resources are being used optimally, and the economy is producing the maximum possible output of goods and services.
What can cause a PPF curve to shift
The PPF shifts outward if there is economic growth.
This is because the productive capacity of the economy has increased.
E.g. this could be caused from improvements in technology.
But this improvement isn’t necessarily equal across all products.
E.g. an improvement in the technology to produce cars isn’t necessarily going to affect the ability to produce butter.
Allocative efficiency
Allocative efficiency occurs when the resources in an economy are allocated in such a way that maximizes the total benefit to society. It is achieved when the price of a good or service reflects the marginal cost of producing it, meaning that the amount produced is exactly what consumers demand at that price.
Productive efficiency
Productive efficiency occurs when goods and services are produced at the lowest possible cost. This means that the production process is using the optimal combination of inputs to produce a given output, minimizing waste and maximizing output.
4 Factors of production
Capital - Resources used to produce goods or services.
Entrepreneurship - Entrepreneurship refers to the ability and willingness of an individual to combine the other factors to create goods or services.
Land - Natural resources used in production. Raw materials, minerals, land
Labour - all productive human effort both physical and mental paid or unpaid
CELL
Define specialisation
Specialisation is the production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way
they are able to access all that they need.
The division of labour
The division of labour is when labour becomes specialised in a particular part of the production process.
Advantages of division of labour
Workers will be quicker, better and more efficient as they are concentrating on one thing and so can quickly develop their skills.
-This may also lead to a higher quality of goods and services, since workers are
more skilled at their jobs.
- It is more cost effective to develop specialist tools, improving speed or quality.
- Time is not wasted moving between jobs and getting out tools etc.
- Workers only need to be trained to do one specific task , rather than many, saving
time and money.
Disadvantages of division of labour
If someone is only doing one specific task, it can make work very boring which will
lead to poor quality of work and people leaving the business.
-There is a reduction of craftsmanship and a much more standardised product
because of mechanisation.
- If for some reason production in one process is delayed, every other task has to stop
until that problem is solved. - The workforce do not have wide industrial training and could therefore suffer from
structural unemployment.
Advantages in specialisation
The theory of comparative advantage states countries should specialise in
producing those goods where they have a lower opportunity cost, and so they are
relatively best at producing. This will help them boost their economy. On the whole,
there is greater output globally.
Disadvantages in specialisation
Countries may become over-dependent on one particular export and if this fails their
economy may collapse.
● Other countries specialise in non-renewable resources and these could run out, which will result in a huge loss of income for that country. It will also mean the loss of these resources.
● There will be high interdependence and this will cause problems if trade is
prevented, for example because of war.
● Some say that increased specialisation means there will be more competition to cut costs and therefore wages will fall, but this is not necessarily true.
The 4 functions of money
-A medium of exchange: It can be used to buy and sell goods and services and is
acceptable everywhere. Removes the double coincidence of wants.
- A measure of value: It can compare the value of two goods.
-A store of value: It is able to keep its value and can be kept for a long time. With
barter, goods such as fruits often went out of date and so could not keep their value.
- A method for deferred payment: Money can allow for debts to be created. People
can therefore pay for things without having money in the present, and can pay for it
later.
What is a free market economy
Individuals are able to make their own choices and own the factors of production without government interference
Consumers make decisions based on utility
Businesses make decisions based on profit
Who believed in the invisible hand
Adam smith
What are the advantages for a free market economy
- The system is automatic
- Consumers have freedom of choice (consumer sovereignty)
-There is high motivation as hard work can lead to high potential
-Political freedom - Firms have competition meaning they can ensure productive efficiency
-In general they have higher growth
