Nature Of Economics Flashcards
What is an economy?
An economy is all the goods and services produced in an area.
What are the factors of production?
Resources used to produce goods and services
- capital (things used to make goods/services)(machinery)
- enterprise (the willingness of people in business to take risks to make profit)
- land (natural resources e.g oil, forests)
- labour (all the work done by humans in production)
What is the economic problem and what questions does it provoke?
How to use the available scarce resources to satisfy people’s infinite needs/ wants
- what to produce?
- how much to produce?
- who to produce it for?
What is an economic agent and who are they?
Economic agents refers to groups that participate in the economy. Either by buying,selling,producing, advertising goods/services.
- producers
- consumers
- government
Who are producers?
Producers create goods/ services in the economy
Who are consumers?
Consumers buy goods and services made by firms
- they could be individuals or firms
What is the government?
- The government sets rules other economic agents must follow
- it also produces some goods/services like roads/healthcare
What are goods and services?
Goods are tangible - physical product
Services is an intangible commodity - an act
What sectors of labour are scarce?
- material sector (e.g oil and gas are in shortage)
- agricultural sector (high energy prices, labour shortages)
Why is labour scarce?
Because there is a shortage of people with skills, qualifications, skills and education.
Why is capital scarce?
Shortage of money (to invest) and labour (operate machines)
What causes land scarcity?
population pressure - as the population rises people need more land to live on
Social inequality - people with limited income/ asserts may not be able to afford land
Environmental issues - in many regions, land is protected for environmental preserves
What is the difference between non-renewable and renewable resources?
Renewable resources cannot be depleted over time as they naturally replenish
Non - renewable resources can be depleted over time as they cannot be replenished at the speed of consumption
What is a sustainable resource?
A sustainable resource is one which is produced as rapidly as it is removed from the environment so that it does not run out.
What is opportunity cost?
The opportunity cost of a decision is the value of the next best alternative forgone
What is the difference between theoretical and empirical information?
Theoretical info - based on ideas and opinions
Empirical info - based on research and economic data
How does opportunity costs impact consumers/ producers/ government?
Consumers use it to decide what to spend their income on
Producers use it to decide what and how much goods/ services to produce
Government use it to decide what policies to choose from (health & safety policy/ non - smoking policy)
Why do economic agents use models?
Economic agents use it to explain how the economy works
- they can be used to predict the impact of economic change
9e.g the impact on unemployment if minimum wage is raised
What does ceteris paribus?
The idea of assuming all the other factors affecting two independent variables remain constant
Why is it difficult for economists to conduct experiments?
The economy isn’t a lab, therefore they must rely on data and assumptions to predict economic future.
What does PPF mean?
Production, possibility frontier shows the maximum potential output of a combination of two goods / services an economy can achieve - given the current level of technology
What does government want?
Social equality - equal play, minimum wage
Social welfare - aid to families, healthcare, unemployment compensation
What is the difference between positive economic growth and negative economic growth?
Economic growth is an increase in the production of goods/ services in an economy
Negative economic growth is a decrease in the production of goods ‘ services in an economy
What causes economic growth?
- an increase in the quality/ quantity of factors of production
What causes the ppf to shift inwards?
Negative economic growth
Perhaps the economy has suffered a great loss or exhaustion of some of its scarce resources
What does a point under/above the ppf mean?
Under - underutilisation of resources
Above - unobtainable have to increase quality / quantity to reach
What is the difference between capital/ consumer goods?
Capital goods are assets that help a firm to produce other goods
Consumer goods are goods that do not produce other goods they are meant to satisfy people’s needs & wants
Why might there be a point under the PPF curve?
- inefficient use of resources
- underutilisation of resources
What does it mean when an economy is at any point on the curve?
There is an efficient allocation of resources since none are being wasted or under-utilised.
What is a positive economic statement?
A positive economic statement is based on economic data and research and therefore can be proven true or false (objective)
What is a normative economic statement?
A statement that is based on opinions and therefore cannot be proven true or false (subjective)
What is a value judgement?
Value judgements influence individuals choices in the economic decisions they make
What words indicate a normative statement?
6 words:
Fair, unfair, should, ought, better, worse
What do governments do in decision making?
- make value judgements on economic issues
- use positive analysis to help make decisions
What rewards do each of the factors of production gain?
labour - wages
Capital - interest/ dividends
Land - rent
Enterprise - profits
What is specialisation?
Specialisation occurs when an individual, firm, region or countries concentrate on the production of a limited range of goods / services
What are the advantages of specialisation?
- high labour productivity
- leading to increases in quality/ quantity of output (lowers cost/unit for firms)
- decrease in production costs means lower prices to increase in profits leading to increase in wages
- creates many low skilled jobs
What are the disadvantages of specialisation?
- repetition of task can lead to boredom reducing quality/ quantity
- simplified jobs can reduce the pride that workers feel in their jobs
- worker turnover rates may increase (leave job)
- increases structural unemployment since workers are only trained in one skill
What is the division of labour?
Division of labour is the specialisation of workers on specific tasks in the production process
Why does division of labour lead to rise in output?
Workers focusing on one task allows them to become more efficient at it hence making less mistakes causing productivity to increase, allowing the firm to produce more given the same time
What are the advantages of specialisation in trade?
- higher labour productivity can reduce production costs and hence reduce prices - (gives the firm a comparative advantage) causes exports to increase leading to economic growth - leading to rise in income.
What does higher productivity cause?
- higher living standards
- increase in quality/quantity of output
- more efficient use of resources
What are the disadvantages of specialisation in trade?
Firms that cannot compete will go out of business causing structural unemployment.
Specialisation may cause over - dependency on other countries resources.
What are the advantages of division of labour ?
- workers become more skilled through repetition of tasks
- productivity of workers rise causing output to rise
- time is saved by workers focusing more on specific tasks
- workers are easier and cheaper to train
What is the overall benefit for firms, workers and the economy given the division of labour?
Firms: greater quantity/ quality of output
Workers: higher skill levels and potentially higher wages
Economy: higher growth - higher standard of living
What are the two methods of trading?
- bartering
- money
What is bartering?
Exchanging goods/ services for other goods/ services without using money
What are the four functions of money
- store of value
- measure of value
- method of deferred payment
- medium of exchange
medium of exchange
Medium of exchange: something commonly accepted in exchange for goods and services
measure of value
Measure of value: money shows the price of a goods revealing its value
Store of value
Store of value: money shows how value is maintained and can be kept for a long time
Method of deferred payment.
Method of deferred payment: allows debt to be created
what are the useful characteristics of money?
- durable
- portable
- homogeneous
- divisible
What is planning?
Planning refers to the process by which the gov allocates resources, this is done through taxation
What is a market?
A market is anywhere buyers and sellers meet to exchange goods/ services for money (can be physical/ digital)
What is price mechanism?
Price mechanism is the process by which the market allocates resources.
What are the three types of economies?
- command economy
- free market economy
- mixed economy
What is a command economy?
A command economy is an economy in which resources are allocated solely by the state
What is a mixed economy
A mixed economy is an economy in which resources are allocated by the state and price mechanism
What is a free market economy?
A free market economy is an economy in which resources are allocated solely by the price mechanism
What is a public sector of the economy?
A public sector is the part of the economy which is controlled/ owned by the government.
What is a private sector?
Private sector is the part of the economy which is not controlled/ owned by the government
In which economy do firms have profit motive and competition?
Firms have profit motive in free market and mixed economies because they have more control on production/ prices which leads to wider choice because this incentivises
- firms to develop new products
- firms to meet consumer demand
How do firms get profit?
By producing as efficiently as possible and producing a product that consumers both want and can afford.
In which economy is profit motive absent?
Profit motive is absent from command economies as firms are told what to produce - leading to limited choice for consumers.
What can limit choice in free market/ mixed economies?
- concentrated markets and monopoly can limit choice
(Monopoly - a market structure that consists of only one seller/ producer)
What are the advantages of free market economies?
- profit motive incentivises firms to meet demand
- competition leads to better quality of goods/ services
- more efficient use of scarce resources
- government intervention is avoided.
What are the disadvantages of free market economies?
- free market ignores inequality - benefits wealthiest
- monopolies could exploit market
- overconsumption of demerit goods causing negative externalities
- public goods are not provided
- merit goods are under provided
Advantages of command economy?
- social equality is the goal of the system
- less unemployment
- workers receive same wage
Disadvantages of command economy?
- firms may not meet consumer preferences
- it limits democracy and personal freedom
- lack of competition/ profit motive causes lack of quality/ innovation
Why is quality & innovation higher in mixed & free market economies
Because there is both competition and profit motive present.
What is efficiency?
Efficiency is concerned with the optimal production and distribution of scarce resources
Why do free market/ mixed economies have less equitable distribution of income & wealth than command economies?
As the owners of capital and land accumulate wealth over time and pass privilege on to their children through property, private education and social networks.
What is a state made up of
- tertiary (sector of the economy that concerns services)
- citizens
- government
What is the difference between the state and the government?
The state is permanent (the gov isn’t)
The state is made up of all citizens (the gov isn’t)
What is the role of the state in mixed economies?
- allocates resources through planning
- redistributes income through welfare spending
- regulates consumer and firms
What are merit goods?
Commodities that the public sector provides free or cheaply because the government wishes to encourage their consumption
What roles does the state play in mixed economies?
- allocates resources through planning
- regulates consumers and firms
- redistributes incomes through welfare spending
How does regulation aim to correct market failure?
- regulation provides an incentive to change behaviour toward the socially optimum lvl of output
- if correctly implemented this leads to the removal of a welfare loss (or welfare gain for positive externalities)
What are the disadvantages of regulation?
- cost - regulation is costly in two respects: administration and enforcement
- setting the right lvl of regulation can be difficult
- it may encourage black market activity
- unintended consequences may arise
What is gov failure?
Gov failure is when government intervention designed to correct market failure results in a less efficient allocation of resources
What are the causes of gov failure?
- distortion of price signals
- unintended consequences
- excessive administrive costs
- information gaps
How can distorting price signals lead to gov failure?
- gov subsidies could distort price signals by distorting the free market mechanism
- there could be an inefficient allocation of resources because the market mechanism isn’t able to act freely.
What are unintended consequences?
When the actions that producers & consumers have unexpected.
How can unintended consequences cause gov failure?
With gov policies consumers react in unexpected ways
- when producers/ consumers aim to maximise their self interest they’ll look for legal/illegal loop holes which creates unintended consequences like illegal markets.
How can excessive administrative costs cause gov failure?
The social benefits of a policy might not be worth the financial cost of administering the policy - might cost more than the gov anticipated
What is long run/short run?
Long run - a time period where all factors of production a variable
Short run - a time period where at least one factor of production is fixed
Difference between capital/ consumer goods?
Capital goods - goods intended for use in production, rather than by consumers
Consumer goods - goods designed for use by final consumers
Renewable resource?
A resource whose stock level can be replenished naturally over a period of time
Non-renewable resource
A resource whose stock level decreases over time as it is consumed
What is ceteris paribus?
all other factors remaining the same
- the assumption that all other variables within a model remain constant whilst the change is being considered
