Nature of economics Flashcards
Define Latin term ‘ceteris paribus’
‘all other things remain equal’
What is the distinction between a positive and normative statement?
Positive statement - objective statement made without any obvious value judgements or emptions, which can be proven or disproven
Normative statement - subjective statement based on opinion which cannot be proven or disproven (often includes words such as, ‘ought’, ‘maybe’, ‘should’, ‘unwise’, or says that one action is better than the other’)
How are positive statements are normative statements used by economists?
Positive statements are often used to back up normative statements
Explain the economic problem
SCARCITY
- people have finite needs, but infinite wants – despite infinite wants, resources are finite and limited
- relative concept as resources may not necessarily be scarce in themselves, but scarce in relation to the demands placed upon them
- e.g. water in India and China, food shortages around the world
- Economies deal with scarcity by deciding WHAT to produce, HOW to produce, and WHOM to produce for
What are the 3 questions Economies ask in order to solve the economic problem of scarcity?
What to produce?
How to produce?
Whom to produce it for?
Define the difference between renewable and non-renewable resources
Renewable resource - resource of economic value that can be replenished or replaced s on a level equal to its consumption.
As long as the rate of consumption is less than or equal to the rate of replenishment, the stock should not decrease
e.g. oxygen, solar power, fish
Non-renewable resource -resource of economic value that cannot be readily replaced by natural means on a level equal to consumption
e.g. fossil fuels such as coal, gas, oil
Define and explain ‘opportunity cost’
- D: The cost of the next best alternative foregone
It means that the same resources cannot be used to produce different goods at the same time
The limited resources allied to unlimited wants means that decisions have to be made
When considering opportunity costs, the following base their decision on:
Governments - maximising social welfare
Producers - maximising profit
Consumers - maximising satisfaction
Name and define the 4 factors of production
REMEMBER CELL
Capital - man-made resources
Entrepreneurship - all other 3 factors combined to make a service or good for a profit
Land - natural resources
Labour - human effort/capital
What is a PPF?
Production possibility frontiers show the maximum possible combinations of capital and consumer goods an economy can produce with its current resources and technology
Name factors that cause economic growth, and factors that cause economic decline
Economic growth :
- increased quantity of capital and consumer goods
- increased quality
Economic decline:
- decreased quantity and quality of labour due to war
- natural disasters
- natural resources running out
- fall in spending on education
- migration
On a PPF diagram, at what point does the economy aim to produce ?
At any point on the curve
What does it mean when the economy is operating…
a) on the curve
b) inside the curve (under)
c) outside of the curve (above)
a) possible and efficient production
b) possible but inefficient production as they are not maximising output
c) unobtainable production as they do not have enough resources/technology to produce here
Explain the difference between a movement and a shift on the PPF curve
A movement along the curve means that there has been a change in the combination of capital and consumer goods. The same amount of resources are allocated between the two goods differently.
A shift on the PPF curve means that there has been a change in the productive potential of an economy (more or less goods can be produced). There has been a change in the number of resources and/or technology in a country so their potential output has changed
Define capital and consumer goods
Consumer goods - goods that are demanded and bought by households and individuals
Capital goods - goods that are produced in order to aid the production of consumer goods in the future
Define specialisation
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 to access all that they need
