Nature of Economics Flashcards
What does ‘ceteris paribus’ mean?
Holding all other variable constant
–> enables us to examine a single chain of reasoning
What are positive economic statements? + E.g.
Objective statements that can be proved or disproved as they are based on facts.
- GDP, unemployment, Price etc.
What is a Normative economic statement
- Subjective statements based on judgements, cannot be proved or disproved
- e.g. Issues like tax, subsidies, minimum/ max pricing
What is the Problem of Scarcity?
- Resources are finite, wants are infinite
–> have to consider, What and how much of something to product, how to produce it and how goods should be allocated.
What are the Factors of Production + e.g.
- Land –> natural resources, raw materials, soil, etc.
- Labour –> those involved in production, both physical and mental efforts
- Capital –> aids to production, buildings, offices, machinery, tech
- Enterprise –> taking the risks involved in production, bringing factors of production together to produce
Renewable vs. Non-renewable resources?
Renewable –> can be naturally replaced after use e.g. solar power, windpower, fish
Non-Renewable –> those were continued consumption will result in their exhaustion –> oil, copper, coal
What is an Opportunity cost
- The next best alternative that is forgone when a choice is made
- Scarcity of resources implies must be a choice made, Oppertunity cost measures real coast in terms of what is forgone
Economic goods vs. Free Goods vs. Public goods
- Public goods = non-rivalrous and non-excludable –> street light, national defence
- Free Good = not scarce, without limit –> e.g. sunlight
- Economic Good = Created from scarce resources, limited and command a price
What does a PPF show
- the maximum potential output. of an economy when all resources are fully employed
(the opportunity cost between producing two goods) - Can also show if resources are not being allocated efficiently (if operating inside curve)
Why is the PPF curve a curve not a straight line
- to represent the diminishing marginal costs
- As output of one good increases the opportunity cost rises
- Some factors of production will be better suited to production of one good than the other due to immobility of these factors of production e.g. worker who specialises in production of iron will be less productive if switched to make chairs etc.
Economic growth vs. Economic decline
- Growth = increase in productive capacity of economy, indicating increase in real output, PPF shift right
- Decline = decrease in productive capacity, indicating decrease in real output, PPF shift left
What is a movement along a PPF caused by
- Movement along = change in combination of two goods being produced, result in OC
What causes an outwards (5) shift of PPF curve
Outwards
- Discovery of New natural resources
- New methods of production, increasing productivity
- Advances in tech
- Improvements in Education / training increasing productivity
- Increase in size of workforce e.g. immigration, increase retirement age, women
What causes an Inwards (4) shift of PPF curve
- Natural disaster - destruction of productive capacity
- Depletion of natural resources
- Reduction in size of workforce e.g. emigration / compulsory education
- Recession - factories close down
Division of Labour meaning + thinker behind it
production process brown down into many separate specialised tasks
- Adam Smith - ‘Wealth of Nations’
–> ↑Output per Worker due to repetition –> increasing productivity
Advantages (4) + Disadvantages (5) of Divisions of Labour
Ad
+ Training costs lower –> Workers only trained in one task
+ Less time wasted –> Workers don’t move from one task to another
+ Increase productivity, reduces AC –> Enables production lines and increased machinery
+ Country benefits from Increase output, greater choice and lower Prices
Dis
- Decreased Productivity –> Monotony + Boredom for workers
- Loss of Skills + Possible structural immobility –> workers have limited skills, problem if made redundant
- Strike by one group could bring production to halt
- Lack of variety of Goods - all goods identical
- Increase in Labour immobility
- country becomes over-dependent on imported Goods / services
What factors limit division of Labour (3)
-Size of Market - small markets difficult to specialise
- Type of Product - designer fashion, unique production not suited to speclisation
- Transport cost - If transporting large-scale production division of labour may not be possible
What are the Function of Money (4)
- Medium of exchange - exchange money for Goods and services
- Store of Value - save to buy goods
- Measure of Value - compare / asses value of different goods
- Means of deferred payments - enable people to pay on credit
Definition + Characteristics (5) + key thinkers of Free Market
Def
- Economic system where prices are determined by supply + demand. No gov interference
Characteristics
- Private ownership of factors of production
- Market forces determine prices
- Producers aim to maximise profits (MR=MC)
- Consumers maximise utility (satisfaction)
- Resources allocated by price mechanism
Thinkers
- Adam Smith
–> When individuals follow self-interest, indirectly promote good of society
–> role of Gov limited to providing public goods
- Friedrich Hayek
–> Gov interference doomed to failure
Definition + Characteristics (5) + key thinkers of Command Economy
Def
- Economy where resources are allocated by the State
Characteristics
- State ownership of resources
- State determined price
- Produces aim to meet production targets set by state
- State allocates resources
- Greater equality of income + wealth
Thinker
- Karl Marx
–> Capitalism inherently unstable as workers exploited by bourgeoisie
–> lead to proletariate revolution
Mixed economy def
- Combination of free market + command economy
- most economies are mixed
- some resources allocated by Price mechanism, other by State
Advantages (6) and Disadvantages (5) for free market economy
Ad
+ Consumer sovereignty –> consumer spending determines what is produced
+ Flexibility –> Free market responds quickly to what is produced
Caused by –> No bureaucracy –> officials not needed to allocate resources
+ Efficiency –> Competition and profit motivate promotional of efficient allocation of resources (allocative efficiency)
+ Increased choice –> Consumer have wide choice of goods and services
+ Economic + political freedom –> consumer and producer have right to own resources
Dis
- Inequality –> those who own resources likely to become richer than those who do not
- Trade cycles –> Free market economies suffer instability in form of booms and slumps
- Imperfect Information –> Consumers unable to make rational hoes if have inadequate information or asymmetric info
- Monopolies –> danger of firms exploiting consumers by charging higher than free market equilibrium
- Externalities –> Cots and benefits to third parties not taken into account during production
What is the role of the State in a Mixed economy (4)
- Defence and Security
- Provision of Public Goods
- Public services e.g. education / health
- Redistribution from rich to poor
Advantages (6) and Disadvantages (5) for Command Economy
Ad
+ Greater equality –> state ensures everyone enjoyed minimum standard of living
+ Macroeconomic stability –> state ensures booms and slumps are smoothed out
+ External benefits and external costs –> taken into account when planning production
+ No exploitation –> Privately owned monopolies unable to exploit workers + consumers
+ Full employment –> State can ensure all workers are employed
+ Resources allocated to maximise social welfare
Dis
- Inefficiency –> absence of profit motivation result in inefficient allocation of resources
- Lack of incentives for risk –> absence of profit reduces incentive for investment
- Restrictions on freedom –> people directed into jobs state deems necessary
- Shortages and Surpluses –> If state miscalculates supply / demand may be excess demand or supply of goods
- Inflexibility –> state may be slow to react to changes in consumer needs
Caused by –> Bureaucracy –> lots of officials needed for resources allocation
- No consumer sovereignty
