Nature Of Economics Flashcards
What is the PPP used for and example
To compare different economies
How much your money can buy in terms of a different currency
BIG MAC (homogeneous good)
How much can consumers buy (have to pay) in UK vs another country’s currency
What is the meaning of the division of labour
Occurs when workers specialise on very specific tasks
Who set out the view that economic growth could be achieved by increasing division of labour
Adam smith
What are the advantages of the division of labour + specialisation
Each worker specialised in tasks for which that worker is best suited
Worker only has to be trained in one task - training costs for firm are low
Less time wasted because a worker no longer has to be moved from one task to another
What are the disadvantages of the division of labour + specialisation
Monotony + boredom’s for workers which could result in decrease in prod
Loss of skills, workers trained in one particular task have only limited skills - could be a problem if made redundant
A strike by one group of workers could bring the entire production facility to a standstill
Lack of variety - all goods produced on a prod line are identical
What are the 4 functions of money
Medium of exchange - enabling people to specialise, exchanging money earned from doing specialist jobs
Store of value - save to buy in future
Measure of value - can asses the value of diff goods by comparing prices
Means of deferred payments - can buy goods and pay for them on credit
What is a free market economy
An economic system in which prices are determined by supply + demand with no gov intervention
What are the characteristics of a free market
Private ownership of resources
Market forces determined by prices
Producers aim to maximise profits
Consumers aim to max utility (satisfaction)
Resources allocated by price mechanism
What is a command economy
One in which resources are allocated by the state
Characteristics of command economy
Public state ownership of resources
State determines price
Producers aim to meet production targets set by state
State allocates resources
Greater equality of income + wealth than in a free market economy
Who thought capitalism was inherently unstable because workers are exploited by the owners of the factors of production
Karl max
What is a mixed economy
Combination of a free market economy + a command economy
Advantages of free market economies
Consumer sovereignty - consumer spending decisions determine what is produced
Flexibility - free market system can respond quickly to changes the consumers want
No bureaucracy - officials are not needed to allocate resources
Increased choice for consumers compared to command
Disadvantages of free market economies
Inequality - those who own resources are likely to becomes richer than those who don’t own resources
Trade cycles - free market economies may suffer from instability in the form of booms + slumps
Imperfect info - consumers may be unable to make rational choices if they have inadequate info
Externalities
Monopolies
Advantages of command economy
Greater equality - state can ensure that everyone can enjoy a min standard of living, no one is rlly rich
No exploitation - privately owned monopolies are unable to exploit workers + consumers
Full employment - state can ensure that all workers are employed
What is the substitution effect
When there is a rise in price, the consumer (whose income has remained the same) tends to buy more more of a relatively lower priced good + less of a higher priced one
What is the income effect
Where there is a rise in price, consumers will suffer a fall in their real incomes (purchasing power of their money incomes falls)
what are renewable and non-renewable resources
renewable = those that can be replaced naturally after use (solar and wind energy)
- likely to be sustainable unless they are consumed more quickly than they can be replaced
non-renewable = those where continued consumption will eventually result in their depletion
what is opportunity cost
the next best alternative that is foregone when a choice is made
what are capital goods
those required to produce other goods - both capital and consumer goods (machinery and factory buildings)
what are consumer goods
those that give satisfaction/ utility to consumers (smartphones, cars, food)
what does any point on the PPF imply?
that all resources are fully and efficiently employed
- indicate the maximum productive potential of an economy and that resources are being used efficiently
what
