Nature of economics Flashcards
Definition of economics
The allocation of scare resources to provide for unlimited human wants.
Why do economists create models?
To understand how consumers and producers behave
What are some assumptions that economists make when making economic models for consumers and producers?
Consumers want to maximise satisfaction. Producers want to maximise profits.
Ceteris paribus definition
All other things being equal
What are positive economics statements?
Statements based on facts which can be tested as true or false and are value free.
What are normative economic statements?
Statements based on value judgements which cannot be tested as true or false. Depends of the values held by individuals.
What is the economic problem?
The economic problem is scarcity. There are finite resources compared to unlimited human wants so choices have to be made about how to use those resources.
What is opportunity cost?
The value of the next best alternative foregone.
What is marginal analysis?
The effects of producing or consuming one extra unit of a good or service.
4 factors of production
Land, labour, capital and enterprise
What are renewable resources?
a resource whose stock level can be replenished naturally over a period of time.
what is a non-renewable resource
a resource whose stock level decreases over time as it is consumed
What does a production possibility frontier show?
Maximum potential level of output for two goods or services that an economy can achieve when all its resources are fully and efficiently employed.
What is a consumer good?
a consumer good is a good that directly provides utlity to consumers. it is wanted for the satisfaction it gives
What is a capital good?
a good that is used to produce consumer goods or services
If the economy is located on the production possibility frontier what can be concluded?
Efficient allocation of resources since none are being wasted.
If the economy is located outside the production possibility frontier what can be concluded?
The output combination is unobtainable given the availability of current resources and technology.
If the economy is located on the inside of the production possibility frontier curve what can be concluded?
Inefficient allocation of resources as not all are being used.
What does an outward shift of a production possibility curve mean?
Country has increased its production potential.
What can cause an outward shift of a production possibility curve?
Increase in quantity or quality of resources. Expansion of higher education and training schemes. Increase in investment. Development of technology.
What can cause an inward shift of a production possibility curve?
War, natural disaster.
what is specialisation
when an individual, firm, region or country concentrates on the production of limited range of goods and services
what are some advantages of specialisation
It increase productivity and living standards across the world. It increase global output.7
what are disadvantages of specialisation
If demand for a good provided by a country falls it can lead to significant structural unemployment. Depletion of resources if specialised good is in high demand. Country may lose out on trade deals for specialised goods if exchange rates don’t favour them.
what is division of labour
the specialisation of workers on individual tasks in the production process to increase efficiency.
advantages of division of labour
1.increase in labour productivity
2.increase in the efficiency of resources
3.increase in the quality of output
disadvantages of division of labour
- repetition creates monotony and boredom
- easier to replace skilled workers with machines, leading to structural unemployment
- specialisation creates interdependence in production
what is money
anything that is generally acceptable in the payment of goods or services, or of a debt
what are the 4 functions of money
1.medium of exchange
2.measure of value
3.store of value
4.method of deferred payment
what does medium of exchange mean?
makes buying and selling easier. makes exchange easier. eliminates need for barter
what does measure of value mean?
enables a value to be placed on products. allows comparison between relative values of products.
what does store of value mean?
convenient way of storing wealth so that it can be spent at a later date. money tends to hold its value in the short term as long as inflation remains low.
what is the term used to set price for borrowing and lending
rate of interest
what does method of deferred payment mean
enables borrowing and lending.
characteristics of a free market economy
all resources are allocated by the price mechanism. no government intervention.
characteristics of a mixed economy
some resources are allocated by the price mechanism and some by the government.
characteristics of a command economy
all resources are allocated by the government. no price mechanism.
what sectors are usually provided by government
education, healthcare, defense, law and order
advantages of a free market economy
economic efficiency and lower prices.
higher quality of products
greater choice of products offered
financial incentives for both workers and entrepreneurs
how does the free market result in economic efficiency and lower prices?
competition results in firms keeping production costs low in order to sell goods and services at a competitive price. -productive efficiency
competition also results in firms providing goods and services that consumers demand - allocative efficiency
how does the free market result in higher quality of products
firms continuously will try to improve the quality of their products to gain an advantage over their rivals.
how does the free market economy provide financial incentives
entrepreneurs have an incentive to invest and take risks in order to earn a profit
workers have an incentive to work hard to gain more earnings
disadvantages of free market economy
monopolies may form as rival firms can get taken over or go out of business
can cause unequal distribution of income and lack of welfare support may lead to people living in absolute poverty
external costs and benefits are sometimes ignored which for example can cause damage to the environment
production of demerit goods with a lack of regulation can negatively impact consumers
lack of merit goods. these can be healthcare and education for example. less healthcare and education investment can result in more disease and lower literacy rates
erratic swings in business cycle can cause high inflation during economic boom and high unemployment in economic slump.
advantages of a command economy
cooperation between firms can potentially lead to a higher level of output
reduction in inequality since government controls wages of all workers
government can limit external costs resulting in less damage to environment or consumers
government can fund provision of merit goods such as education which yield high external benefits
government has more control of economy leading to less unemployment and inflation
disadvantages of a command economy
inefficient allocation of resources as price mechanism can’t operate and so you can get excess demand or excess supply.
lack of competition leads to inefficiency and so productivity is low.
can lead to poor quality products as emphasis is put on output rather than quality
less consumer choice for goods and services
workers may be directed to specific jobs due to lack of different goods being produced
labour has little incentive to work and entrepreneurs have little incentive to take risks in order to develop new goods/services
economic growth and living standards grow slower.
why is government intervention important
to provide merit goods such as education and healthcare
to provide public goods such as defense
