Nature of Economics Flashcards
Why is economics a social science?
it studies human decision making under scarcity
What is an economic model?
a simplified version of reality used to explain and predict economic behaviour
Why do economists use assumptions?
the real economy is too complex to analyse every detail. assumptions help simplify reality and make models testable.
Why do economists use Ceteris Paribus?
to isolate the effect of one variable while keeping everything else unchanged.
What is a positive statement?
Objective, fact based statement that can be tested
What is a normative statement?
Subjective, opinion based statements involving value judgements that cannot be tested.
What is the problem of scarcity?
there are unlimited wants but finite resources.
What is opportunity cost?
the next best alternative given up when making a decision.
What does the PPF curve show?
shows the maximum productive potential of an economy when all resources are fully and efficiently used. It also illustrates opportunity cost, economic growth, efficiency and trade offs.
What causes a movement along the PPF curve?
when resources are reallocated between 2 goods, shows opportunity cost
What causes a shift outwards in the PPF curve?
Economic growth
What causes a shift inwards in the PPF curve?
Economic decline
What is a capital good?
used to produce other goods and services eg. machines and factories
What is a consumer good?
directly consumed by individuals eg. clothes/ food
What is specialisation?
when firms or individuals focus on producing specific goods or services. Leading to higher efficiency because workers become skilled in their tasks.
What is the division of labour?
A form of specialisation where production is split in different tasks, and workers become experts in one area.
4 advantages to specialisation and division of labour
Higher productivity, lower costs, time saving and better use of resources
3 Disadvantages to specialisation and division of labour
Boredom and demotivation, risk of unemployment, over reliance on trade.
What are the 4 functions of money?
Medium of exchange, measure of value, store of value and method of deferred payment
What is the mixed economy?
A combination of free markets and government intervention
How are resources allocated in the free market?
resources are allocated through market forces (supply and demand)
What is the Command economy?
The government controls all economic decisions.
