Nature Of Economics Flashcards
Why do economists need to make assumptions?
To simplify complex and real world scenarios and build models that are easier to analyse
Why is Ceteris Paribus assumed in economic models?
To isolate the effect of a single variable, making analysis clearer
Why can’t economics make scientific experiments?
Economics studies human behaviour which is unpredictable and influenced by many variables
What is the role of value judgments in influencing economic policy?
Economics deals with normative issues and policymakers have to use value judgements to choose between trade offs
Difference between a positive and normative statement
Positive Statement- Objective, Fact Based and can be proven right or wrong
Normative Statement- Subjective and value based (expressing an opinion)
What do we assume consumers aim to do?
Will this always happen?
Maximise Utility (to get most satisfaction from a limited income)
No - brand loyalty can prevent consumers from switching to better value alternatives meaning they fail to maximise their utility
What do we assume firms aim to do?
Will this always happen?
Maximise Profit
No, with the divorce of ownership from control, managers may aim to pursue objectives such as revenue maximisation.
Firms may not maximise profit in the short run by charging low prices to undercut new entrants
What are the 4 functions of money?
Medium Of Exchange £10 to buy lunch - exchanging of goods and services)
Measure Of Value (easier to compare - car costs 10k and a phone costs 1k), Store Of Value (Saving Money to buy phone) and Method Of Deferred Payment (buying a phone in installments)
Advantages Of A Free Market Economy
Efficient allocation of resources driven by price signals
Incentive to innovate due to profit motive
Consumer Sovereignty
Dynamic Efficiency
Disadvantages Of A Free Market Economy
Poverty and Inequality
Public goods and merit goods are under provide
Lack of consideration for social costs (pollution)
Monopolies
Advantages Of A Command Economy
Reduces inequality (through central planning)
Resources allocated for social welfare rather than profit (socially optimal points)
Can focus on long-term goals
Full employment
Disadvantages Of A Command Economy
Lack of incentives for innovation or productivity
Risk of government failure or poor planning
Limited consumer choice and potential for shortages (lack of price signals)
Advantages Of Mixed Economy
Governments can provide for stability but allow for innovation in a free market
Governments can correct market failures
Welfare can reduce inequality and poverty
Disadvantages Of A Mixed Economy
Risk of excessive regulation can discourage enterprise
Still presence of inequality
