Pack 1: The Nature of Economics Flashcards
What is scarcity?
Resources are limited in supply and so cannot fulfil all the unlimited human wants
What are the classified world limited resources?
Land: includes resources underground/in sea and air
Labour: economy’s work force/skills/training they have
Capital: manufactured stock of tools, machines etc
Enterprise: skill entrepreneurs have, specifically in organizing other factors of production and taking risks by setting up business enterprises
What are non-renewable resources?
Will never be replaced once they are used e.g. coal
What are renewable resources?
Can be used and replaced, such as solar power
What is opportunity cost?
Value of the next best alternative foregone
What choices do governments have to make due to scarcity?
- UK government have scarce amount of tax revenue to spend on the economy
e.g spending on NHS means less to spend on schools
What choices do businesses have to make due scarcity?
- scarce amount of finance to invest into their organizations
e.g spending on advertising means less to spend on wages
What choices do consumers make due to scarcity?
- households have scarce amount of income to spend on goods and services
e.g spending on holidays means less to spend on a new car
What is a social science?
- studies societies and the human interactions within those societies
What do economic models do and why are they used?
- use assumptions to simplify reality in order to make insights into economics situation
- uses assumptions in order to account for complex human behaviour and constantly changing variables
What is Ceteris Paribus?
- all other things are held equal
Why is ceteris paribus used?
- allows economists to simplify and explain causes and effects
What is a positive statement?
- concerned with objective statement
- based on evidence and tend to be statements of fact
- can be proven to be true of false
What are Normative statements?
- value judgement
- subjective
built around opinions/beliefs
What is the Production Possibility frontiers (PPF)?
- an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services
What is a consumer good?
- goods/services that are used by people to saitisfy their need/wants
- e.g TV
What is a capital good?
- goods used in production of other goods
- e.g machines, factories
How can a PPF be used to show efficiency, inefficiency, attainable and unattainable production?
- Producing at any point on the curve represents productive efficiency
- Any point inside the curve represents inefficiency
- Using the current level of resources available, attainable production is any point on or inside the curve and any point outside the curve is unattainable
How can economic growth be shown on a PPF curve?
- outward shift
- Economic growth occurs when there is an increase in the productive potential of an economy
- shift is caused by an increase in the quality or quantity of the available factors of production
How can the quality of a factor of production be improved?
- the impact of training and education on labour.
- An educated workforce is a more productive workforce and the production possibilities increase
What is an example of how the quantity of a factor of production can be increased?
- through a change in migration policies.
- If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase
What causes economic decline?
- when there is any impact on an economy that reduces the quantity or quality of the available factors of production
What is the division of labour?
- when a task is broken up into several component tasks
- allows workers to specialise by focusing on one of the components that make up the production and thereby gain significant skill in doing it
- results in higher output per worker and so increases productivity
What are the Pros of Division of Labour and Specialisation?
- Higher labour productivity lowers cost/unit for firms
- Lower costs can be passed on to consumers in the form of lower prices
-Lower costs can mean higher profits for the firms. This may lead to higher wagesfor workers - Increased productivity allows some firms to sell beyond their local market into international markets
- creates many low skilled jobs
What are the Cons of Division of Labour & Specialisation?
- Task repetition often leads to boredom
- decrease in motivation may lead to less productivity and/or poorer manufacturing quality
- may increase worker turnover rates as workers look to move on to a role that is more stimulating
- Mass produced products often lack variety and do not take different consumer preferences into account
- if workers lose their jobs, then it may be hard for them to find work as they are only trained in one skill
What four functions must money fulfil?
- medium of exchange :to avoid double coincidence of wants
- measure of value:allow buyers/sellers to arrange an agreeable exhange
- store of value:allows money to be save
- method of deferred payment:allows people to pay for things later
What are the pros of Division of Labour & Specialisation in Trade?
- Higher labour productivity lowers cost / unit for firms, which makes their goods more competitive internationally (exports)
- Increased exports can result in economic growth for the nation
- Economic growth usually leads to higher income and a better standard of living
- Income gained from exports can be used to purchase other goods from around the world (imports). This increases the variety of goods available in a country
What are the cons of the Division of Labour & Specialisation in Trade?
- International trade is beneficial for the firms that can compete globally. However, some industries will be unable to compete and will go out of business
- Many firms in an entire industry may close leading to structural unemployment
- Specialisation may create over-dependency on other countries’ resources. This may cause problems if conflict arises.
- Specialisation using a country’s own resources will lead to resource depletion over time.
What is structural unemployment?
- caused by a mismatch between workers skills and the available jobs in the economy
What did Adam Smith believe?
- advocate for free markets
- competition between firms essential
- see some role for the state in certain areas of the economy
What did Karl Marx believe?
- criticism of free market capitalism
- capitalism would be replaced by communism
What did Frederik Hayek believe?
- supporter of the free market
- deeply critical of socialism/communism
What is a free market economy?
- where scarce resources are allocated entirely by price mechanism
What is a command economy?
- where scarce resources are allocated entirely by the government
What are Adv of free markets?
- Consumer choice
- Competition and efficiency
- Incentives/Economic growth (as less income tax)
What are the Dis of free markets?
- Inequality: not state provision
- Market failure:
- some goods over-provided e.g cigarettes
- some goods under-provided e.g healthcare
What are the adv of command economy?
- Guaranteed standard of living
- Solving market failure:
gov intervention:
- e.g providing public services
What are the dis of command economies?
- lack of choice and freedom
- lower efficiency and economic growth : no profit motive
- Failure of large scale government: corruption
