Section 1:The Economic Problem Flashcards
What are wants and needs?
Unlimited
The factors of production are….
Limited resources
What are the four factors of production?
-land
-capital
-labour
-enterprise
How is land a factor of production?
Limited space
How Is capital a factor of production?
Machinery, tech, vehicles etc are limited
How is labour a limited resource?
Workers skilled in a particular area is limited
How is enterprise a limited resource?
entrepreneurs
What are the names of the three economic systems?
-free market(capitalism)
-command economy(state control)
-mixed economy(in the middle)
What does every choice have?
An opportunity cost
What does scarcity mean?
Limited resources
Traditional economic theory assumes…
Customers seek to satisfy their own satisfaction and that businesses aim to maximise profits
What is microeconomics?
The study of economics at the level of the individual, firm or consumer household
What are economic agents?
-individuals
-households
-governments
-firms
What do governments want?
To improve the economic and social welfare of citizens
What do rational consumers want?
Wish to maximise their satisfaction by choosing how to spend their income
What do producers/firms want?
Wish to maximise profits:
-producing goods at highest costs
-sell at high costs
Profit
What is profit?
Total revenue-total costs
What does the opportunity cost measure?
The cost of a choice in terms of the next best alternative
What are work-leisure choices?
The opportunity cost of deciding not to work an extra 10 hours a week
What are government spending priorities?
The opportunity cost of the government spending 10 billion in defence, that might mean 10 billion less on healthcare
What is investing today for consumption tomorrow?
The opportunity cost of an economy investing resources in new capital goods is the production of consumer goods given up for today
What is use of scarce farming land?
The opportunity cost of using farmland to grow wheat or bio-fuel—less food available for food production.
Factors of production input and output:
-land
Input: natural resources available for production
Output: rental income to owners of land
Factors of production input and output:
-labour
Input human input into the process of production
Reward: wages and salary from employment
Factors of production input and output:
-capital
Input: goods used in the supply of other products
Reward: interest from savings +dividends from shares
Factors of production input and output:
-enterprise
Input: entrepreneurs orations factors of production and take risks
Reward: profit
What are capital goods?
Goods that are used to make consumer goods and services
(Capital input includes machinery, hardware software)
Types of customer goods:
-customer durables: -products provide a steady flow of satisfaction
-customer non-durables: used up when consumed(food)
-customer services: haircut or ticke
What are free goods!
-do not use up any factor inputs when supplied
-zero opportunity costs(marginal cost of supplying an extra unit of a free good is zero)
Describe a free market?
-allocate resources
-driven by the profit motive
-limited role for state
-private sector dominates
Describe a mixed economy?
-mix of state and private ownership
-government intervention in markets
-mix will vary from country to country
Describe a command economy?
-most resources are state owned
-planning allocates resources
-little role for market prices
What is the basic problem in economics?
How to best allocate resources
What is a trade off?
When you have to choose between conflicting objectives
What does a trade off involve?
An opportunity cost
What does a production possibility frontier show?
The options you need to consider when you look at goods and services
What do mixed economies combine?
-free markets
-government intervention
What are markets and what happens?
Markets are a method for allocating scarce resources
In a market a buyer and seller chooses to exchange something
What are the pros of a free market economy?
Efficiency: only best products in demand
Entrepreneurship: rewards for new ideas make a lot of money
Choice: wide range of consumer choice
What are the cons of a free market economy?
Inequalities: huge differences in income
No non-profitable goods: drugs to treat new medical conditions may not be created
Monopolies: successful business es become the only supplier of a product
Pros of a command economy?
-maximise welfare: government distribute evenly(no inequality)
Low unemployment: -governments provide jobs and salary
Prevent monopolies: no market dominance
Cons of a command economy?
Poor decision making:-slow, poor decisions
Restricted choice: limited choice for consumers
Lack of risk taking and efficiency: -no incentive to increase efficiency because they don’t need profit
Public sector?
Government: doesn’t need profit
Private sector?
Business: needs profit to survive
What does utility mean?
Satisfaction
Economics as a social science:
What is margin?
The change is a variable caused by one unit
What are the key assumptions in economic theory?
-economic agents are utility maximisers(satisfaction)
-economic agents are rational
What do behavioural economics look at?
The impacts of social and psychological and emotional factors on decision making and trying to make more realistic predictions
Explain the concept of utility maximisation?
It’s assumed that a rational individual will attempt to maximise their utility(economic profit)
They do this by
What are positive statements?
Objective statements: they can be tested amended or rejected by referring to available evidence
What does positive economics deal with?
Objective explanation and the testing and rejection of theories
Is a false statement a positive one?
Yes
What are the 3 key questions in economics?
-what to produce?
-how to produce?
-for whom?
What are normative statements?
Subjective statements: can’t be proven
What comes under macroeconomics?
-TNC
-trade
-taxation
-unemployment
-migration
-utilities
-inequalities
What does traditional economic theory assume?
Everyone has perfect information and can use this to make a rational decision
Who controls production in a free market economy?
Everyone
Who controls production in a command economy?
Gov
What are the reasons why consumers don’t act rationally?
-limited time
-lack of available information
-people may not be able to evaluate the vast amounts of data
What is a rational individual?
Individual assumed to have complete self-control and will act to maximise their utility
What are the types of bias that stop individuals acting in a rational way?
-rules of thumb
-anchoring
-availability bias
-social norms
-habitual behaviour
Bias: rules of thumb
Useful tools that help an individual make a decision e.g choosing a middle priced when faced with a range of different prices for similar products
Bias: anchoring?
Placing too much emphasis on one piece of information
Bias: availability test?
Judgements made about the probability of occurring based on how easy it is to remember events occurring
Following a drought people will be more likely to overestimate the probability of another drought
Normative statements….. e.g
Ought to be
Should be
Must be
Could be
Value judgments are…
Normative statements, most normative statements of gov are normative statements
Bias: social norms?
Individuals behaviour can be influenced by their social group
Bias: habitual behaviour
Same thing over and over again
How can fairness affect decision making?
Giving to charity is not out of self interest and doesn’t maximise utility
Paying above minimum wage doesn’t maximise utility
What type of economics do government use?
Behavioural because traditional economic theory makes unrealistic assumptions that are not useful
Choice architecture?
Where an individual’s choice is influenced by adapting the way a choice is presented
What are the 5 ways choice architecture can occur?
-default options
-framing
-nudges
-restricted choice
-mandated choices
Choice architecture: What are default options?
People more likely to choose the default options so this can be used to encourage Individuals to act a certain way
Choice architecture: framing?
The context in which information is presented can influence a decision
(Changing the wording makes it more desirable)
Choice architecture: restricted choice?
Occurs when peoples choices are restricted, e.g restricted to only a number of schools in their area
Choice architecture :What are mandated choices?
Where people have to make a decision e.g gov implemented a policy where people have to to choose if they will or will not donate organs
What is the marginal opportunity cost?
Amount of sacrifice of a commodity to gain in another commodity
What is capital?
Goods which can be used to produce other goods in the future?
What is economic growth?
Increase the amounts of goods and services produced per head of the population over a period of time
What will lead to an outward shift in the production possibility frontier?
Improvement in the technology available to produce capital goods
What are Verblen goods?
Goods that we demand because they are expensive,
