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Economics > Section 1: The Economic Problem > Flashcards

Section 1: The Economic Problem Flashcards

1
Q

Why is Economics considered a social science

A

Looks at the behaviour of humans, either as individuals or as a part of an organisation

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2
Q

Explain the methodology used by Economists

A

Develop theories and create economic models to explain phenomena
Use simplifying assumptions to limit the number of variables in an investigation
Test theories and models against relevant known facts, making use of observation, deduction, graphs, statistics and other tools
Use empirical data to improve and revise their economic model
Use economic models to make predictions

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3
Q

What does ceteris paribus mean and why is it used

A

‘all other things remaining equal’
When economists are looking at the relationship between two factors they assume that only these two factors change and all other factors that would have an effect remain the same

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4
Q

Explain the two kinds of economic statements

A

Positive statement: objective statements that can be tested by referring to the available evidence
Normative statements: subjective statements which contain a value judgement

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5
Q

What is the basic economic problem

A

‘How can the available scarce resources be used to satisfy people’s infinite needs and wants as effectively as possible?’

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6
Q

What are the four factors of production

A

Land, Labour, Capital, Enterprise

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7
Q

What are free goods

A

A good that has no opportunity cost and can be consumed as much as possible without affecting availability to others

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8
Q

What are economic goods

A

A good that is scarce and which can be therefore traded

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9
Q

Explain Land

A

Includes all natural resources in and on it
Also includes the animals that live on it

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10
Q

Explain Capital

A

Equipment used in producing goods and services
Capital is different from Land because it has to be made first

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11
Q

Explain Enterprise

A

The willingness to take a risk to make a profit

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12
Q

What does scarcity require

A

The careful allocation of resources

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13
Q

What are goods

A

Physical products you can touch

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14
Q

What are services

A

Intangible things

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15
Q

What is the purpose of economic activity

A

To increase people’s economic welfare by creating outputs that satisfy their various needs and wants

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16
Q

What are the three fundamental questions when it comes to the allocation of resources

A

What to produce?
How to produce it?
Who to produce it for?

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17
Q

What are the three economic agents

A

Producers - firms or people that make goods or provide services
Consumers - people or firms who buy the goods and services
Governments - a government sets the rules that other participants in the economy have to follow, but also produces and consumes goods and services

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18
Q

In a market economy what is the assumption made about the economic agents

A

They are assumed to be rational

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19
Q

What is a market

A

A system in which the production of goods and services is determined by demand and supply

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20
Q

What is the purpose of a market

A

It is a way to allocate resources to different economic activities

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21
Q

What is a free market

A

This market allocates resources based on supply and demand and the price mechanism

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22
Q

What are mixed economies

A

A combination of free markets and government intervention

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23
Q

List the pros of a free market economy

A

Efficiency - As any product can be bought and sold, only those of the best value will be in demand . So firms have an incentive to try to make goods in the most efficient way possible
Entrepreneurship - In a market economy, the rewards for good ideas can make entrepreneurs a lot of money. This encourages risk-taking and innovation
Choice - The incentives for innovation can lead to an increase in choice for consumers

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24
Q

List the cons of a free market economy

A

Inequality - Market economies can lead to huge differences in income. And in a completely free market, anyone who is unable to work would receive no income
Non-profitable goods may not be made - drugs to treat rare conditions may never sell enough for a firm to make any profit - won’t be made
Monopolies - Successful businesses can become the only supplier of a product - this market dominance can be abused

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25
Q

What is a command economy

A

An economy where it is the government that decides how resources should be allocated

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26
Q

List the pros of a command economy

A

Maximise welfare - Governments have more control, they can prevent inequality and redistribute income fairly - can ensure the production of goods that people need and that are beneficial to society
Low unemployment - The government can try to provide everyone with a job and a salary
Prevent monopolies - The market dominance of monopolies can be prevented by the government

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27
Q

List the cons of a command economy

A

Poor decision-making - A lack of information means the governments may make poor decisions about production
Restricted choice - Consumers have a limited choice and firms will make what they’re told to make
Lack of risk taking and efficiency - Government-owned firms have no incentive to increase efficiency, take risks or innovate - no profit incentive

28
Q

What is market failure

A

When free markets result in undesirable outcomes

29
Q

What does the government often do when market failure happens

A

Might change laws, offer tax breaks or create some other kind of incentive to try to influence people’s behaviour
Governments can also intervene in the economy by buying or providing goods or services

30
Q

What two things do mixed economies have

A

A public and private sector

31
Q

Explain the public and private sector

A

The government is known as the public sector
Privately owned businesses make up the private sector

32
Q

Explain the ideas of Adam Smith

A

His ideas has shaped traditional economic theory
Big believer in the free market and he described how its ‘invisible hand’ would allocate resources in society’s best interest
This is because consumers are motivated maximise their self benefit and producers are motivated to maximise profit
In the free market, consumers’ demand and producers’’ supply will lead to price levels being set at a point which benefits them both
In order for the free market to work there can’t be any monopolies and there would have to be low barriers to entry so competition can be maximised
He also wrote about specialisation and the division of labour

33
Q

Explain the ideas of Karl Marx

A

Critical of the free market
Believed it created a situation where the small ruling class (bourgeoisie) dominated and exploited the larger working class of wage earners (the proletariat)
He argued that the profit-maximising bourgeoisie would exploit workers until the proletariat eventually rose up in a revolution and took over
This will lead to the workers controlling production and everyone having a share in the ownership of resources

34
Q

Explain the ideas of Friedrich Hayek

A

Supporter of the free market and critic of command economies
He believed that governments shouldn’t allocate resources because they lack the information to properly allocate them in the way that is most beneficial to society
He believed that individual consumers and producers have the best knowledge of what they want or need, so the allocation of resources should be left to them and the price mechanism
He saw the price mechanism as a way for consumers and producers to communicate. The price level set by the forces of supply and demand would show what both consumers and producers want and will naturally allocate resources in a much more efficient way than governments can

35
Q

What is a margin

A

The change in a variable caused by an increase of one unit of another variable

36
Q

How do you calculate the marginal cost

A

Find the difference between the total cost at the new output level and the total cost at one unit less than that

37
Q

If the total cost of making 100 ice creams is £100 and the total cost of producing 101 ice creams is £102, what is the marginal cost of making the 101st ice cream

A

102 - 100 = 2
£2

38
Q

What does traditional economic theory assume about the economic agents involved

A

That they seek to maximise utility

39
Q

What is marginal utility

A

The benefit gained from consuming one additional unit of a good

40
Q

What is total utility

A

The overall benefit gained from consuming a good

41
Q

What is the law of diminishing marginal utility

A

The idea that when each additional unit of a good is consumed the marginal utility decreases

42
Q

At what point will a rational consumer choose to consume a good

A

When marginal utility = price

43
Q

What is the shape of the demand curve and explain why that is

A

It is a downward sloping curve because as each additional unit is consumed the satisfaction decreases

44
Q

How do you work out the profit for a firm

A

total revenue - total costs

45
Q

What are firms assumed to want to maximise
Explain

A

Profit
Profit means the firm can survive
Greater profit allow firms to offer better rewards for their shareholders and staff
Profit can be reinvested in the business in the hope of making more profits later

46
Q

What other things do firms want to maximise besides profit

A

A larger market share could lead to monopoly power - can charge higher prices
Bigger firms are often considered more stable and prestigious so they attract the best employees
Some firms may have ethical objectives

47
Q

How does the government balance the resources of a country with the needs and wants of the population

A

Economic growth : usually measured by growth in a country’s GDP
Full employment : everybody of a working age who is capable of working, having a job
Equilibrium in the balance of payments : a balance between the payments into the country over a period of time and the payments out
Low inflation : keeping prices under control, as high inflation can cause serious problems

47
Q

What do consumers want to maximise

A

Utility while not spending more than their income

47
Q

What assumption is made when it comes to consumers

A

We assume it is spent rationally

47
Q

How do behavioural economists challenge traditional economic theory

A

They look at the impact of social, psychological and emotional factors on the decision making to try to make realistic predictions about the future

47
Q

What are the two assumptions made by traditional economists

A

Agents are utility maximisers
Agents are rational

48
Q

What do governments seek to do

A

To balance the resources of a country with the needs and wants of the population (public interest)

48
Q

What is the term used to refer to a rational individual

A

Homo economicus

48
Q

Give three reasons why consumers may not act rationally

A

The time available may not be sufficient in order to make a rational decision
Insufficient or incorrect information
People might not be able to process the vast amounts of data and compare the costs and benefits of the alternatives

48
Q

Explain the theory of bounded self control

A

Rational individual is assumed to have total self control
Behavioural economists argue that consumers don’t have total self control

48
Q

Explain the biases behavioural economists believe that consumers have

A

Rules of thumb - time saving patterns to make decisions
Anchoring - placing too much emphasis on one piece of information
Availability bias - judgements are made about the probability of events occurring based on how easy it is to remember those events
Social norms - behaviour can be influenced by the persons social group of culture
Habitual behaviour

48
Q

Which economic theory do governments use when making decisions

A

Behavioural economic theory
Traditional makes too many unrealistic assumptions

48
Q

Give examples of choice architecture

A

Default options - people are more likely to choose the default option
Framing - the context in which information is presented can influence a decision
Nudges - where alternative are made easier without removing the freedom of choice
Restricted choice - choices are limited
Mandated choice

48
Q

What are the different types of information that explain why a consumer may act irrationally

A

Imperfect - won’t have all the information to make a rational decision
Asymmetric - when one party has more information than the other in a transaction

48
Q

What is choice architecture

A

Where an individual’s choice is influenced by adapting the way the choice is presented

49
Q

What does PPF stand for

A

Production Possibility Frontiers

50
Q

What does a PPF do

A

Shows you the options available when you consider the production of just two types of goods or services

51
Q

What is opportunity cost

A

The opportunity cost is the value of the next best alternative foregone

52
Q

What are the problems with using opportunity cost to make an economic decision

A

Not all alternatives are known
May be a lack of information about the alternatives
Some factors have alternative uses
Some factors may be hard to switch to an alternative use

53
Q

What things can cause a PPF to shift outwards

A

Increased workers
Increased resources
Improved tech

54
Q

What does a shift outwards to a PPF show

A

Economic growth

55
Q

What is the price sold for a product decided by

A

The demand and supply in the market

Economics (5 decks)

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