T1.1 Introduction to Markets and Market failure - Economics Flashcards
Define assumptions
Assumptions are initial or prior conditions made before a micro or macroeconomic analysis is built
exam tip: try to note down at least one assumption when writing analysis in exam answers
What is the basic economic problem?
The basic economic problem is when there are infinite demands on finite resources
Define opportunity cost
Opportunity costs is the value of the next best alternative forgone
What does ceteris paribus mean?
All other things considered equal
What are positive statements?
Positive statements are objective statements that can be tested and evaluated based on empirical evidence
What are normative statements?
They carry one or more value judgements about what ought to be
Involves political considerations as well as positive analysis
Define Production Possibility Frontiers (PPFs)
PPFs is a line to show possible combinations of goods an economy can produce with all resources being fully employed
Factors of production:
Land - natural resources
Labour - workers
Capital - man made resources
Enterprise - ideas, risk taking, management
Define renewable resource
A resource that has the ability to replenish its stock level
Define sustainable
A sustainable resource is renewable resource that is managed in such a way that it does replenish its stock level
Define productive effciency
Productive effciency are all resources being fully utilised (any point on the PPF)
Define allocative efficiency
It is the economy producing what consumers wants
What happens when combinations of goods are lying inside the PPF?
This means that there are unemployed resources or when resources are used ineffciently
If combinations are beyond the PPF are they attainable or unattainable?
Unattainable
Define resource depletion
This is a decline in the total stock of resources available
Define resource depreciation
This is when the productivity/ effciency of resources diminishes with age and also with repeated use when producing goods and services
What is specialisation?
Specialisation is when we concentrate on producing a specific task or product
What is Division of labour?
Division of labour is the breaking down of a production process of a good/service into smaller tasks, each of which is carried out by a different person
Drawback of specialisation
- Unrewarding, repetitive work that requires little skill can lower motivation and eventually cause lower productivity
- Dissatisfied workers cause absenteeism to increase
- Some workers receive little training and may not be able to find alternative jobs when out of work - they suffer structural unemployment/ occupational immobility
+ve of DoL
Higher productivity levels
Lower unit costs (so higher profits)
Easier to train workers
-The narrower range of tasks, the less to teach
-ve of DoL
Mass- produced standardised goods lack variety for consumers
Increased risk of production being shut down due to a missing worker
What is an economic system?
An economic system refers to the way resources are allocated
What is a command economy?
Command economies are where resources are allocated by state (central planning)
What is a free market economy?
Free market economy are where resources are allocated by forces of demand and supply
Who advocated for the free economy?
Friedrich Hayek
Who advocated for the command economy?
Karl Marx
Who advocated for the mixed economy?
John Maynard Keynes & Adam Smith
What is the role of value judgments?
Value judgements help us explain why economic policies vary from place to place, and time to time
What are the main functions of money?
A medium of exchange - can be used to buy things
Store of value - an asset that holds its value over time
Unit of account - allows pricing
Standard deferred payment - this refers to the expressing the value of the debt
What are the 6 key characteristics of money?
Durable
Portable
Divisible
Hard to counterfeit
Accepted
Valuable
-ve of Free market economies
Some members of society may be unable to work e.g the elderly, those with disabilities
Goods that are bad for us may be over produced e.g cigarettes & alcohol
Because of the profit motive, firms may be tempted to cut costs, and so exploit labour
+ve of command economies
Low level of inequality
Low level of unemployment
Fast to get a large scale infrastructure built
-ve of command economies
Bureaucratic costs of central planning of resources
Low productivity and weak incentives lead to rising losses for many state-owned businesess
Causes of an outward shift in the PPF
Higher productivity
Better management of factor inputs
Increase in the stock of capital and labour supply
What does a straight line on the PPF mean?
A straight line on the PPF is an indication of perfect substitutability of resources such as labour or capital
Causes of an inward shift in the PPF
Human capital flight
Capital scrapping
Natural disasters
Deforestation
What are capital goods?
They are used to make other goods
What are consumer goods?
They are used to fulfil wants and needs
