The Economic Problem Flashcards
What is economics
A social science
Looks at human behavior
What are the two types of economic statement
Normative statement
Positive statement
What is a normative statement
Subjective statements that contain a value judgement (opinion)
What is a positive statement
Statements that can be tested by referring to evidence
What is the economic problem
Satisfying infinite wants and needs with limited resources
What are the four factors of production
Land
Labour
Capital
Enterprise
What’s an example of land in factors of production
Natural materials, water, animals
What is an example of labour in factors of production
The work done by people
What is an example of capital in factor of production
Factories, equipment, schools etc.
How is capital different from land
Capital is different from land as capital has to be made
What is an example of enterprise in factors of production
Entrepreneurs
What is economic activity
The making of the good and the provision of the service
What are economic agents
Participants in an economy
E.g. producers, consumers, government
What do economic agents do
They affect how resources are allocated
What are economic agents in a market economy
They are assumed rational
So make decisions best for themselves based on incentives e.g. making profit
What is opportunity cost
The next best alternative that you give up in making a particular decision
What does a ppf show
Shows the maximum amount of two goods and services an economy can produce
What is a market a method for
It is a method for allocating scarce resources
What are the pros of a free market economy
It is efficient
Encourages entrepreneurship
Lots of choice
What are the cons of a free market economy
Inequalities
Non profitable goods may not be made
Monopolies
What are the pros of a command economy
Maximise welfare
Low unemployment
Prevent monopolies
Cons of a command economy
Poor decision making - leads to poor, slow decisions
Restricted choice
Lack of risk taking + efficiency
What is market failure
An undesirable outcome in a free market
What does the government do when there is market failure
The government intervine when there is market failure
E.g law changes, tax breaks etc.
What is a mixed economy
When gov and markets play a part in allocating resources
What are the two sectors in a mixed economy
Public sector
Private sector
What is the public sector
Government
What is the private sector
Firms
What are economic agents assumed to be
Utility maximisers
E.g.
Customer -> happiness
Firm -> profit
What is marginal utility
Benefit gained from consuming one additional unit of a good
What is total utility
Overall benefit gained from consuming a good
What are the economic objectives of producers
-profit
They want to maximise this to
Reinvest into company in hopes of making more profit later
Survive
Offer better rewards to shareholders and staff
What are the economic objectives of consumers
Utility
What are other objectives firms may want to maximise other than profit
Increase market share - could lead to some monopoly power, meaning firms could charge higher prices due to a lack of competition
Total sales
Ethical objectives - ‘doing some good’ I.e. buying resources locally to support the local economy even if cheaper alternatives are elsewhere
Define trade off
An opportunity cost
What you give up in order to so something else
What happens in a command economy
Government decides how resources should be allocated
What happens in a free market economy
Allocates resources based on supply and demand and the price mechanism
