The Economic Problem Flashcards
What are the 2 kinds of Economic Statements?
Positive and Normative Statements
What is a positive statement?
A statement that is objective and can be tested and proved by evidence
What is a normative statement?
Subjective statements that include value judgements, people’s opinions
What is the basic economic problem?
There is a scarce amount of resources available to satisfy people’s wants and needs
What are the four factors of production?
Capital
Enterprise
Land
Labour
What is labour?
The work done by people
What is Capital?
The equipment used to produce goods and services
What is enterprise?
The willingness to take a risk in order to make a profit
What are the 3 economic agents?
Producers
Consumer
Governments
What does a production possibility frontier (PPF) diagram show?
The options that are available when you consider the production of just two types of goods or services
What is a trade-off?
When you must choose between two conflicting objectives because you cannot achieve all your objectives at the same time
Where on the PPF curve are all factors of production being utilised?
Anywhere on the PPF curve
Where on the PPF curve are all factors of production not being fully utilised?
Anywhere on the inside of the PPF curve
Where on the PPF curve is it not possible to produce at that level?
Anywhere outside the PPF curve
What is an opportunity cost?
The next best alternative that you give up in making a decision
What causes the PPF curve to shift outwards?
Increased resources
Improvements to technology or labour
What causes the PPF curve to shift inwards?
When fewer total resources are available, such as after a natural disaster or a war
What causes the PPF curve to only shift in one direction?
When there is an improvement in resources only for a specific good or service
What do markets do?
They are a method of allocating resources
What is a free market economy?
An economy that allocates resources based on supply and demand and the price mechanism
What are the 2 types of economies?
Free market
Command economy
What is a command economy?
When a government controls how resources are allocated
What are the pros of a free market economy?
Efficiency - Firms have the incentive to make goods in the most efficient way possible so they can sell at the highest price possible
Entrepreneurship - Rewards for good ideas can bring lots of money, which encourages risk - taking and innovation
Choice - There is a more wide range of choice for a product
What are the cons of a free market economy?
Inequalities - Free market economies can lead to differences in income
Non Profitable goods may not be made, such as a firm may not sell a drug to treat a rare drug as it is not profitable.
Monopolies - Successful businesses can become dominant in a market, and could abuse its power
What are the pros of a command economy?
Maximise welfare - Government have more control, so they can prevent inequality and redistribute income fairly
Low unemployment - Governments can try to give everyone a job.
Prevent monopolies - Market dominance of monopolies can be avoided
What is a mixed economy?
An economy with a private and public sector
What are the cons of a command economy?
Poor decision making - Lack of information means government cannot make the best decisions
Restricted choice - Consumers have limited choice, firms will produce what they are told to produce.
Lack of risk - taking and efficiency - Governments don’t need to take risks and be efficient because they don’t need to make a profit
What is a margin?
The change in x caused by an increase of unit y
What does traditional economic theory assume about economic agent?
That they are utility maximisers and they always act rationally
What does behavioural economics look at?
The impact of social, psychological and emotional factors on decision making
What causes economic agents to act irrationally?
Imperfect or asymmetric information
Bounded rationality
What biases can individuals be influenced by?
Rules of thumb - Such as saying please or thankyou
Anchoring - Placing too much emphasis on on piece of information
Availability bias - Where judgements are made about a product based on a piece of information that can be remembered, but has a low chance of actually happening.
Social norms - Buying and smoking cigarettes just because everyone around you thinks its normal
What is choice architecture?
When an individual’s choice is influenced by adapting the way the choice is presented
What are the types of choice architecture?
Default choice - People can’t be bothered to change the choice so they leave it, such as opting out as an organ donor.
Framing - The way is presented, making it look more or less desirable
Nudges - Giving people some alternative to choose without removing the freedom of choice
