The Economic Problem & Labour Market Flashcards
What does the basic economic problem involve?
Involves deciding how to allocate a nation’s scare resources between different uses
The Basic Economic Problem: Name 3 decisions it involves making (Qs)
- Who will get them?
- What goods and services to produce?
- How will they produce them?
What is scarcity?
Unlimited wants but limited resources
What is opportunity cost?
The benefit lost from the next best alternative (we choose to go without)
When is an opportunity cost incurred (PPC wise)?
When moving from one point to another on the PPC
What are 2 parts of value & what do we want?
- Benefits
- Cost
We want:
- Greatest benefit
- Lowest cost
What is a Production Possibility Curve?
A diagram showing different possible combinations of two goods that can be produced using available resources
What is a point OUTSIDE the PPC called & what does this mean?
Unattainable - Isn’t achievable using the current level of resources
What is a point ON the PPC called & what does this mean?
Maximum efficiency - All resources are being used = productivity is efficient
What is a point INSIDE the PPC called & what does this mean?
Not all resources are being used = productively inefficient
Illustrate an increase in resources on a PPC
Illustrate an opportunity cost on a PPC
What is a mixed economy?
Both private and public sector organisations provide goods and services
Name 3 advantages of a mixed economy
- No demerit goods
- Social welfare
- Public services
- Wide variety of goods and services both public and private
- Resources will not be overused
Name 3 disadvantages of a mixed economy
- People have to pay taxes
- Business may be limited to the products they can produce
- May be some corruption
What is meant by types of economies (aka economic systems)?
The method used by a society to produce and distribute goods and services
Private Sector: For whom to produce?
Sold to anyone who can afford them
Private Sector: What to produce?
- Provides most goods (e.g. food & clothes)
- Market system ensures that firms only produce goods people want
Private Sector: How to produce?
Completing firms choose production methods that maximise quality & minimise costs
Public Sector: How to produce?
- Services are provided by government organisations
- Decide how services should be provided efficiently
Public Sector: What to produce?
Provides services such as education and healthcare because firms in private sector may under-provide them
Public Sector: For whom to produce?
Services are provided free to everyone and are paid for mainly from taxes
What is a free market economy?
Where the government does not interfere in business activity in any way
In a free market economy, who provides the goods and services and how are they distributed?
Private sector firms provide most of goods and services, which are distributed by market forces
In a free market economy, who answers the economic questions?I
Individual buyers and sellers
In a free market economy, what drives the economy?
Motive for profit
Name 3 features of a free market economy
- Competition
- Economic Freedom
- Private Property
Name 3 advantages of a free market economy
- Cheaper prices, high quality products and reduced prices ∵ there’s higher competition
- Wide variety of goods and services
- No taxes
Name 3 disadvantages of a free market economy
- Demerit goods may be produced
- High prices due to no government intervention
- Wages may be lower as there’s no minimum wage
- No public services
- No social welfare
What is a command/planned economy?
Government regulation of business practices
Name 3 advantages of a command/planned economy
- Prevent Monopolies
- Low unemployment
- Maximise welfare
- Resources are quickly and efficiently mobilised on a large scale
Explain why’d there be low unemployment in a command/planned economy
Can provide everyone with a job and salary
Explain why’d welfare would be maximised in a command/planned economy
- Can prevent inequality and distribute income fairly
- Ensure production of goods that people need and are beneficial to society
Name 3 disadvantages of a command/planned economy
- Poor decision making
- Restricted Choice
- Black market increases due to governmental restrictions
- Employees are restricted in what type of work they do and for how long
Explain why’d there be poor decision making in a command/planned economy
Lack of information = governments make poor (& slow) decisions about what’s needed to be produced
Explain how there would be restricted choice in a command/planned economy
Consumers have limited choice in what hey can consume + firms will make what they’re told to make
Why do economies ensure production is efficient?
Resources are scare
Name 3 ways we can increase efficiency
- Minimise resources used in production
- Minimise costs
- Only produce goods that are needed
Name 2 ways the public sector can increase efficiency
Set performance targets or pay private sector to supply government services
When does market failure occur?
Occurs when resources are not allocated efficiently
Name 4 times when resources are not allocated efficiently (in a Mixed Economy)
- Missing Markets
- Negative Externalities
- Merit Goods
- Lack of Competition
What is meant by missing markets?
Public goods (e.g. defence or policing) are not provided by private sector
How can merit goods not be allocated efficiently?
Such as education and healthcare are under-provided by private sector
Explain what is meant by a lack of competition
- In markets dominated by one firm = consumers may be exploited
- Leads to higher prices and less choice
Who deals with market failure?
Public sector
Describe how the public sector deals with market failure
Provides public and merit goods to ensure that competition exists and penalise those who impose costs on society
What is division of labour?
Assigning different parts of a manufacturing process or task to different people in order to improve efficiency
Name 3 advantages of division of labour to the worker
- Workers become experts and can find employment more easily
- People may experience more job satisfaction and may have better promotion prospects
- Higher rates of pay can be earned if workers are experts
- People may become more skilled and enjoy a higher status at work
Name 3 disadvantages of division of labour to the worker
- People can become demoralised through repeating tasks and may lose interest in their work
- Unemployment if repetitive tasks are taken over by machines
- Unemployment ∵ a specialist skill is no longer required because demand has fallen
Name 3 advantages of division of labour to the firm
- Greater efficiency because workers practise their tasks repeatedly and become experts
- Production time is reduced because workers don’t have to move form one task to another
- Organisation is easier because each worker fits into a structured production process
- Greater use of specialist tools and equipment which improves efficiency
Name 3 disadvantages of division of labour to the firm
- A lack of flexibility might exist if workers cannot be switched between jobs
- Productivity and quality might fall if tasks too boring and repetitive
- If a specialists is absent & can’t be replaced the whole production process may halt
- Chance of over production
What is wage determination?
Wage rate in a labour market is determined by interaction of supply and demand for labour
What is equilibrium wage rate?
Amount of money that workers are willing to work for = business are willing to pay for workers
What is a salary?
Fixed amount of money an employee receives per year
Why do firms want workers who are well trained?
∵ productivity will be higher
How can the quality of human capital be improved?
With investment in training and education
Name 4 factors that affect the demand for labour (Non-Wage)
- Factor Substitutions (costs and availability of substitutes)
- Consumer’s demand increases (demand for goods)
- Labour Productivity
- State of Economy
Explain how labour productivity affects the demand for labour
If workers can produce more output = demand for labour increases
Explain how factor substitutions affects the demand for labour
When technology replaces human workforce = demand for labour will decrease
Explain how the state of the economy affects the demand for labour
- During times of rescission
- Demand for labour will decrease
- During a boom in economy
- Demand for labour will increase
Name 6 factors that affect the supply for labour (Non-Wage)
- Level of Qualification
- Population
- Health
- Changes in school leaving age or retirement age
- Working Environment
- Net Migration
What is the public sector?
Companies owned and run by government
What is the private sector?
Companies owned and run by individuals
What is the income gap?
Difference between high income earners and low income earners
Illustrate wage determination in a labour market
What is a minimum wage?
Minimum amount of a employee must receive for their work (set by government)
What happens to demand for labour when a minimum wage legislation is put into place?
As wages increase = demand decreases (costs business more)
What happens to supply of labour when a minimum wage legislation is put into place?
Wages increase = supply increases (workers will earn more)
Name 2 ways a minimum wage legislation affects the government
- Increase in accumulation of tax
- Pay less on merit goods
Name 3 reasons for a minimum wage legislation
- To reduce poverty
- To benefit disadvantaged workers
- To help businesses
Explain how a minimum wage legislation can help businesses
- A minimum wage should promote greater equality and
fairness among workers- ∴ worker motivation will improve
Illustrate the effect of a minimum wage legislation
What is a trade union?
Organisations that represent people at work
What is a trade union’s purpose?
To protect and improve people’s pay and conditions of employment + campaign for law which benefit working people
Name 4 things trade unions do
- Negotiate pay and working conditions with employees
- Provide legal protection by e.g. representing workers in court
- Provide information and advice
- Provide member services e.g. Training
What is employee turnover?
Amount of employees that are let go or leave their job over a period
Name 2 advantages of trade unions to employer
- Disputes solved quickly
- Better working relationship
How do trade unions force up wages?
- Apply pressure on employers by threatening industrial action if their wage demands are not met
- Employers give in to trade unions to avoid disruption to their businesses
What is the downside of trade unions forcing up wages?
May cause unemployment amounts their members ∵ employers may reduce demand for workers at the higher wage level
By forcing up wages, trade unions may cause unemployment amounts their members. How can this be avoided? (2x)
- If labour productivity rises
- If employers charge customers more or cut their profit margins
What is collective bargaining?
When group of workers come together to negotiate issues with their employer
What are entrepreneurs?
A person who sets up a business/businesses and takes finical risks in hope for profit
What are resources?
Something that is used to make goods or services
