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Theme 1 Introduction To Markets And Market Failure > The Nature Of Economics > Flashcards

The Nature Of Economics Flashcards

1
Q

What is economics

A

The allocation of scarce resources to provide for unlimited human wants

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2
Q

How is economics a social science

A

Economics is a social science, which means it is concerned with the study of human behaviour. It investigates how scarce resources are allocated to provide for unlimited human wants.

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3
Q

Why do economists make assumptions

A

Economists develop models which attempt to simplify and improve our understanding of how consumers and producers behave.

These models include assumptions eg. Consumers aim to maximise profits satisfaction or utility when spending their income.

Producers may aim to maximise profits

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4
Q

Simply, what is ceteris parabus

A

All other things being equal

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5
Q

What is ceteris paribus

A

It means all other things being equal or all other things remaining the same.

Used in models to show the effects of one change on something

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6
Q

What is positive economics

A

Positive economics is concerned with facts and is value free. Positive statements can be tested as true or false by referring to the facts.

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7
Q

What is a positive economics statement

A

Based on facts which can be tested as true or false and are value free

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8
Q

What is normative economics

A

Concerned with value judgements and is a non scientific approach to the discipline

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9
Q

Normative economics statement

A

Based on value judgements which cannot be tested as true or false.

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10
Q

What is scarcity

A

There are finite resources compared to infinite human wants, so choices have to be made about how to use those resources.

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11
Q

What is the economic problem

A

The economic problem is based on scarcity. Scarcity arises because there are insufficient resources to provide for everyone’s wants.

Some crucial decisions have to be made over what, how and for whom to produce. These decisions are faced by consumers, producers and the government. Once a decision has been made about what to use a resource for, opportunity cost arises.

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12
Q

Simply what is opportunity cost

A

The value of the next best alternative forgone.

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13
Q

What are resources/factors of production

A

Resources/ factors of production, are inputs used in the production of goods and services. They are finite and can be classified into 4 types, land, labour, capital and enterprise.

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14
Q

What are the factors of production

A

Land, labour, capital and enterprise.

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15
Q

What is a renewable resource

A

Is one whose stock level can be replenished naturally over a period of time. Such resources include solar energy, wind power, tidal flower, fish, timber and soil.

However, renewable resources may decline over time if they are consumed at a faster rate than the environment can replenish them. They require careful management, to avoid such things as deforestation and soil erosion.

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16
Q

What is a non renewable resource

A

A non renewable resource is one whose stock level decreases over time as it is consumed. These resources include fossil fuels such as coal, oil and gas. They also include commodities such as steel, copper and aluminium. It is possible to reduce the rate of decline of non-renewable resources through recycling and the development of substitutes. The price mechanism also has a role to play in reducing the rate of consumption via higher prices

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17
Q

Was is a renewable resource simply

A

A resource whose stock level can be replenished naturally over a period of time

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18
Q

What is a non renewable resource simply

A

A resource whose stock level decreases over time as it is consumed.

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19
Q

What does a production possibility frontier

A

A PPF shows the maximum potential level of output for two goods or services that an economy can achieve when all its resources are fully and efficiently employed, given the level of technology available.

It can be used to illustrate scarcity and opportunity cost.

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20
Q

What can a PPF illustrate

A

Scarcity and opportunity cost.

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21
Q

What are the Axis on a typical PPF

A

Capital goods output on y axis

Consumer goods output on x axis

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22
Q

What are consumer goods

A

Consumer goods directly provide satisfaction or utility to consumers. They are wanted for their own sake rather for what they produce. Examples include clothing, food, drink, a holiday and iPhones.

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23
Q

What are capital goods

A

Capital goods are used to produce more consumer goods and services. Generally, they provide satisfaction to consumers indirectly. Examples include machinery, office blocks, training of workers and factories.

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24
Q

Some what is a consumer good

A

A good such as a chocolate bar, that directly provides utility to consumers. It is wanted for the satisfaction it gives.

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25
Q

Simply what is a capital good

A

A good that is used to produce consumer goods or services, such as a machine that helps make chocolate bars. It is wanted not for its own sake, but rather for the consumer goods and services it can provide.

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26
Q

What would happen if a country’s economy is at point x (halfway between consumer and capital) and more to W, towards capital goods output

A

There would be an opportunity cost of consumer goods of the amount between where it was and is now.

Eg 30 consumer goods

It also increases rate of economic growth as capital goods are crucial for increasing production.

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27
Q

What does a shift in production along the curve towards capital goods mean

A

It increases the rate of economic growth, since capital goods are crucial for increasing production.

Economic growth itself can be shown by an outward shift of the production possibility frontier. However, the loss of 30 units of consumer goods means that current living standards will fall in order to enable future living standards to rise at a faster rate.

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28
Q

What does it mean if the economy is located at any point on its production possibility frontier

A

There is an efficient allocation of resources, since none are being wasted.

However, if the economy is located within its PPF, there is an inefficient allocation of resources as not all are being used. It is possible to increase production of both consumer and capital goods, by utilising unemployed resources. Since nothing is given up in return, there is no opportunity cost.

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29
Q

Explain the shape of the PPF

A

A typical PPF is bowed to the origin and shows that, as more of one good is produced, an increasing amount of the other good is forgone. The opportunity cost rises. This is because not all resources are as efficient as other resources in the production of both goods. Diminishing returns set in.

Eg farmland. We assume farmland can be used for either growing wheat or livestock production. Farmland in some areas may be better suited to crops and some Better for livestock.

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30
Q

Define the production possibility frontier

A

The maximum potential output of a combination of goods an economy can achieve when all its resources are fully and efficiently employed, given the current level of technology.

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31
Q

Why might there be an outward shift in the PPF

A

A country’s production potential may increase over time, shown by an outwards shift in its PPF. This represents economic growth and there are a number of possible causes.

For example, an increase in the quantity or quality of resources; the expansion of further and higher education and government training schemes; or an increase in investment and the development of new technology.

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32
Q

Why may the PPF for an economy shift inwards towards the origin

A

This shift inwards indicates a decrease in the potential output of an economy. This may be caused by war or a natural disaster where many resources are destroyed.

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33
Q

What is the specialisation

A

Specialisation occurs when an individual, a firm, a region or a country concentrates on the production of a limited range of goods and services.

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34
Q

What are the advantages of specialisation

A

That it increases productivity and living standards across the world. The uk specialises in the production of medicinal drugs, aircraft manufacture, tourism, and financial and business services. These goods and services can then be traded for other goods and services produced by other countries. It leads to a higher level of global output and higher living standards.

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35
Q

What are the disadvantages of specialisation

A

When demand for a good or service falls, leading to a significant increase in structural unemployment. Also, a country specialising in the production and export of minerals may face problems of resource depletion. Another problem relates to the price at which goods are sold: for example, many developing countries face an unfavourable rate of exchange, selling their commodities at a low price compared to the goods they purchase from overseas.

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36
Q

What is the division of labour

A

The division of labour is one form of specialisation, where individuals concentrate on the production of a particular good or service. Production is broken down into a series of tasks, conducted by different workers. For example, house construction involves a range of specialist labour, including architects, surveyors, bricklayers, carpenters and electricians.

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37
Q

What did Adam smith say about the division of labour

A

Adam Smith, the first ever professor of economics, writing in the 18TH century, explained division of labour by referring to production in a pin factory. He explained that If pin production were broken down into 18 different specialist tasks, each carried out by a different worker, output of pins would increase by 2000% compared to a situation where each worker had to carry out all the tasks involved.

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38
Q

Define specialisation

A

When an individual, firm, region or country concentrates on the production of a limited range of goods and services.

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39
Q

Define division of labour

A

The specialisation of workers on specific tasks in the production process.

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40
Q

What are the advantages of the division of labour

A

The major advantage is increased productivity (higher output per worker per hour), which leads to higher living standards. Increased productivity helps to reduce the cost per unit of output and so increases the efficiency of resources.
The reasons for increased productivity include:
A worker becoming highly skilled in a task due to repetition
No time wasted in moving from one job to another
Capital equipment can be used continuously in production.
Less time required to train workers for specific tasks
There is more choice of jobs for workers and they can specialise in the tasks they are most suited to.

41
Q

What does division of labour do to costs

A

It will typically increase total production costs for a firm, since it is likely to increase total output, requiring more raw materials and machinery. However, it also leads to a reduction in the cost per unit of output, since workers become more productive.

42
Q

What are the disadvantages of the division of labour

A

Repetition creates monotony and boredom. There could be a high turnover of staff, leading to increased recruitment and selection costs.

Breaking down production into different tasks makes it easier to replace skilled workers with machines, leading to structural unemployment.

Specialisation creates interdependence in production. If one group of workers goes on strike, it could halt production across the whole industry.

43
Q

What is money

A

Money is anything that is generally acceptable in the payment of a good or service, or of a debt. Money comes in various forms, largely in cash and bank deposits. Advances in technology mean we are moving towards a cashless society where most payments occur through debiting and crediting bank accounts.

44
Q

Why is it crucial that people have confidence in the money used.

A

If they don’t, it will lose its general acceptability for making transactions. Once this happens it ceases to be money.

A recent example of this problem arose in Zimbabwe where the government printed off too many Zim dollars, leading to hyperinflation and the currency becoming worthless.

45
Q

List the four functions of money

A

Medium of exchange

Measure of value

Store of value

Method of deferred payment

46
Q

Tell me about a medium of exchange as a function of money

A

It enables the buying and selling of products, making exchange easier. Money eliminates the need for barter.

47
Q

Tell me about money as a measure of value

A

It enables a value to be placed on products so they can be bought and sold with ease. Money creates a unit of measure that enables comparisons between the relative values of products.

48
Q

Tell me about money as a store of value

A

It is a convenient way of storing wealth so that it can be spent at later date. Money will tend to hold its value in the short term as long as inflation remains low.

49
Q

Tell me about money as a method of deferred payment

A

It enables borrowing and lending. This means someone can borrow money in order to buy a product rather than waiting until enough funds have been saved. A price is usually set for borrowing and lending - this is known as the rate of interest.

50
Q

Define money

A

Anything that is generally acceptable in the payment of a good or service, or of a debt.

51
Q

What simply is a free market economy

A

All resources are allocated by the price mechanism. No government intervention

52
Q

What is a mixed economy

A

Some resources are allocated by the price mechanism and some by the government

53
Q

What is a centrally planned economy (command economy)

A

All resources are allocated by the government. No price mechanism.

54
Q

What type of economy are most economies in reality

A

The vast majority of economies comprise a mixture of both private enterprise (the private sector) and state intervention (the public sector), thus being mixed economies.

In the uk, around 60% of resources are allocated by the private sector and 40% by the public sector. The government is a major provider of education, healthcare, defence and law and order in society. In other European economies France, Germany and Sweden, the size of the public sector is greater, while in North America it is lower. In all cases these are considered to be mixed economies.

55
Q

What is a free market economy

A

It’s where decisions on what, how and for whom to produce are left to the operation of the price mechanism. It is associated with the writings of economists ADAM SMITH and FRIEDRICH HAYEK. Resources are privately owned and economic decision making is decentralised among many individual consumers and producers. There is minimum government intervention.

56
Q

Define free market economy

A

Where all resources are privately owned and allocated via the price mechanism. There is minimal government intervention.

57
Q

Are there are free market economies in the world

A

There are no pure free market economies in the world today since, in every economy, the government directly controls some resources and output. However, the proportion of government intervention tends to be significantly less in some developing countries, such as Malaysia and Thailand, compared to the developed world. Perhaps the best example of a developed economy with a relatively small government sector is Japan.

58
Q

What is the advantage of a free market economy to do with efficiency

A

Economic efficiency and lower prices: competition means that firms try to keep production costs down in order to sell goods and services at competitive prices (productive efficiency). Competition also means that firms try to produce goods and services that consumers demand (allocative efficiency). This means the price mechanism will equate consumer demand with producer supply.

59
Q

What is the advantage of a free market economy to do with quality

A

Quality of products: competition means firms will continuously try to improve the quality of their products to gain an advantage over rivals. There is considerable consumer sovereignty: that is, consumer power in the market

60
Q

Tell me an advantage of a free market economy to do with choice

A

Greater choice: consumers can often choose to buy from a wide selection of goods and services; workers often have a wide choice of employment opportunities.

61
Q

Tell me an advantage of free market economies to do with financial incentives

A

Financial incentives: entrepreneurs have an incentive to invest and take risks in order to earn profit; labour has an incentive to work hard to gain more earnings.

62
Q

What is a disadvantage of a free market economy to do with monopolies

A

Monopolies may form as a result of competition in some markets, rival firms get taken over or go out of business

63
Q

What is a disadvantage of a free market economy to do with distribution of wealth

A

The distribution of income and wealth is very unequal and the lack of welfare support may lead to people living in absolute poverty.

64
Q

What is a disadvantage of a free market economy to do with external costs

A

External costs and benefits from production or consumption are sometimes ignored. For example, the price mechanism ignores the external costs of pollution and the external benefits of education.

65
Q

What is a disadvantage of a free market economy to do with information gaps

A

Information gaps persist, people may consume excessive amounts of demerit goods such as drugs, tobacco and alcohol, unaware of their dangers. There is a lack of regulations and taxation to protect consumers.

66
Q

What is a disadvantage of a free market economy to do with public goods

A

There is an insufficient quantity of public goods and merit goods is provided in a market economy.

Public goods include defence and street lighting, while merit goods include healthcare and education.

67
Q

What is a disadvantage of a free market economy to do with the business cycle

A

Erratic swings in the business cycle may cause high inflation during an economic boom and high unemployment during an economic slump.

68
Q

What is a command economy

A

This is an economy where the government makes the decision on what, how and for whom to produce. It is associated with the writings of Karl Marx.

In a command economy, the government has control of resources and economic decision making is centralised. There is no role for the price mechanism.

69
Q

What did Karl Marx believe

A

He was a nineteenth century economist and philosopher who believed that production should be directed on the basis of human need rather than profit.

70
Q

When can command economies work effectively

A

Command economies can work effectively during times of national crisis. For example, the UK was run like one during the Second World War with great success. However, personal freedom and living standards tend to be jeopardised in such economic. One example today is North Korea.

71
Q

Tell me an advantage of a command economy to do with output

A

Cooperation between firms can lead to high levels of output. In general, the maximisation of output replaces the maximisation of profits as the key aims of firms.

72
Q

Tell me an advantage of a command economy to do with inequality

A

There is a reduction in inequality compared to free market economics, since the government controls the wages of all workers.

73
Q

Tell me an advantage of a command economy to do with external costs

A

The government may limit the external costs from production and consumption: for example, it can limit pollution emissions from firms and place severe taxes on harmful products such as tobacco and alcohol.

74
Q

Tell me an advantage of a command economy to do with public goods

A

The government can fund the provision of public goods such as defence and law and order, it can also increase the provision of goods which yield high external benefits to society, such as education and healthcare.

75
Q

Tell me an advantage of a command economy to do with control of business cycle

A

The government has more control of the economy and so there are smaller swings in the business cycle, leading to less unemployment and inflation.

76
Q

Tell me a disadvantage of a command economy to do with the price mechanism

A

The price mechanism is unable to operate and so markets may suffer from shortages (excess demand) and surpluses (excess supply), leading to an inefficient allocation of resources.

77
Q

Tell me a disadvantage of a command economy to do with competition

A

The lack of competition between firms leads to inefficiency, and so productivity is low. The lack of competition leads to poor quality products, especially when the emphasis is on maximising output rather than profit.

78
Q

Tell me a disadvantage of a command economy to do with choice

A

There is less choice of goods and services for consumers to select from, labour may also be directed into specific jobs with no choice depending on their location.

79
Q

Tell me a disadvantage of a command economy to do with financial incentives

A

A lack of financial incentives: managers have no profit incentive to take risks by developing new goods and services, as the focus is on maximising output, labour has little incentive to work hard, since wages are fixed by the government.

80
Q

Tell me a disadvantage of a command economy to do with under performance

A

Under performance of command economies: economic growth and living standards tend to grow at a much slower rate than in market based economies. This was a major cause of collapse of the Soviet Union during the early 1990s

81
Q

Define command economy

A

Where there is public ownership of resources and these are allocated by the government.

82
Q

What do you notice about pros and cons of command and free market economies

A

Pros of one are cons of the other!

83
Q

What is a mixed economy

A

This is an economy where decisions on what, how and for whom to produce are made partly by the private sector and partly by the government. Most developed countries in the world today fall under this classification. Eg uk, France, Germany, Canada and Sweden

84
Q

What’s the rationale of a mixed economy

A

It’s to gain the advantages of the market economy while avoiding its disadvantages through government intervention. It is associated with the writings of John Maynard Keynes in the early 20th.

85
Q

Why does government intervention occur in a mixed economy

A

Government intervention occurs to correct market failure: for example, the under provision of merit goods such as education and healthcare or the non provision of public goods such as defence.

Government intervention usually arises to help markets work more effectively

86
Q

Define mixed economy

A

Where some resources are owned and allocated by the private sector and some by the public sector

87
Q

What is economics

A

Economics is concerned with how resources are allocated to provide for human wants. As resources are finite, there is an opportunity cost in producing a good or service, since the resources could have been used to produce alternative goods or services.

88
Q

What are positive and normative economics

A

Positive economic statements are facts which can be tested as true or false, whereas normative economic statements are value judgements which cannot be tested as true or false.

89
Q

What is a PPF

A

The production possibility frontier illustrates the concepts of finite resources and opportunity cost. It can also be used to show unemployment and economic growth.

90
Q

What does specialisation and division of labour lead to

A

Huge increases in productivity

91
Q

What is money

A

Money is anything that is generally acceptable in the payment of goods and services, or of debts. It has four functions, a medium of exchange, a measure of value, a store of value and a method of deferred payment.

92
Q

What type of economy are most economies

A

Most economies are mixed economies, where resources are allocated partly by private enterprise and partly by the government.

93
Q

What is the opportunity cost of you staying on at school or college to study a levels

A

The opportunity cost of you staying on at school to take A levels is the next best alternative: for example, earning income from a job or joining an apprenticeship scheme to learn a trade.

94
Q

How might opportunity cost be shown on a production possibility frontier

A

Opportunity cost can be shown by a movement along a production possibility frontier. For example, from position A to B. An extra 10 units of manufactured goods are obtained at the expense of 5 units of services.

95
Q

What is the state of the economy if it is operating at a point within its production possibility frontier

A

There must be unemployed resources in the economy - spare capacity exists.

96
Q

Outline the factors which might lead to an outward shift of the production possibility frontier for a country

A

An outward shift of the PPF might be caused by an increase in the quality or quantity of labour, an increase in capital goods (investment), new technology, enterprise and discovery of natural resources.

97
Q

Why does the division of labour increase productivity or output per head

A

The division of labour means workers become more skilled at what they do through experience and repetition of tasks. It thereby leads to greater output.

98
Q

Which type of economic system best describes the UK

A

The UK is a mixed economy, since both private enterprise and the government decide how resources are allocated for production and distribution.

Theme 1 Introduction To Markets And Market Failure (4 decks)

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