theme 1- 1.1 the nature of economics Flashcards
what is economics concerned with?
the ways in which societies organise scare resources in order to satisfy people’s wants
what are economic models based on?
assumptions (e.g. the consumer is rational)
ceteris paribus
assumption that all other things are equal
inability of economics to make scientific experiments
economics is a social science based on people- one policy may not be able to be universally applied- not generalisable
positive statements
based on facts- objective
normative statements
based on value judgements- subjective, used to influence policymaking e.g. to reduce a budget deficit, a left wing economist suggests taxing the rich, while a right wing may suggest cutting welfare spending
economic problem- scarcity
resources are finite, but wants are infinite- must allocate resources to meet demand
factors of production
the resources of a country/firm
FoP- land
all natural resources , raw materials, fertility of soil, resources found in the sea
FoP- labour
those involved in the production of goods and services- all human effort, physical or mental
FoP- capital
any man-made aid to production e.g. factories, offices, machinery, IT equipment
FoP- enterprise
performs 2 essential functions-
1. bringing together the other factors of production
2. taking the risks involved in production
renewable resources
those that can be replaced naturally after use e.g. solar energy
non-renewable resources
those which continued consumption will eventually result in their depletion e.g. oil
opportunity cost
scarcity = choice of allocation has to be made, each choice has an opportunity cost of the next best alternative
economic goods
created from resources in limited supply and so are scarce- therefore command a price
free goods
unlimited in supply, consumption does not limit consumption from others, opportunity cost = 0 e.g. sunlight
PPFs
shows combinations of 2 goods that could be produced by an economy if all its resources are employed fully and efficiently
assumptions involved in PPFs
that the economy can either produce capital or consumer goods
what do points on the curve indicate
the maximum productive potential of an economy and resources are being used efficiently
what do points inside of the curve indicate
resources not being allocated efficiently
what do points outside the curve indicate
unobtainable production only possible with economic growth
PPFs and marginal analysis
involves consideration of the impact that small changes have on the current situation
-> a marginal increase in output of capital goods means some consumer goods must be sacrificed (opportunity cost)
PPFs and economic growth
a shift to the right indicates economic growth, to left indicates economic decline
factors causing an outward shift of the PPF
- discovery of more natural resources
- new methods of production that increases productivity
- improvements in education/training -> productivity of the workforce
- increase in the size of the workforce e.g. migration, high retirement age
factors causing an inward shift of the PPF
- natural disasters
- depletion of natural resources
- reduction in size of the workforce
- recession -> loss of productive capacity
what do movements along the curve indicate?
a reallocation of resources increase/decrease production of either good
division of labour
occurs when workers specialise on very specific tasks
adam smith
had the view that economic growth could be achieved by increasing the division of labour
e.g. each worker becomes an expert, increasing productivity
advantages of specialisation
- had a task they become an expert in
- low training costs- only learn 1 task
- less time wasted from moving between tasks
- enables line methods to be employed increasing productivity and decreasing costs of production
disadvantages of specialisation
- alienation and boredom- decreases productivity
- loss of skills as workers are limited to 1 skill
- strikes could bring production to a standstill
- lack of variety in goods
advantages of specialisation for trade
- increased output
- greater choice
- lower prices
disadvantages of specialisation for trade
- overdependency on imported goods and services
- consistent current account imbalance
limits to the division of labour
- size of the market
- type of product (can’t be a unique product)
- transport costs (if high large scale production + division of labour may not be possible)
functions of money
- medium of exchange (money in return for labour)
- store of value (save to buy goods in future)
- measure of value (assess value of a good by comparing prices)
- means of deferred payments (buy and pay on credit)
free market economies- main characteristics
- private ownership of resources
- market forces e.g. supply and demand decide prices
- producers aim to maximise profits
- consumers aim to maximise utility
- resources allocated by the price mechanism
free market economies- economists
adam smith and friedrich hayek
command economy- characteristics
- public ownership of resources
- state determines price
- producers aim to meet the targets set by the state
- state allocates resources
- greater equality of income and wealth than a free market
command economy- economists
karl marx
mixed economy
mix of free market and command
some resources are allocated by price mechanism, while others are allocated by the state
the state provides public goods and services e.g. streetlamps, roads, welfare, education, defence
