Theme 1 Flashcards
What is the basic economic problem?
The basic economic problem is that there are infinite wants and finite resources. Resources are scarce in relations to wants. Choices need to be made about how to allocate resources among competing uses: what to produce? How to produce? For whom to produce?
What does the term ‘The Division of Labour’ mean? Apply the concept to a car factor
A form of specialisation where the tasks needed to produce an item is split among workers. in a car-manufacturing company may have one dedicated area for attaching wheels to cars and another for affixing doors to them, with workers assigned to just one of these tasks.
What are the advantages and disadvantages to the division of labour?
Advantages
- Increases productivity and efficiency by allowing workers to specialize in their specific tasks
-Lower costs- reduces training time and waste
-Economies of scale- mass production as possible, large quantities of identical goods being produced more efficiently
Disadvantages
-High staff turnover- works may find repetitive tasks monotonous and unrewarding
-Dependency- overreliance on one work/task/factory makes units vunerable to staff illness or economic shocks.
Structural unemployment-workers trained in fewer skills, machines can replace some labour tasks (technological unemployment)
-Lack of variety- Mass produced goods can reduce
consumer choice
What do we mean by productivity?
productivity, in economics, the ratio of what is produced to what is required to produce it.
What is and What are the advantages and disadvantages to specialisation?
Specialisation - the concentration of individuals, firms, or nations on
producing a limited range of goods or services.
The division of labour - a form of specialisation where the tasks
needed to produce an item are divided among workers.
Adam Smith argued that specialisation leads to increased
productivity and economic growth in the Wealth of Nations (1776)
Advantages
-Workers become quicker at producing goods (more productive)
-An increase in productivity causes the cost if production to decrease (lower average costs)
-Production levels are increased
-Specialised workers tend to get higher pay
-Workers’ specific skills will be improved
-More motivation from job satisfaction
Disadvantages
-Greater cost of training workers
-Quality may suffer if workers become bored by the lack of variety in their job
-More expensive workers
-Boredom for the worker as they do the same job everyday
-workers skills may suffer as they are only doing one job
-Workers may eventually be replaced by machinery
Name four influential economists and one or two sentences explaining what their big idea was
John Maynard Keynes was a British economist, best known for spearheading the revolution in economic thinking, which overturned the then existent ideas of neoclassical economics. Keynes is also regarded by many as the founder of modern theoretical macroeconomics. His ideas formed the basis of an independent school of thought, Keynesian economics. His contributions include some of the most useful economic concepts, including liquidity preference, fiscal multiplier, deficit spending, and aggregate demand-aggregate supply model.
Adam Smith was a Scottish philosopher and political economist who is widely considered the father of modern economics and the world’s first free-market capitalist, for he explained how―in a free-market economy―rational self-interest led to economic well-being. Undoubtedly one of the biggest names in this field, he influenced the likes of Karl Marx, John M. Keynes, and Thomas Malthus. Smith’s contribution to economics came in the form of his famous works: The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776); the latter was published as a five-book series.
David Ricardo was a British political economist, who together with James Mill, founded classical economics. It was Adam Smith’s The Wealth of Nations that inspired Ricardo to take interest in this subject. He was a believer of monetarism, which was evident from his argument that the propensity of the Bank of England to issue excess banknotes was responsible for the prevailing inflation in the country. His biggest contribution to the field of economics was his theory of comparative advantage.
Milton Friedman was an American economist and statistician. An ardent advocate of laissez-faire capitalism, Friedman was awarded the Nobel Memorial Prize in Economics in 1976. He was best known for his demonstration of the complexity of stabilization policy, which was introduced to stabilize the economy. Some of his prominent contributions to this field include the concept of monetarism, price theory, permanent income hypothesis, floating exchange rates, applied macroeconomics, and the Friedman test.
3 advantages and disadvantages of command economies?
Any of these advantages
Resources are allocated by the government to maximise social welfare
* Relatively even distribution of income/wealth
* Workers are given jobs by the state; there is no unemployment
* Adequate provision of public goods
* Government should take externalities into account in decision-making
* Environmental protection possible
* Government can invest in economy’s infrastructure easily
* Policies to manage the macroeconomy
* Welfare safety net
* National interest considered rather than individual profits
Any of these disadvantages
Danger of government failure
* Difficult for the government to set and correct output planning targets
and fix prices appropriately
* Government may not have enough information to make good decisions
eg malinvestment by state
* Very bureaucratic – lots of red tape which reduces efficiency
* Underemployment
* Lack of choice for consumers
* Lack of incentives to be innovative and entrepreneurial
* Lack of incentives to work hard, causing lower productivity
* Corruption is likely to develop
* Shadow market activity can flourish
3 advantages and disadvantages of free market economies?
Any of these advantages
Resources can be bought and sold
* Consumer sovereignty
* Freedom of choice
* Profit-motive and self-interest incentivises
* Incentive to worker harder for higher wages; productivity rises
* Firms face competitive forces driving down prices
* Incentive to innovate and invest in new ideas (dynamic efficiency)
Any of these disadvantages
* Income/wealth inequality, and poverty
* Market failure can reduce social welfare
* Lack of provision of public goods
* Over-provision of goods with negative externalities
* Under-provision of goods with positive externalities
* Information gaps may cause market failure
* Unemployment/worker exploitation/low pay for some
* Environmental depletion/degradation
* Resources may be wasted on advertising and marketing
* Firms may develop monopoly power and push up prices
* Macroeconomic instability
What is an opportunity cost?
Opportunity cost is the value of the next best alternative foregone (given up) when
a choice is made
What is a production possibility frontier?
A production possibility frontier (PPF) shows the maximum possible
output combinations of two goods or services an economy can achieve
when all resources are fully and efficiently employed
What would cause a shift in a PPF?
Outward shift: This means the economy can produce more of both goods or services. This can happen when there is an increase in resources (such as land, labor or capital), or an improvement in technology or productivity123.
Inward shift: This means the economy can produce less of both goods or services. This can happen when there is a decrease in resources (such as due to a natural disaster or a war), or a decline in technology or productivity
what causes a shift along the ppf curve?
change in technology, or because of economic growth. For example, if someone developed a faster computer, or a more efficient way of manufacturing cars, we might see a shift to the right in the PPF.
Explain the gradient of the Production Possibility Frontier?
PPFs are usually curved
because of the Law of
Diminshing Returns – the
marginal (extra) output of
consumers goods diminishes
as more factor resources are
allocated to it
What is demand?
Demand is an economic concept that relates to a consumer’s desire to purchase goods and services and willingness to pay a specific price for them
Draw a demand curve
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