Theme 1 Flashcards
What’s the difference between real and nominal values?
Nominal values are not adjusted by inflation and so use the level of prices existing during the time period being measured.
Whereas real values are, and involve taking one time period as the base year.
E.g. gdp at market prices can be heavily affected by inflation making it seem as if a countries output has increased immensely even if that is not the case.
Where on a PPF can production take place?
Production can only take place:
- on the boundary which means you’re using your resources efficiently
- within the boundary meaning the economy is producing less than its maximum
However it cannot produce at a point above the boundary and PPF shows the maximum output for the economy. It can only increase by a shift outwards of the PPF
What’s the difference between consumer goods and capital goods?
Consumer goods are goods/services that are used by people to satisfy their needs. Capital goods are those used in the production of a product e.g machinery.
What is specialisation (division of labour)?
Specialisation is when each individual worker in a firm is allocated a different task in which they become experts. This should increase productivity as if a worker is specialised in their task then they should be able to carry it out efficiently and quickly. An increase in productivity decreases cost of production.
What’s the difference between the private and public sector?
The public sector is the state/govt sector of the economy where the production of goods are produced through govt organisations, local authorities and state owned businesses.
The private sector is owned by private individuals, firms and charities.
What are the functions of money?
A medium of exchange: should be given in return for goods and services
A measure of value: money should have a definite worth/value however in reality this isn’t entirely true as eg. high inflation can decrease the value of money during that time period so it’s worth isn’t the same as when you got it.
A method of deferred payment: if a deferred payment is made then firms will make sure the money it receives has the same value as it does today
What is near monies?
Assets which fulfil some but not all functions of money. It has a measure as well as store of value but does not act as a medium of exchange. However depending on the asset, this can be changed into a medium of exchange easily (liquidity is how easily an asset can be changed into money).
What is the market mechanism?
It allocates resources through buyers and sellers reaching an agreement on a price of a good being sold.
What is planning?
Planning allocates resources through administrative decisions e.g. govt bodies such as the NHS allocate resources through planning.
What’s the difference between free market economies and planned economies?
In a free market, the majority of resources allocated through the market mechanism e.g. The USA. Whereas in planned economies, resources are mainly allocated by the state.
Evaluation of free market economy?
- There is more variety in a free market economy as the lack of govt intervention allows room for innovation and choice.
- there is more competition as there are different companies so incentives to produce good quality goods are high.
- firms tend to take more risks
- there tends to be high levels of inequality as resources aren’t allocated equally, only to those that can afford it eg. Health care
Evaluation of a planned economy?
- choices are limited in the market as planning tends to provide uniform goods
- due to lack of choice, there is less competition and so no need for innovation as profit will still be made
- smaller income inequality gap as govt provides people with basic services to survive if they cannot afford it themselves
- people are left with less money after tax as rates are high to find these services
What did Adam Smith say about how markets are run?
He believed that the invisible hand would allocate resources to everyone’s advantage. He said that if you left people follow their own endeavours, they would make decisions that benefitted them the most, leading to an economy that is self driven. This would happen if the govt did not regulate the markets. However he did say that the govt needs to provide a framework in which the free market can operate.
What did Karl Marx say about capitalism?
He said that capitalism will fall because of a revolution lead by the proletariat. This is because they are exploited by the bourgeoisie by working longs hours and not receiving the right amount of pay.
A New Democratic society will be made that encourages equality and where property is owned by everyone.
What is rational decisions making?
It is when economic agents are able to use all the information they can get and chose an outcome that maximises their benefit.
Assumptions of a consumer’s rational behaviour?
It is assumed that consumers maximise their economic welfare by making choices based on the level of utility/satisfaction gained.
Assumptions of a workers rational behaviour?
It is assumed that they want to maximise their own welfare at work. This includes looking at a range of option when considering where to work according to again satisfaction e.g. Good pay and less travel will give high satisfaction.
Assumptions of a firms rational behaviour?
It is assumed the owners of these firms want to increase rewards gained from sales meaning that they will aim to maximise profit.
Why is the demand curve downwards sloping?
It shows that the lower the price, the higher the quantity demanded of the good. It has a negative correlation.
What is Ceteris Paribus? UPDATE THIS
The condition that all other factors, besides price, stays the same.
What is the difference between a movement along and shift in the demand curve mean?
A movement along indicates a change in price. Whereas a change in non price factors cause a shift.
What is the difference between normal and inferior goods?
Demand for a normal good rises as income rises.
However with an inferior good, the demand for it goes down as income rises as people can now afford better things.
Factors that affect demand? UPDATE THIS
P - population A - adverts S - substitutes I - F - fashion trends I - C - compliments
What is the law of diminishing marginal returns?
With every extra unit you consume of a good, the less satisfied you feel compared to the last unit.
One example is buffets because at the start you feel as if you’re getting your money’s worth however as you eat more and become fuller, you start to feel unsatisfied.
What is the paradox of value?
When goods such as diamonds have such a high price that some people are willing to pay, but necessities like water are cheap.
What is consumer surplus?
The difference between what price consumers are willing to buy at and the actual price of the good.
What is price, income and cross elasticity of demand?
A measure of responsiveness of quantity demanded to changes in the price of the good (PED), to changes in income (YED) and to changes in the price of another good (XED).
What is the formula for PED?
% change in quantity demanded/ % change in price
How do you calculate percentage change?
[(New value - old value)/original value] x 100
What does it mean when demand is price elastic or inelastic?
Price elastic is when a change in price cause a proportionate or larger change in quantity demanded and PED > 1.
Whereas price inelastic is when a change in price leads to a smaller change in quantity demanded in comparison and PED < 1.
What is the difference between perfectly elastic, in elastic and unitary elasticity of demand?
If demand is perfectly elastic (theoretically) a fall in demand will cause an infinite increase in quantity demanded and is shown as a horizontal graph.
If demand is perfectly inelastic, a change in price will have no effect on demand so the graph is vertical.
If demand is unitary, a change in price leads to the exact and opposite change in quantity demanded causing the graph to be diagonal. At this point PED = 1.
What is the formula for YED and what does the answer being positive or negative mean?
The formula is:
% change in quantity demanded/% change in income
A negative answer means the good is inferior and a positive answer means it is a normal good.
