Theme 1 - Introduction to Markets and Market Failure (1.1 - The Nature of Economics) Flashcards
Describe what is meant by the “Ceteris Paribus” theory. [1]
(Ref - 1.1.1 - Economics as a Social Science)
The assumption that, while effects of a change in one variable is measured, all other variables are constant. [1]
Define a normative statement [1]
(Ref - 1.1.1 - Economics as a Social Science)
A statement which is a value judgement, so cannot be supported or opposed. [1]
Define a positive statement [1]
(Ref - 1.1.1 - Economics as a Social Science)
A statement which can be supported or opposed with evidence. [1]
What is the main theory of the Basic Economic Problem? [2]
(Ref - 1.1.3 - The Economic Problem)
Wants are infinite, but resources are scarce. [1]
Therefore, resources must be allocated between competing uses. [1]
Define and give an example of opportunity cost [2]
(Ref - 1.1.3 - The Economic Problem)
Opportunity cost is the lost benefits of the next best alternative [1]
e.g. The opportunity cost of buying a house is 2 cars. [1]
State the 4 resources which are commonly known as the factors of production. [4]
(Ref - 1.1.3 - The Economic Problem)
- Land
- Labour
- Capital
- Entrepreneurship
Describe the 2 types of capital and their properties [4]
(Ref - 1.1.3 - The Economic Problem)
Working capital [1] - Stocks of raw materials and manufactured goods waiting to be sold. [1]
Fixed capital [1] - Stocks of offices, factories, machinery etc. [1]
Describe the role of entrepreneurs in an economy/business. [4]
(Ref - 1.1.3 - The Economic Problem)
Organising production [1] - Organising the production of goods/services from land, labour and capital [1]
Taking risks [1] - Buying more factors of production with the hopes of more profit. [1]
Describe 2 rewards to the factor of production [2]
(Ref - 1.1.3 - The Economic Problem)
Owners of fixed capital can earn profits from renting equipment [1]
Entrepreneurs can earn considerable profit from risking financial capital [1]
What does the Production Possibility Frontier (PPF) show? [1]
The maximum potential output of goods of an economy. [1]
If an economy decides to produce more capital goods at the production possibility, what would most likely occur? [1]
(Ref - 1.1.4 - Production Possibility Frontiers)
The amount of consumer goods produced decreases. [1]
Describe how the Production Possibility Frontier represents opportunity cost [2]
(Ref - 1.1.4 - Production Possibility Frontiers)
Generally, if an economy is working in line with the production possibility, [1] the more capital or consumer good produced [1], the less of the other good is produced [1].
How does the shape of the PPF affect the opportunity cost? [2]
(Ref - 1.1.4 - Production Possibility Frontiers)
A straight line PPF shows a constant opportunity cost [1].
A curved line PPF will cause variation in opportunity cost along the PPF. [1]
Define Specialisation [2]
(Ref - 1.1.5 - Specialisation and the Division of Labour)
Production of a limited range of goods by an individual/firm [1] in co-operation with others to produce a complete range of goods. [1]
Define Division of Labour [1]
(Ref - 1.1.5 - Specialisation and the Division of Labour)
When production is broken down into many separate tasks, as individuals undergo constant repetition. [1]
Explain 2 advantages of division of labour [4]
(Ref - 1.1.5 - Specialisation and the Division of Labour)
Increases in workers productivity [1] as workers are undergoing repetition on a specific task, which makes them more skilled in performing it. [1]
Competitive advantages by increasing sales [1] as the end product will be of higher quality, therefore there is more customer loyalty. [1]
Explain 2 disadvantages of the division of labour [4]
(Ref - 1.1.5 - Specialisation and the Division of Labour)
Decreased productivity in workers [1] which means that the worker will undergo boredom, therefore experience less motivation to work. [1]
Harder to find replacements [1] as if one worker is not present, it would be harder to find a replacement, therefore the economy suffers [1]
State the 4 functions which money must fulfill [4]
(Ref - 1.1.5 - Specialisation and the Division of Labour)
- It must be a medium of exchange [1]
- It must be a measure of value [1]
- It must be a store of value [1]
- It must be a method of payment [1]
Describe how a medium of exchange and a measure of value relates to money [2]
(Ref - 1.1.5 - Specialisation and the Division of Labour)
(Medium of exchange) - It can be used to buy or sell goods. [1]
(Measure of value) - The amount of money a product costs determines it’s value. [1]
Describe how a store of value and a method of payment relates to money [2]
(Ref - 1.1.5 - Specialisation and the Division of Labour)
(Store of value) - Money that can hold a fixed worth over time. [1]
(Method of payment) - Widely accepted as a reward for goods/services. [1]
Define a Free Market Economy [1]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Scarce resources are allocated entirely by the price mechanism [1]
Define a Mixed Market Economy [1]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Scarce resources are allocated partly by price mechanisms and partly by governments [1]
Define a Command Economy [1]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Scarce resources are allocated entirely by governments [1]
Explain 2 advantages of free markets [4]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Competition/efficiency [1] - Free markets compete for profits. Therefore there is more motive to be more efficient. [1]
Consumer Choice [1] - There will be many businesses competing in an economy, which provides a variety of goods/services for consumers [1]
Explain a disadvantage of a Free Market [2]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Inequality [1] - There is no government to provide state benefits. Those on low incomes will remain in poverty. [1]
State and explain 2 advantages of Command economies [4]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Guaranteed standard of living [1] - A command economy provides a base standard of living for all consumers. [1]
Solving market failure [1] - Government intervention (e.g. public services) can solve market failures [1]
State and explain 2 disadvantages of Command Economies [4]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Low economic growth [1] - Large command economies have little competition, therefore less incentive for productivity causes low economic growth [1]
Low consumer choice. [1] Low number of competing firms produce a small variety of goods. [1]
Describe the role of the state in a mixed economy [2]
Give an example of this role in the economy [1]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Intervention in order to solve market failure [1] and provide a minimum standard of living for it’s citizen’s. [1]
E.g. Governments progressively taxing the rich, to redistribute income to people with lower incomes. [1]
State 3 key people who had key views on how the economy works and runs [3]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Adam Smith [1]
Karl Marx [1]
Frederick Hayek [1]
Describe Adam’s view of the types of economies [2]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
He believed that competition between firms was essential [1]
He believed that the price mechanism should be used to maximise business profits and consumer utility [1]
Describe Friedrich Hayek’s view of the types of economy [2]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Hayek believed that governments should not intervene in resource allocation (Communism) [1]
Hayek believed that free market economies provided a communication network, leading to efficient resource allocation [1]
Describe Karl Marx’s view of the economy [2]
(Ref - 1.1.6 - Free Market, Mixed, and Command Economies)
Karl believed that there was large amounts of income inequality in a capitalist system. [1]
Karl believed that capitalism would eventually be replaced by communism [1]
