THEME 1, Nature of Economics (1.1) Flashcards
What is Ceteris Paribus?
All things being equal: The assumption that, whilst the effects of a change in one variable are being investigated, all other changes have been kept constant
What is an economic law?
A theory or model which has been verified by empirical evidence
What is Normative Economics?
The study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated.
What is Positive Economics?
The scientific or objective study of the allocation of resources.
What is a Positive Statement?
A statement which can be supported or refuted by evidence.
What is a Normative Statement?
A statement which cannot be refuted or supported by evidence. This is also a value judgement.
What is the Scientific method?
A method which subjects hypotheses to falsification by empirical evidence.
What is a theory/model?
A hypothesis which is capable of refutation by empirical evidence
What do assumptions allow for?
They allow us to simplify a problem so we can solve it.
What does the word ‘rational’ mean?
It means that economic agents have well defined preferences.
They act to maximise their self interest.
What does evaluating mean?
Thinking how valid our analysis has been.
What is an Opportunity cost?
The next best alternative forgone
What are the 4 factors of production?
Land
Labour
Capital
Enterprise
What is ‘land’?
All natural resources.
(e.g. fish, mining, wood etc)
What is ‘labour’?
The workforce
What is ‘capital’?
Money spent on goods used to manufacture goods and services.
What is ‘enterprise’?
Seeking out profitable opportunities for production and take risks in attempting to exploit these.
What are economic goods?
Goods that are scarce because their use has an opportunity cost.
What is the fundamental economic problem?
Resources have to be allocated between competing uses because wants are infinite whilst resources are finite/scarce.
What is ‘fixed capital’?
Economic resources such as factories and hospitals which are used to transform working capital into goods and services.
What are free goods?
Goods that are unlimited in supply and which therefore have no opportunity cost.
Example of free goods.
Solar
Wind
What is human capital?
The value of the productive potential of an individual, group or workers. Made up of skills, talents, education and training.
Represents the value of future earnings and production.
Example of non-renewable resources.
Oil
Coal
Gas
Nuclear energy
Example of renewable resources.
Renewable resources can be used and replaced.
Fish stocks
Forests
Water
What is a sustainable resource?
Sustainable resources can be exploited economically and will not diminish or run out.
E.g. a forest is renewable however it is only sustainable if it survives over time despite logging or commercial farming.
What is an economy?
An economy is a system which attempts to resolve the basic economic problem.
How to economists distinguish three parts to the economic problem?
- What is to be produced? (Output/input spending)
- How is production to be organised? (E.g where should smartphones be made?)
- For whom is production going to take place? (What proportion of output should go to the workforce?)
Why do some people have more than others?
- Background
- Inheritance
- Oppurtunity
- Luck
- Location (1st world, 2nd world…)
What is market mechanism?
A system of the market where the forces of demand and supply determine the price and quantity of goods and services traded.
What is VAT?
- Value added tax
- A tax on spending/consumption
What is allocative efficiency?
- Producing the things that people want the most
- Only one point on the PPF graph is allocatively efficient
What is productive efficiency?
- Producing the maximum outputs from the given inputs
- All points on the curve are points of maximum productive efficiency
What is it called when a point is inside the curve on a PPF graph?
Unemployed resource
How are axis labelled on a microeconomics diagram?
- Good A / Good B
- Capital / Consumption
What moves the PPF out?
- Increase in factors of production (e.g. inward immigration (more labour), more investment in Capital))
- Increase in the quality of the factors of production (productivity)
- The efficiency with which factors of production can be combined
What is SR growth?
- Short run growth
What is LR growth?
- Long run growth
What is static efficiency?
- Productive and allocative efficiency
What would happen to the curve if the firms became more efficient at producing Good B but there was no change to Good A? Why might this situation arise?
- PPF would be pushed out (towards the right)
- This situation might arise if technological advances for GOOB B but not GOOD A
- E.g. Yamaha making pianos and motor cycles
What are the implications of having unemployed resources?
- It is a waste of scarce resources
What is a real value?
- Data expressed in constant prices
- eg taking one time period as the base year and valuing quantities in other years at base year prices.
- It removes the impact of inflation
What is CPI?
Consumer Price Index
What is the Consumer Price Index?
A weighted price index used to measure inflation
What is the Claimant Count?
- A measure of unemployment, in which the number of people claiming Job Seeker’s Allowance (JSA) is counted.
How is the Claimant Count calculated?
- Calculated using data from benefit offices to produce a partial indication of unemployment.
Why isn’t the Claimant Count used internationality?
- Different countries receive different level of benefits.
What is a nominal value?
- Data expressed in the prices of the day
What is the labour force survey?
- Internationally comparable method used to measure employment and unemployment
What is survey data?
- Data produced from a sample of respondents
What are experimental statistics?
- Official statistics that are still in the testing stage and therefore subject to more uncertainty eg data on collaborative platforms
What are index numbers/ values?
- Where a series of data has been re-based relative to a base period which is given the value 100.
What is a base period / year?
- The period given the value 100 against which other values are compared when constructing a series of index numbers
What is the Log Scale?
- A scale which compresses the values on the vertical axis as they increase
What did Smith say about specialisation?
- Smith essentially said that by dividing the production of pins into 18 different tasks the output of pins could increase significantly.
- Each worker specialises and output
increases.
What is the definition of specialisation?
- When a firm, individual or country specialises in a single task or narrow range of skills
- E.g. Bangladesh specialises in the textile industry
What is needed to make specialisation effective?
- Money
- Without money trade would depend on barter and a double coincidence of wants
What impact does specialisation have on economic agents?
- Creates new jobs
- If other industries (E.g. coal stopped) then there is possible unemployment
What is gained from specialisation?
- Learning by doing
- Time saved switching between tasks
- Specialist equipment can be used.
- There are more opportunities for economies of scale, so the size of the
market increases. - There is more competition and this gives an incentive for firms to lower their prices and costs
- Higher output and potentially higher quality, since production focusses on
what people are best at. - There could be a greater variety of goods and services produced.
What are the downsides of specialisation?
- Vulnerability to economic shocks and technological change
- If workers are bored the quality of the product can decrease - lower productivity
- Overly specialist skills do not have flexibility and are not transferable to others jobs
- Variety could decrease for consumers.
- There could be higher worker turnover for firms, which means employees
become dissatisfied with their jobs and leave regularly
What does it mean to barter?
- To exchange one good or service for another
- It is a very inefficient mean of exchange
What did Adam Smith believe in?
- Believed in the free market economy and the laissez-faire approach by governments
Where did Adam Smith notice that specialisation could help the economy?
- In a Pin Factory
What did Smith say about specialisation?
- Smith essentially said that by dividing the production of pins into 18 different tasks the output of pins could increase significantly.
- Each worker specialises and output
increases.
What 4 functions are needed for something to be suitable to be used as money?
- Medium of exchange
- A store of value
- A measure of value
- Method of deferred payment
What characteristics must something have to be suitable to be used as money?
- Portable
- Divisibility
- Sufficient scarcity
- Safe and difficult to counterfeit
In a modern economy which assets are classified as money?
- Notes and coins
- Money in current accounts
- Near money
What is near money?
- Non-cash assets that are highly liquid and easily converted to cash
Can near money be used as a medium of exchange?
- No
What does it mean when an asset is liquid?
- An asset that can easily be converted into cash in a short amount of time
Are credit cards described as money?
- No
- Credit cards are considered short loans, not Money though a person can use them to make purchases.
Why isn’t a credit card considered money?
- It is a short loan
- It has many characteristics of money but it is not a store of value for example
What is a medium of exchange?
- Any asset widely accepted as a medium of exchange. (TRANSACTION)
- It facilitates transactions
What is a store of value?
- An asset that holds its value over time
- Allows for saving and delayed consumption
What is a unit of account?
Money is a measure used to value or cost products.
What is method of deferred payments?
Accepted ways to settle a debt.
What is digital currency?
Money with no physical form.
What is crypto-currency?
- Exists outside traditional banking system.
- Uses a system called a blockchain as a ledger
What are consumer goods?
Goods and services that are used by people to satisfy needs and wants.
What is a margin?
A point of possible change
What are the 3 main sectors in an economy?
- Primary sector
- Secondary / manufacturing sector
- Tertiary / service sector
What is in the primary sector?
- Extraction of raw materials:
- Agriculture
- Forestry
- Fishing
What is in the tertiary sector?
- Services such as transport, sport, leisure, distribution, education and health
What is capital productivity?
Output per unit of capital employed
What is labour productivity?
Output per worker
What is the private sector?
The part of the economy owned by individuals, companies and charities
What is public sector?
The part of the economy where production is organised by the state or government
What is a sub-market?
A market which is a distinct and identifiable part of a larger market.
What is a command economy?
- An economy in which all allocation decisions are taken centrally
Has the command economy model historically been proven to be successful?
No
How are most economies in the world structured?
- A mix of free market and command
What is the market mechanism?
- Prices provide the incentives for resources to be allocated when markets are in disequilibrium
What are firms assumed to do when there is an excess of supply?
- When there is an excess of supply and less demand…
- Firms are assumed to lower prices in an attempt to clear unsold stocks
What does inelastic demand mean?
- When the price of a good or service goes up, consumers’ buying habits stay about the same,
- and when the price goes down, consumers’ buying habits also remain unchanged
What are product markets?
- Where goods and services are sold
What are factor markets?
- Where the factors of production themselves are traded
Advantages of market economies:
- Greater choice
- Greater quality
- More innovation
- Greater efficiency
- Higher economic growth
- Incentivises competition between firms
Disadvantages of market economies:
- Unequal distribution of income and wealth
- Exposure to risks
- Reluctance to take large risks
Where does Adam Smith sit on the economic spectrum?
Free market / mixed economy
What did Adam Smith say the GOVt should take responsibility for in an economy?
- Maintain law and order, as the many poor would want to take the property of the rich.
- The issuing of patents and copyright
- Providing national defence
- Regulating the banking sector
- Building infrastructure, and public goods
What type of economy is Smith regarded to be the founder of?
- Free market (or laissez-faire) economics
Where does Karl Marx sit on the economic spectrum?
- Command economy
What did Marx believe?
- Marx believed that the drive for profit by business owners in the capitalist system would push worker wages to ‘subsistence’ levels and that they would be exploited.
- He said that, exploited workers would work together and overthrow capitalism in a revolution.
What did Hayek believe about government intervention in economies?
- That intervention in money markets was one of the main causes of economic instability
Did Hayek support any government intervention within economies? If so, which strategies did he support?
- Yes
- To maintain law and order
- Later in life he suggested that the state could provide a small ‘safety net’ for those who found themselves unable to work.
What did Hayek believe about free market economies?
- Hayek believed that markets alone would have the information needed to make these decisions,
- because markets coordinate the views and information held by everyone, in a ‘spontaneous’ way
