Theme 1: Nature of Economics Flashcards
Positive statement
Statements that are objective and can be tested with factual evidence.
Normative statements
Based on value judgements that are subjective and based on opinion rather than factual evidence.
Basic economic problem
Wants are unlimited and resources are finite, so choices have to be made.
opportunity cost
The opportunity cost of a choice is the value of the next best alternative forgone.
Capital description
goods, machines and buildings
Capital reward/incentive
Interest from the investment
Entrepreneur description
Someone who takes risks, innovates and uses FOP.
Land description
Natural resources
Labour description
Workforce
Entrepreneurship reward/incentive
Profit
Land reward/incentive
Rent
Labour reward/incentive
wages
What can PPFs show?
The maximum potential of an economy and the opportunity cost of using scarce resources.
The law of diminishing returns
adding an additional factor of production results in smaller increases in output.
Capital goods
Goods which can be used to produce other goods eg machinery.
Consumer goods
Goods which cannot be used to produce other goods, eg clothing
Who came up with the idea of specialisation?
Adam smith
Who can achieve specialisation?
Individuals, businesses, regions of countries or countries themself
What are 4 advantages of specialisation?
1- Greater number of products and services to be produced.
2- Lower cost of production.
3- Encourage trade and partnerships between nations.
4- Mass production and more peoples wants being satisfied.
What are 3 disadvantages of specialisation?
Work can become repetitive and monotonous
Specialisation can lead to over reliance on a certain industry
Division of labour can lead to interdependence
What are the 4 functions of money?
medium of exchange, measure of value, store of value, method of deferred payment
Who are 2 free market economists?
Adam Smith and Friedrich Hayek.
What is a free market economy?
Where governments leave markets to their own devices, so the market forces of supply and demand allocate scarce resources. No government intervention.
Why is Adam smith a free market economist?
He believes in the invisible hand theory. That prices are determined by the spending votes of consumers and businesses.
Why is Friedrich Hayek a free market economist?
He believes that government intervention makes markets worse.
5 Advantages of free markets
- More choice
- Incentive for firms to innovate and produce high quality goods and services
- Greater efficiency
- Dynamic markets are a catalyst for economic growth
- Associated with political freedom
Disadvantages of free markets
- Ignores inequality and benefits those who have the most money.
- Monopolies could exploit the market.
- Over consumption of demerit goods.
- Public goods aren’t provided and merit goods are underprovided.
What is a command economy?
Where governments allocates all of the scarce resources in an economy to where they think there is a greater need.
What did Karl Marx believe?
The free market is unstable. Profits created come from the exploitation of labour.
Advantages of command economy?
No one firm is able to dominate and exploit consumers by fixing high prices.
Wealth distributed more fairly through government planning.
Social welfare is the main concern of the state.
Disadvantages of a command economy?
Central planning imposes the will of a small minority on the whole
Less choice
No incentive to innovate due to lack of competition.
Little incentive to work efficiently
Slower growth
Political control.
What is a mixed economy?
A balance between command and free market economies.
