Theme 1: Nature of Economics Flashcards
Define ‘ceteris paribus’
All other things being equal
Explain the difference between a ‘want’ and a ‘need’
Need: Things required for survival
Want: Anything that is not a need
Define ‘opportunity cost’
The benefit foregone of the next best alternative
List the 4 factors of production
Capital
Enterprise
Land
Labour
Define a positive statement
A statement which can be proven or disproven with reference to evidence and data
Define a normative statement
A value judgement which does not have evidence to certainly prove or disprove it
Explain what a Productin Possibility Frontier (PPF) shows
The maximum potential output of an economy when resources are fully and efficiently employed
Explain factors that would cause an outward shift in a PPF
Any increase in the quality / quantity of the factors of production (more workers, improved skills, advanced technology, etc…)
Explain how a PPF illustrates the concept of opportunity cost
When efficiency is maximised, the only way to increase output of consumer goods is to forefit the output of capital goods, and vice versa
Explain the difference between capital goods and consumer goods
Capital goods: used to produce consumer goods
Consumer goods: goods bought by individuals to satisfy wants / needs
Explain specialisation
Where workers, firms, or regions focus on producing a limited range of goods or services in order to maximise efficiency
Explain the advantages of specialisation and the division of labour in firms
Workers specialise in tasks best suited to their own skillset
Reduces training costs
Allows specialist machinery to be utilised
Less time is wasted from moving between tasks
Increases productivity
Reduces costs of production
Explain the disadvantages of specialisation and the division of labour in firms
Monotony and bordeom could reduce productivity
Loss of skill and overspecialising is problematic if there are redundancies
Strikes in one worker group could halt the entire production line
Lack of variety in products
Explain the advantages of specialisation in the production of goods and services to trade
Countries increase output of products they are well equipped to supply
Trading allows greater choice and lower prices for products it is not suited to output
Explain the disadvantages of specialisation in the production of goods and services to trade
Country may become overdependent on imported goods
If its products are not competitive, it may lead to structural unemployment
Value of imported goods may exceed the value of exported goods
Explain the 4 functions of money
- Medium of exchange - enables proportionate exchange of the price of labour for goods and services
- Store of value - saving for valuable goods in the future
- Measure of value - assessment of realtive goods’ values
- Mean of deferred payment - purchasing goods and paying with credit
Explain a command economy structure
There is state ownership and allocation of resources. The state determines price, and dictates producer output targets
Explain a free market economy structure
There is private ownership of resources. Market forces determine production. Consumers maximise utility, producers maximise profit. There is little to no government intervention
Explain the advantages of a command economy
Greater equality of income and wealth
Macroeconomic stability
External costs / benefits considered with consumption / production
No exploitation of monopoly power
Full employment
Resources allocated to maximise social welfare
Explain the disadvantages of a command economy
Inefficiency - no profit motive or competition
Lack of incentive to invest
Restrictions on freedom of choice
Shortages and surpluses
Bureaucracy
No consumer sovereignty - state dictates production
Not flexible to market trends
Explain the advantages of a free market
Consumer sovreignty - spending dictates production
Flexibility in response to demand changes
Efficient due to profit motive and competition
Increased choice of goods and services
Economic and political freedom
No resources wasted on bureaucracy
Explain the disadvantages of a free market
Inequality
Trade cycles = instability
Imperfect information
Monopolies
Externalities rarely considered
Goods and services that aren’t profitable aren’t produced
