Theme 1: Nature of Economics Flashcards
What is ceteris paribus?
All other things held constant (in Latin)
What type of science is economics?
A social science
How do economists make models/theories?
They assume ceteris paribus (meaning that they focus on one factor)
What is a positive statement?
An objective and fact-based statement which can be tested using evidence
What is a normative statement?
A statement that carries value judgements which are opinions so it cannot be tested
Why are value judgements useful?
It plays a huge role in policy making
What is the economic problem?
When the human wants are infinite but we are faced with scarce resources
What is opportunity cost?
The benefit given up of the next best alternative
What is an economy?
Any system that tries to solve the economic problem
What are the 3 questions that the government should consider when solving the economic problem?
1) What do we produce?
2) How do we produce it?
3) For whom are we making this stuff for?
What does the factors of production mean?
Resources which can be used to produce things
Why is money not considered factors of production?
Money can’t be used to produce anything. It can be used to buy factors of production
What are the 4 main factors of production?
1) Land
2) Labour
3) Capital
4) Entreprise
What are non-renewable resources?
Resources that will not replenish
What are renewable resources?
Resources that can replenish over time
What is Capital?
The technology or machinery we use to make goods
What is Enterprise?
When an entrepreneur combines and organizes land, labour and capital to produce a good
What is Land?
All the earth’s natural resources
What is labour?
Human workers used to produce a good
What does PPF stand for?
Production possibility frontier
What is a PPF?
A graph which shows all the possible combinations of 2 goods we can produce using all of our resources efficiently
What are capital goods?
Goods we use to produce consumer goods
What is division of labour?
When a firm splits up its production process into smaller separate tasks, and assigns different workers to each of these tasks
What are the 4 pros of division of labour?
+ increase output
+ increases quality
+ reduce unit costs
+ save on tratin
What are the 4 cons of division of labour?
- demotivation
- absenteeism
- employee turnover
- unemployment
What are the 4 functions of money?
- standard of deferred payment
- unit of account
- medium of exchange
- store of value
What are the 3 pros of specialization in trade?
+ more variety of goods
+ more output
+ more trade
What are the 3 cons of specialization in trade?
- over-specialization
- natural resources depletion
- vulnerable
What does deferred payment mean?
You can borrow money to buy goods now, and then pay the money back in the future
What does unit of account mean?
Money helps us compare prices of different products
What does medium of exchange mean?
We can use money to trade goods and services
What does store of value mean?
You can store your money and save it for later
What do economists mean by ‘utility’?
Happiness
Economists assume that consumers:
Want to maximise their utility
What’s the formula for profit?
Total revenue - total cost
Formula for total revenue?
Price x quantity
What is herd behavior?
Following the crowd
What is habitual behavior?
When consumers have a certain habit
What do economists refer to habitual behavior as?
Status quo bias
What does weakness at computation mean?
When consumers miscalculate probabilities and eventually make bad choices
What is a free market economy?
An economy in which all resources are allocated by the price mechanism
Can you give an example of a free market economy?
Hong Kong in the 1960s
What is a command economy?
An economy where all resources are allocated by the government
Can you give an example of a command economy?
North Korea
What is a mixed economy?
An economy where resources are allocated by the price mechanism and the government
What 2 things did
Adam smith came up with?
Specialization and Free market economics
What was adam smith’s book called?
The wealth of nations
What did adam smith talk about in his book specifically about the free market?
Resources are allocated through the invisible hand
How are prices adjusted in the free market? (Give 3 ways)
1) rationing
2) signalling
3) incentivising
What did adam smith talk about in terms of types of economies? (Give 3 things)
- supported free markets
- invisible hand is efficient at allocating resources
- the government should leave markets alone
Why did Karl Marx disliked the idea of free markets?
It was capitalistic
What did Karl Marx support?
Command economies
What was Friedrich Hayek’s view on free markets and command economies?
He supported free markets but was critical with command economies
Why was Friedrich against command economies?
He thought it was impossible for the government to collect all the information of the market
What are the 3 pros of Free Market economies?
+ price mechanism is super efficient
+ lower prices
+ Choice
What are the 3 cons of free markets?
- Inequality
- Monopolies
- Market Failures
What did Friedrich Hayek say about the price mechanism?
That’s its like a communication network
What are the 3 pros of command economies?
+ correct market failure
+ less inequality
+ stop monopoly abuse
What are the 3 cons of command economies?
- Government Failure
- destroy incentives
- limited choice
