Theme 1- Nature of economics (key terms) Flashcards
The economic problem
Humans have infinite wants and needs but only finite resources
The factors of production
Land, Labour, Capital, Enterprise
Opportunity cost
The value of the next best alternative forgone
PPF(Production possibility frontier)
Shows the maximum level of output of two goods that an economy can make in a certain period of time when all resources are being fully and efficiently employed
Allocative efficiency
Occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production
Pareto efficiency
In neoclassical economics, an action done in an economy that harms no one and helps at least one person. A situation is Pareto efficient if the only way to make one person better off is to make another person worse of
Specialisation
When a person, a firm, or even a country, concentrates on producing or doing just one thing
The division of labour
Production of a complex good or service is broken down into lots of smaller and simpler tasks for different workers
Economic system
A network of organisations used to resolve the problem of what, how much, how and for whom to produce
The market
A place where buyers and sellers are brought together to exchange goods and services for a price
Free market economy
All the resources are allocated by the forces of supply and demand (price mechanism)
Centrally planned economy (command economy)
All the resources are allocated by the government
Capitalist economy
Uses market-determined prices to guide our choices about the production and distribution of goods. One keyrole for the state is to maintain the rule of law and protect private property
Consumer sovereignty
- Exists when an economic system allows scarce resources to be allocated to producing goods and services that reflect the wishes of consumers
- Sovereignty can be distorted by the effects of persuasive or misleading advertising
Normative statements
Subjective statements that involve value judgments and express how things should be rather than how they are - includes words like ought, fair etc
