Theme 1, The Nature of Economics CC1 Flashcards
scarcity
wants and needs are infinite, resources finite and insufficient to make all the products that consumers want
three questions of the basic economic problem
what to produce, when to produce, how to produce
economic resources
scarce, involves opportunity cost
goods - physical items
services - activities that others do for you
renewable and non-renewable resources
renewable - replenished by natural processes
non-renewable - not replaced naturally
opportunity cost
measures the value of the next best alternative use of resources foregone
free goods
not scarce, unlimited supply
has no opportunity cost to society
factors of production
land - all that nature provides, reward is rent
labour - reward is wages
capital - all man-made goods which help to produce goods/services, reward is interest
enterprise - entreprenuers, reward is profit
PPF shows
maximum possible output of two goods/services that can be produced in most efficient way possible
productive capacity
PPF shifts
outwards:
- improvements in productivity
- better management of existing resources
- more factors of production available (larger workforce)
- discovery of new natural resources
inwards:
- opposite of ‘outwards’
consumer goods
satisfy wants and needs
future productive capacity limited
capital goods
offices, factories, machinery
increase future productive capacity
specialisation
when individuals/firms/regions concentrate on a particular task/product
division of labour
specialisation by workers where the production of a good is broken up into many separate tasks each performed by one person
productivity
productivity - output per unit of input employed over a given time period
labour productivity - output per worker per time period
capital labour - output per unit of capital employed per time period
cost per unit
unit cost = total cost/units of output
factors affecting productivity of a workforce
- extent and quality of fixed assets
- skills, ability and motivation of workers
- methods
- external factors (eg reliability of supplies)
advantages of specialisation/division of labour
firm: - reduced unit costs and improved quality - better use of scarce resources trade: - increased global market
disadvantages of specialisation/division of labour
firm:
- boredom -> higher labour turnover
- lack of transferable skills
trade:
- environmental impact (eg transporting goods)
- structural unemployment if industry dies
four functions of money
- medium of exchange
- measure of value
- store of value (storing wealth)
- method of deferred payment (eg credit)
economic system def
complex network of individuals, organisations and institutions and their social and legal interrealtionships
the main economic actors/agents
consumers: maximise own welfare or utility
factory owners: maximise returns
producers (firms): maximise profit
government: maximise social welfare, most likely have their own political agenda
command/planned economy
the government allocates resources in a society
rationing:
- workers given jobs by state
- state decides what is produced, how and for whom
- market prices play little or no part
free market economy
resources allocated by price mechanism
Adam Smith’s ‘invisible hand’:
- private ownership
- price mechanism, competition within producers, choice for consumers
- motivated by pure self interest
- free enterprise -> few government limits
advantages of a command economy
- greater equality
- full employment
- key services (eg defence) provided
- prevents consumer exploitation by firms
- basic necessities (eg food, water) provided
advantages of a free market economy
- greater choice
- consumer sovereignty (consumer’s desires and needs dictate output)
- risk taking
- innovation
mixed economy
the inevitable ‘real world’ compromise
resources allocated partly by price mechanism and partly by government/state
private sector of a mixed economy
private ownership of factors of production, competition, consumers/producers motivated by self-interest
public sector of a mixed economy
state owned/run, planning process. raising revenue through taxes and redistributing income in benefits or provision of services (eg healthcare)
Adam Smith
Laissez-Faire attitude
Invisible Hand
free market economist
but aware of problems such as exploitation
Freidrich Hayek
Laissez-Faire attitude
wrote ‘Road to Serfdom’ warning of dictatorship
believes it guarantees individual liberty
Karl Marx
believed profit is exploitation
believes producing too much causes economic crisis
command/planned economy
said capitalist ideas teach to be competitive, anxious and conformist
why is economics regarded as a social science
study of human behaviour
why is it argued that economics cant be a science
cannot be tested under lab conditions
what research methods can economists use
mathematical and statistical tools
what is meant by an economic ‘model’
model = simplification of reality
ceteris paribus
all other things remain constant/being equal
positive statement
fact
can be proved or refuted
normative statement
a statement which cannot be proved or tested using evidence
sustainable resource
managing resources so they don’t deplete
economic agents
consumers
producers (firms)
government
PPF gradient
opportunity cost
steeper = greater sacrifice
PPF pivots
change in productivity in only one good or service
PPF imperfect factor substitution
better suited making one item over another
