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Microeconomics > Theme 1 Topic 1 > Flashcards

Theme 1 Topic 1 Flashcards

1
Q

What is a model?

A

A simplified representation of reality used to provide insight into economic decisions and events.

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2
Q

What is ceteris paribus ?

A

All other factors being equal.

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3
Q

What is a social science ?

A

A social science is the scientific study of human beings.

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4
Q

What is economics ?

A

The study of how scarce resources are allocated to provide for unlimited human resources.

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5
Q

What is scarcity ?

A

It arises due to insufficient resources to provide for everyone’s wants. Resources are finite compared to material wants.

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6
Q

What is a positive statement ?

A

It is a factual statement. It is objective and can be tested with factual evidence. It can consequently be rejected or accepted.

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7
Q

What is a normative statement ?

A

It is based on value judgements. It is subjective and opinionated.

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8
Q

What is an opportunity cost ?

A

It is the benefit lost from the next best alternative forgone.

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9
Q

What is a trade-off?

A

A range of alternatives all of which have been given up.

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10
Q

What is an economic agent?

A

Individuals, firms, and governments that partake in economic activity, the supply of and demand for goods and services.

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11
Q

What is a free market economy?

A

One where firms decide what goods and services to produce with limited intervention from the government.

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12
Q

What is economic welfare?

A

The level of prosperity and standard of living of either an individual or a group of people. (unemployment benefits, free education)

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13
Q

What is PPF (Production possibility frontier)?

A

Shows different combinations of output for 2 products. ‘Good x’ and ‘good y’.

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14
Q

What is marginal analysis?

A

Used to enhance our understanding of the PPF.

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15
Q

What happens when there is an increased economic growth on a PPF diagram?

A

Shifts to the right due to an increase in factors of production available in an economy. This causes an increase in the productive capacity of the economy. Greater output is made.

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16
Q

What is a cause of outward shifts in the PPF? (3)

A
  1. Higher productivity of factor inputs so increase in output per unit of input used in production.
  2. Better management of inputs so reduced waste and improvement in quality.
  3. Discovery of new natural resources (e.g. land)
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17
Q

What is an economic shrinkage on a PPF diagram?

A

It shifts to the left. Occurs when there is a reduction in an economy’s production capacity. Less output is made. Causes include civil unrest and obsolete equipment.

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18
Q

What is a cause of the inward shift of the country’s PPF? (2)

A
  1. Damaging effects of natural disasters like floods.
  2. A trend decline in the productivity of inputs (e.g. caused by a persistent economic recession)
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19
Q

What are the 3 types of sustainabilities?

A
  1. Economic sustainability
  2. Social sustainability
  3. Environmental sustainability
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20
Q

What is economic sustainability?

A

The impact of economic choices on economic objectives (employment, growth).

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21
Q

What are 2 examples of economic sustainability?

A
  1. If economic choices lead to a high rate of unemployment over a long period of time, this is unlikely to be sustainable.
  2. If economic growth means that we run out of resources, this is unsustainable.
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22
Q

What is social sustainability?

A

The impact of economic choices on society

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23
Q

What are 2 examples of social sustainability?

A
  1. The majority of households will be able to access a decent quality of life and standards of living.
  2. Firms have to be able to produce whilst helping maintain a decent quality of life for households.
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24
Q

What is environmental sustainability?

A

The impact of economic choices on the environment.

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25
Q

What are 2 examples of environmental sustainability?

A
  1. Production needs to be undertaken without causing significant pollution.
  2. Resources need to be used so that there will be plenty left for future generations. Therefore, production needs to take into account if the resource is renewable.
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26
Q

What are capital goods?

A

Man-made products used by a business to produce consumer/capital goods.

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27
Q

What are consumer goods?

A

Products used by consumers.

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28
Q

What is productive efficiency?

A

Producing the largest number of products/services based on the resources available.

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29
Q

What is allocative efficiency?

A

Markets use scarce resources to make the products and provide the service that society wants and demands.

30
Q

Where are productive efficiency and allocative efficiency on a PPF?

A

productive: anywhere on a PPF.
allocative: only occurs at a specific point on a PPF as it is based off of demands.

31
Q

What is specialisation?

A

Economic units (individuals, firms, countries) concentrate on producing specific goods/services.

32
Q

What is the division of labour?

A

Specialised use of workers within an organisation.

33
Q

Process of division of labour:

A
  1. Workers are assigned specific tasks
  2. Constantly doing the same job improves workforce performance.
  3. Cuts down on the production costs, giving a competitive advantage.
  4. Using production/assembly lines increases the speed and accuracy of the work even further.
34
Q

What are problems with the division of labour? (2)

A

1.Work can become monotonous (repetitive, boring)
Leading to issues with the workforce (high staff turnover and absenteeism)
2. UK wages are higher than many countries, so tends to be undercut by low cost foreign competition.
UK firms produce highly differentiated products where quality rather than price is the main concern.

35
Q

What are the advantages of specialisation? (4)

A
  1. Increases output as economic units become more effective
  2. Increased output can be exchanged for other goods and services between economic units. This trade of goods causes the PPF to shift outwards.
  3. Reduced unit costs (economies of scale) causes bulk buying
  4. Creates a USP by producing higher quality goods and services.
36
Q

Disadvantages of specialisation: (5)

A
  1. Work can become monotonous which affects quality, productivity, and eventually leads to increased absenteeism.
  2. It is limited by the size of the market as smaller firms can’t afford to introduce specialisation.
  3. Threat of structural unemployment if an industry goes into decline.
  4. Reduced flexibility of the workforce as production flows may be stopped which affects the ability to meet demand.
  5. In a competitive global market, UK economic agents could quickly loose market share.
37
Q

What is structural unemployment?

A

Occurs when labour markets are unable to provide jobs to people due to mismatch between the skills of the job seekers and the available opportunities.

38
Q

What is barter?

A

Exchange of goods and services between 2 parties without a medium of exchange.

39
Q

Why is money more efficient than barter?

A
  1. It is a medium of exchange
  2. It is a store of value
  3. It is a unit of account
  4. It is a standard of deferred payment
40
Q

What is a medium of exchange?

A

An intermediary between 2 parties when buying and selling.

41
Q

What is a store of value?

A

Can be kept for future use.

42
Q

What is a unit of account?

A

Allows us to measure the value of goods and services in units.

43
Q

What is a standard of differed payment?

A

Allows us to pay for goods and services provided now at a later date.

44
Q

What is a free market?

A

The basic economic problem of what, how, and for who to produce is solved by market forces. Economic decisions are primarily made by private individuals and firms without government intervention. It is based off of supply and demand.

45
Q

What are the 4 ways that owners of factor inputs can act to maximise personal gain?

A
  1. Land - rent
  2. Capital - interest
  3. Labour - remuneration
  4. Enterprise - profit
46
Q

What are the characteristics of the free market? (5)

A
  1. Private sector ownership
  2. Free enterprise (demand and supply is determined by the market mechanism)
  3. Limited government intervention
  4. Firms compete for market share
  5. Allocation of resources is determined by market forces
47
Q

Who is Adam Smith?

A

He is an 18th century Scottish philosopher and pioneer of political economy, known as the “Father of Economics”

48
Q

What is “The Invisible Hand”

A

Advocated by Adam Smith :
1. The self regulating behaviour of the market place
2. Individuals seeking to maximise personal gains will lead to an efficient allocation of resources
3. This self interest benefits the society as a whole.

49
Q

Which approach does classical economics suggest?

A

Laissez- faire by the government towards markets. This will provide the greatest goods for the greatest number of people.

50
Q

What are the advantages of the free market? (3)

A
  1. Competitive market
  2. Consumer choice
  3. Economic growth
51
Q

What are the disadvantages of a free market?

A
  1. Inequalities of wealth
  2. Little regulation
  3. Provision of demerit goods
52
Q

What is a demerit good?

A

It is bad for society but is over provided by the market.

53
Q

Who is Friedrich Hayek?

A

A famous free market Austrian economist. He believed that the state shouldn’t interfere in the free market and that its role should be to maintain the rule of law.

54
Q

What did Friedrich Hayek suggest?

A
  1. He advocated decentralisation and decision making made by individuals and firms.
  2. The creation of a ‘safety net’ by the state to support workers in time of need.
55
Q

What is a command economy?

A

Resources are allocated by the government. The state decides what, for whom, and how to produce.

56
Q

What are the advantages of a command economy?

A
  1. Greater equality
  2. Removal of demerit goods
57
Q

What are the disadvantages of a command economy?

A
  1. Lack of incentives
  2. Resources misallocation, leading to shortages
58
Q

Who is Karl Marx?

A

A German economist who believed that labour was exploited by capitalists. He published the communist manifesto in 1848. He envisioned a classless society with centralised planning.

59
Q

What is a mixed economy?

A

Resources are allocated by a combination of both the market mechanism and the government.

60
Q

What is a public good?

A

It’s consumption doesn’t reduce the amount available for consumption by others.

61
Q

What is the role of the state in a mixed economy? (3)

A
  1. To reduce negative externalities
  2. To control macro economic variables (inflation)
  3. To encourage free trade (restrict monopoly power, taking over the whole market).
62
Q

What are the 3 opportunity costs to economic agents?

A
  1. What to produce - economic incentives provide economic agents with the data needed on what to make
  2. For whom to produce - according to supply and demand (free market economy)
  3. How to produce - combining 4 factors of production
63
Q

What does it mean if a point ‘A’ is on the PPF curve?

A

Working at full efficiency, business can make a good amount of each product

64
Q

What does it mean if a point ‘B’ is below the PPF curve?

A

Shows inefficiency, not all resources are being used

65
Q

What does it mean if a point ‘C’ is above the PPF curve?

A

It is unobtainable, not enough resources to produce the level of output

66
Q

How does the PPF show the concepts of scarcity, choice, and opportunity cost?

A

There is a choice between 2 competing resources, due to the resources being scarce. The economic problem is due to unlimited wants but finite resources

67
Q

How does the PPF show the concepts of trade offs and conflicting objectives?

A

Trade offs between competing uses occurs as there is a choice on how to use resources. Conflicting objectives can occur since there is an opportunity cost to what goods and services can be made. Suppliers may want capital goods, but consumers may want consumer goods.

68
Q

What is economic growth?

A

Percentage change in total output of a country

69
Q

What is profit satisficing ?

A

A level of profit below profit maximisation that satisfies the needs of owners and managers of an organisation

70
Q

What is profit satisficing ?

A

A level of profit below profit maximisation that satisfies the needs of owners and managers of an organisation

Microeconomics (4 decks)

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