Topic 1 - Nature of Economics Flashcards
Model
A simplified representation of reality used to provide insight into economic decisions and events. All models are based on assumptions
Ceteris paribus
A Latin phrase meaning ‘other things being equal’ it is used in economics when we focus on changes in one variable while holding other influences constant.
Positive statement
A statement about what is, it is factual and objective.
Normative statement
A statement that involves a value judgement about what ought to be.
Scarcity
A situation that arises when people have unlimited wants in the face of limited resources.
Basic economic problem
The basic economic problem exists because, although the needs and wants of people are unlimited, the resources available to satisfy needs and wants are finite, this is know as scarcity and it requires decisions makers to make sacrifices and decisions in order to maximise consumer welfare.
Opportunity cost
The value of the next best alternative decisions forgone when making a decision. E.g. picking between going out for a meal or eating in and you choose eating in, the opportunity cost would be going out.
Marginal analysis
An approach to economic decision making based on considering the marginal benefits and costs of a change in behaviour.
3 economic agents:
Household, firms, government
4 factors of production:
Labour
Land
Enterprise
Capital
Renewable resource
Natural resources that can be replenished, such as forests that can be replanted or solar energy that doesn’t get used up.
Non renewable resource
A resource which, once used up, cannot be replenished, such as coal or oil.
Capital factor of production
A man made aid for production e.g machinery, factory or infrastructure
Factors of production (definition)
The resources used in the production process; inputs into production particularly including land, labour, capital and entrepreneurship.
Production Possibility Frontier (PPF) curve
A curve showing the different maximum combination of 2 goods assuming all factors of production are used fully and efficiently
Potential economic growth
An expansion in the productive capacity of an economy
Specialisation
A situation where individual workers, firms or economies concentrate on a particular task or upon producing some goods and services and not others
Division of labour
The separation of discrete roles in the production process of a good and assigning these individual roles to each worker, in the hopes of increasing productiveness.
Market
A set of arrangements that allows transactions to take place.
Due to scarcity, the coordination problem arises. What is the coordination problem?
What to produce? How to produce? For whom to produce?
Market economy
An economy in which market forces are allowed to guide the allocation of resources, it is free from government intervention.
Command economy
An economy in which decisions on resource allocation are guided by the state.
Mixed economy
An economy in which resources are allocated partly through price signals and partly on the basis of intervention by the state. Most modern day markets are mixed economies.
Microeconomics
The study of economic decisions taken by individual economic agents, including households and firms
