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Economics Revision > Unit 1 - Basic economic ideas and resource allocation > Flashcards

Unit 1 - Basic economic ideas and resource allocation Flashcards

1
Q

1.1 What’s the economic problem?

A

The situation of relatively scarce resources in relation to the unlimited wants and needs of people

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2
Q

What are wants and needs?

A

Wants: Demand for a good that’s less important than the demand for a need.

Needs: Demand for something that’s essential

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3
Q

What’s scarcity?

A

When there are insufficient resources to satisfy all the needs and wants of people

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4
Q

Who makes decisions on the allocation of scarce resources?

A

Individuals, firms, and governments

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5
Q

Define opportunity cost

A

It’s the next best alternative that is forgone as a result of making a choice

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6
Q

3 basic questions of resource allocation

A
  1. What goods to produce
  2. How to produce the goods
  3. For whom to produce the goods
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7
Q

1.2 Define positive statement

A

As statement based on factual evidence. It is objective.

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8
Q

Define normative statement

A

A statement that is based on personal beliefs/opinions and involves making a value judgement. It is subjective.

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9
Q

Define value judgement

A

A judgement made that’s a reflection on particular beliefs or values

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10
Q

What is ceteris paribus?

A

Ceteris Paribus means all other things being equal where other factors which could influence a relationship between two variables are assumed to remain constant

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11
Q

Define short run

A

It’s a period of time in which at least one factor of production remains fixed in supply

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12
Q

Define long run

A

It’s a period of time where all factors are variable, and output can be increased by using more of all variable factors

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13
Q

Define very long run

A

A period of time where technical progress is taking place, and it affects the firm’s ability to supply

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14
Q

Define resources

A

Inputs used to produce goods and services

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15
Q

1.3 What is land FOP?

A

Land is related to the natural resources of an economy (farmland, rivers, lakes)

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16
Q

What is labor?

A

Labor is related to the workforce of the economy in terms of physical and mental effort used in production

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17
Q

What is capital?

A

Capital is the human-made aids of production (machinery, technology)

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18
Q

What is enterprise?

A

A FOP that takes a risk in organizing the other 3 FOP that promotes efficiency and increases output

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19
Q

What is an entrepreneur?

A

An individual that takes the risk of organizing the other 3 FOP

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20
Q

What is human capital?

A

Refers to the human aspect of production (talent, knowledge, abilities)

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21
Q

What is physical capital?

A

Non-human resources used in the production of goods and services (tools, buildings, machinery)

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22
Q

State the rewards for each FOP

A

Land = rent
Labor = wages/rent
Capital = interest
Enterprise = profit

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23
Q

Define specialization

A

Specialization is the concentration on the provision of particular goods or services rather than other products and it encourages firms, individuals and regions to focus on what they are best at producing

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24
Q

Define division of labor

A

The process where workers specialize in or concentrate on particular tasks

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25
Q

Advantages of division of labor

A
  1. Saves time
  2. Application of technology is made easier
  3. Increases workers’ skills
  4. Increased productivity
  5. Potential to earn higher earnings
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26
Q

Disadvantages of division of labor

A
  1. Workers’ dependency on others
  2. Dependency on technology
  3. Frustration, boredom, demotivation
  4. Over-concentration on particular skills
  5. Unemployment
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27
Q

What are the 2 main roles of an entrepreneur in an economy?

A
  1. The organization of other factors like land, labor, capital
  2. The risk taking that arises with uncertainty that will be associated with the action they take
28
Q

Define economic system

A

It’s the way in which a country tries to solve the basic economic problem

29
Q

Define allocative mechanism

A

Its where scarce economic resources are allocated between alternative uses

30
Q

Define consumer sovereignty

A

It’s the idea that consumers have the spending power to buy and is able to influence production decisions

31
Q

Characteristics of a market economy

A
  • Decisions are made by sellers and buyers who are expected to act in own self-interest
  • producers’ main aim is to maximize profits
  • consumers’ main aim is to maximize utility
  • efficient allocation of resources is determined by the market forces of demand and supply
  • little govt intervention and more control from private sector
32
Q

Define market economy

A

Decisions about allocation of resources are held in private sector by buyers and sellers

33
Q

Define price mechanism

A

Changes in price (resulting from changes in demand/supply) result in changes of allocation of resources in market economy

34
Q

Advantages of market economy

A
  • No need for govt intervention as resources are allocated through market forces so govts can focus more on international diplomacy
  • Producer’s motive is profit maximization which can be an incentive for sellers to be more innovative and cost-effective
  • Cost-effectiveness means lower prices for consumers so they’ll benefit from more choice
  • Maximizes producer and consumer surplus
35
Q

Disadvantages of market economy

A
  • Public goods wouldn’t be provided (police forces)
  • Over-consumption and over-production of demerit goods
  • Under-consumption and under-production of merit goods
  • Can lead to negative externalities like noise or visual pollution
36
Q

Characteristics of a planned economy

A
  • Decisions are held by govt
  • Govt will own most or all of economic resources
  • Prices are determined by govt rather than price mechanism
  • Key objective is to maximize social welfare than profits
37
Q

Advantages of planned economies

A
  • Economic decisions can be taken in the interest of the whole society as govt controls most/all economic resources
  • Govt decides which goods to be produced and to whom they’re going to be supplied
  • Products more likely kept under control and lower rate of unemployment
38
Q

Disadvantages of planned economies

A
  • Bureaucratic because govt intervenes in so many areas which makes system inflexible and rigid to changes in consumer demand
  • Less incentive for firms to be innovative as profit motive isn’t important; variety of goods is less and may be of poor quality
  • Majority of firms will be state owned which means lack of competition, high levels of inefficiency and low levels of productivity
39
Q

What is a mixed economy?

A

It’s where the decision on allocation of resources is taken in both public and private sector

40
Q

Characteristics of mixed economies

A
  • Ownership of economy’s resources is divided by public and private sector
  • Private sector is influenced by self-interest (producers’ max profits and consumers’ max welfare) while public sector has broader aims relating to public interest
  • Competition in private sector and public sector has tax and regulation
  • Allocation of resources in private sector is held by price mechanism, for public decisions are taken by govt
41
Q

What is a transitional economy?

A

An economy that changes from a planned economy to a mixed economy

42
Q

Issues of a transitional economy

A
  1. Inflation
  2. Industrial unrest (disagreement between employers and employees)
  3. International trade
  4. Employment
  5. Output
  6. Reduction in welfare services
  7. Markets
43
Q

Define PPC

A

A curve that shows the different combinations of products that can be produced over period of time given existing resources and level of tech available

44
Q

What does a PPC show?

A
  • shows the idea of choice
  • concept of opportunity cost
  • shows max possible output and production that can be achieved
  • in order to increase the output of one product, the output of the other needs to be decreased
45
Q

PPC in microeconomics

A
  • Studies decisions of firms/individuals
  • Studies individual markets in economy
  • PPC can be used in the concept of opportunity cost or productive efficiency
46
Q

PPC in macroeconomics

A
  • Studies whole of the economy
  • Eg: Rate of inflation, unemployment, economic growth, etc
  • PPC can be used to show level of unemployment or economic growth
47
Q

Define the law of diminishing returns

A

As EXTRA number of resources are used in production, this leads to smaller increase in output

48
Q

Define increasing opportunity cost

A

The extra production of one good involves the increasing sacrifice in another good

49
Q

Causes of a PPC to shift to the right

A
  • Investment in improved technology
  • More supply of labor
  • New resources
  • Improvement of human capital
  • Better management of resources
  • Encouraging enterprise culture
50
Q

Define economic growth

A

This is the increase of the productive potential in the economy

51
Q

Define free good

A

A free good is a good that is NOT scarce, so it doesn’t need a mechanism to allocate it

52
Q

Define private good

A

A private good is both rival and excludable. It is relatively scarce, so needs an allocative mechanism

53
Q

Define rival and excludable

A

Rivalry - When one person consumes a good, there is less available to others

Excludable - A producer can exclude consumers from using the good by charging a price for the product

54
Q

Define public good

A

A public good is a good that is non-rival and non-excludable.
- E.g. streetlamps, police, national defense

55
Q

Define non-rivalry

A

When one person consumes a product, it doesn’t reduce the availability of that product to others

56
Q

Define non-excludability

A

For a public good, it’s not possible to exclude any person from using that good

57
Q

What’s the free rider problem?

A

A type of market failure that occurs when people who benefit from a public good don’t pay/ under-pay for it

58
Q

What’s non-rejectability?

A

It’s the idea that certain public goods can’t be rejected such as the police or armed forces

59
Q

Define quasi goods

A

Quasi (near/almost) goods have characteristics of both public and private goods

60
Q

Define merit goods

A

Merit goods are a product which is under-produced and under-consumed as a result of imperfect information held by consumers.
E.g. Education, healthcare, public libraries

61
Q

Define imperfect information

A

It’s a situation where people (both producers and consumers) lack the necessary information to make rational decisions, reducing the extent of efficiency

62
Q

Define demerit goods

A

Demerit goods are products that are over-produced and over-consumed as a result of imperfect information held by consumers.
E.g. Alcohol, tobacco

63
Q

How can governments reduce the consumption of demerit goods?

A
  • taxation on demerit goods making it expensive
  • this will reduce the consumer’s demand
  • depends on PED of product
  • PED is likely to be price inelastic due to addiction so consumers will less likely reduce their consumption of good
64
Q

Define information failure

A

This is when people don’t have the full information needed to make informed decisions on their behavior

65
Q

What is imperfection in the market?

A

It’s where a market doesn’t behave as it’s expected to which leads to a misallocation of resources

Economics Revision (5 decks)

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