Unit 1-Basic economic ideas and resource allocation Flashcards
What is economics?
A social science subject that studies how human beings manage the basic economic problem and resource allocation in the most efficient way
Why is economics a social science?
social - focuses on human behaviour
science - theories are put forward and invesitigated
What are theories/models?
A simplified representation of what has taken place and usually explained mathematically.
They can be used over and over in different contexts, to test theories.
Define
Positive statements
+words used
statements that can be settled with facts
they key words are true/false, yes/no
true is taken as to be consistent with facts
Define
Normative students
+key words
- statements based on opinion, moral beliefs
- can not be proved by facts, settled by voting
- ought would should
What is the fundamental economic problem?
unlimited needs and wants and limitied resources
to satisy the needs and wants
What are the factors of production?
Land
Captial
Labour
Enterprise
Define
Oppurtunity Cost
The cost of the forgone alternative
What are the economic problem questions?
What to produce
How to produce
For whom to produce
Define
Scale of the preference
How human beings arrange their wants to minimise oppurtunity cost
Define
Ceteris Paribus
used by economists to refer to a situation where other things are held constant or other things remain equal
The margin
Time periods
Short Run
some factors of production are changed, not all of them
At least one factor of production is fixed
Time periods
Long run
all factors of production can change
Time periods
very long run
all factors of production can change as well as other external variables
eg. technology\
Factors of production
Land
natural resource
valued on both quality and quantity and can be improved
Factors of production
What is the factor reward for land?
Rent
Factors of production
Labour
human resource
Quality - skilled or unskilled depending on levels of eductation
Quantity - affected by working population, cultural practices, immigration
Factors of production
What is the factor reward for labour?
salaries/wages
Factors of production
Capital
Physical resource that is human made and that aids production
Combines land and labour to produce goods and services
eg offices machines and infrastructure
Factors of production
What is the factor reward for capital?
Interest
Factors of production
Enterprise
Form of human capital involves organising production and taking risks to be able to produce the goods and services themselves
Factors of production
Factor reward for enterprise
Profit
First mover advantage
an advantage gained by a company/enterprise that first intoduces a good or service to the market
Benefit of economies of scale?
the more goods produced, the cheaper it is to produce and the lower the cost per unit for consumers
Define
Non-excludable
Once provided you can not stop another from using it
Define
Non-rival
one’s consumption does not diminish anothers
Define
Non-rejectable
Once provided you can not refuse
Forms of labour?
Capital saving and Labour saving
Advantages of division of labour
- Efficiency at specific operations
- Saving equipment
- Saving time
- Saving skills(new jobs)
- Allows for greater degrees of mechanisation
Disadvantages of division of labour
- Loss of flexibility
- Loss of other skills
- Monotony
- Interdependence
- Increased risk of unemployment
What is required for specialisation to work properly
Large markets for standardised products, large output and large labour force and good transport systems
What is direct production?
one person makes a product beginning to end
What is Indirect production?
multiple people perform specific tasks to produce one good
Market systems
allocative mechanism in charge of resource managemnet to resove the fundamental economic problem
Describe
Planned system
- Government is in charge of resource allocation
- This is done by the central planning committee
- Long bureaucratic chain of command
Market systems
Role of the central planning committee in the planned market system?
- Allocation of resources
- Setting targets for the economy
- Planning for long term growth
Market systems
Advantages of a Planned economy
- Public goods are produced
- No wasteful duplication and competition
- economies of scale
- Decisions not influenced by the price mechanisms
Market Systems
Disadvantages of a Planned economy
- Bureaucracy
- Limited choices for consumers
- No customer sovereinity
- Low motivation of workers- low quality output
- Shortages and rationing due to mistakes of the cpc
Describe
Market economy
Controlled by private capitalists and the price mechanism
Market systems
Advantages of Market economies
- Customer sovereinity
- More options for the consumers
- better quality of goods due to competition
- High motivation of workers
Market systems
Disadvantages of Market systems
- Wasteful duplication
- Demerit goods
- Unstable economy
- Public goods are not produced
Define
Free Goods
abundant in supply with no opputunity cost
non-excludable and non-rival
can be turned into economic goods
Define
Private/economic goods
scarce and have an oppurtunity cost
Excludable and Rivalrous
Define
Zero-marginal cost
No direct cost to you, but bought by the government with your taxes
Define
Public goods
Produced by the government because market would underproduce them
non-excludable
non-rival
non-rejectable
zero-marginal cost
Define
Merit goods
Produced and subsidised by the government to encourage consumption because they have positive externalities, and would be underproduced by the market
Define
Demerit goods
Goods with negative externalities that are often over consumed dues to lack of education on their effects.
Heavily taxed by the government to discourage use and consumption
Production Possibility Curve
A representation showing the maximum quantity of two goods that can be produced given the current resources and state of technology, assuming all resources are fully and efficiently utilized
What does point B represent on the PPC
Full utilization of resources for good A
