Unit 1: Nature of Economics Flashcards
Ceteris paribus
Assuming all other things are constant
What is meant by a model in economics?
A simplified representation of reality to provide insight into economic decisions and events
How could the ceteris paribus assumption be used when talking about price and demand?
Ceteris paribus, if the price of an item falls, demand will increase.
Why do economists use models, assumptions, and ceteris paribus?
To simplify situations in order to better study and understand them
How does economics differ from a science like physics?
It is a social science, so it studies people, not matter like a hard science such as physics.
Define positive economics
A branch of economics that uses statements about ‘what is’ i.e that can be proven
Define normative economics
A branch of economics that uses statements that contain a value judgement (think should, ought, unfair etc. , more opinion based)
How does value judgment affect policy making?
Different economists can make different conclusions, judgements, and predictions from the same statistic
What is the purpose of economic activity?
Satisfying needs and wants through the production of goods and services.
What is the fundamental economic problem?
There are limited resources, however people have unlimited wants and needs.
What are the four categories of economic resources?
Capital, Enterprise, Land, Labour
Define capital
The stock of goods used to make other goods and to provide services, such as machines.
Define land (economics wise)
Goods like minerals, land itself, and all the resources we take from the earth e.g raw materials
Define labour (economics wise)
The workforce, and their skills, abilities and intelligence
Define Enterprise
Risk takers that are prepared to organise businesses to make goods and services (e.g someone like Alan Sugar)
What is the difference between renewable and non-renewable resources?
Renewable - can be remade
Non-renewable - finite, limited supply
Why is choice a necessary element in the economic problem?
Resources are scarce, therefore a decision must be made about what to have
Define opportunity cost
The next best alternative forgone when an economic decision is made
Examples of opportunity costs consumers face
Buying products (choosing what to buy) Keeping items or selling them Paying someone to do something for you (as opposed to doing it yourself)
What are the 4 main economic groups?
Consumers, producers, firms, government
Examples of opportunity cost that producers face
What materials to use
What equipment to buy
Spending on rent and utilities
Examples of opportunity cost that the government faces
Funding new buildings (e.g choosing between a university and a hospital)
Spending on different sectors (e.g healthcare vs education)
What is specialisation?
*** When you don’t produce everything you need to survive, and instead become an expert in a specific skill then trade the surplus.
What are 3 benefits of specialisation?
Increased productivity
REDUCED COST OF TRAINING
REDUCED COST OF CAPITAL (more specialised to each task)
What is meant by productivity and how can you measure it?
Productivity is how much output of a good is created PER UNIT OF INPUT.
It can be measure by dividing output by input, e.g GDP per hour worked.
Why is a system of exchange an essential part of specialisation?
It means the surplus of goods can be efficiently traded without having to barter (trying to find a double co-incidence of wants).
What is the division of labour?
Division of labour is splitting a task into subtasks and allocating labour to these subtasks.
How does the division of labour increase productivity?
Workers become more skilled in a specific area, meaning they are more efficient.
What are 3 disadvantages of specialisation?
May become boring to keep doing the same tasks.
BOTTLENECKS (hold-ups) may occur in the production line.
REDUCE IN QUALITY due to mass productions
What are the 4 functions of money?
Medium of exchange
Store of value
MEASURE OF VALUE
METHOD OF DEFERRED PAYMENT
Define an economic agent
Individuals, firms and organisations who are involved in economic activity
Define economic welfare
A consumer’s utility or satisfaction received from the allocation of resources
Define a free market economy
An economy where there is very little government involvement in providing goods and services
Define a mixed economy
An economy where both the free market mechanism and the government control the allocation of resources
Define a command/planned economy
An economy where the government, through a planning process, allocates resources
Define economic needs
The things a consumer needs to survive e.g water
Define economic wants
The things consumers want but do not need e.g branded clothes
Define scarcity
A situation that arises when people have unlimited wants in the face of limited resources
Define economic goods
Goods which are scarce and therefore command a price
Define free goods
Goods without opportunity cost and therefore do not command a price
Define factors of production
The resources in an economy that are combined to produce goods and services
Define sustainable resources
Renewable resources which are economically exploited in a way so that they don’t run out
Define production possibility frontier
Shows all the different combinations of two goods that can be produced by an economy when all factor of production are fully and efficiently used
Define allocative efficiency
Achieved when society is producing an appropriate amount of goods relative to consumer preference
Define productive efficiency
When output is produced at lowest cost per unit
Define marginal analysis
An approach to economic decision making based on considering the additional benefits and costs of a change in behaviour
Define potential economic growth
An expansion in the productive capacity of an economy
Define GDP
A measure of the economic activity carried out in an economy over a period of time
Define productivity
Measures output per unit of input
Define a market
A set of arrangements that allows transactions to take place
Define microeconomics
The study of economic decisions taken by individual economic agents e.g households
Define macroeconomics
The study of the relationships between economic variables at an aggregate level
Name 2 advantages of a free market economy
More choice for consumers
Motive for profit so more income
Responds to changing consumer wants and needs
Name 2 advantages of a mixedd economy
Safety net to alleviate poverty
Gov can stabilise economy and stop market failure
Prevents monopolys
Name 2 advantages of a command economy
Removes inequality
Theoretically no unemployment
Name 2 disadvantages of free marke pt economy
inequality
No safety net
unstable
monopoly abuse
Name a disadvantages of a mixed economy
Gov intervention may cause even bigger problems
Name 2 disadvantages of a command economy
no incentive to work
cannot respond to market forces - limitwd choice and low output
define barter
swapping one good for another without using money
