Y1 - Nature of economics Flashcards
Define positive statement
Statement based on facts which can be tested as true/false
Define normative statement
Statement based on value judgements which cannot be tested as true/false
Define opportunity cost
The value of the next best alternative forgone
What is the basic economic problem?
Wants are infinite and resources are scare = must choose what to produce, how much to produce and for whom to produce
Define PPF
Graph showing the maximum output of a combination of goods/services that can be produced in an economy with all resources fully and efficiently employed
X-axis = consumer goods
Y-axis = capital goods
Define consumer good
A good that directly provides utility to consumers
Define capital good
A good that is used to produce consumer goods/services
Define specialisation
When an individual, firm, region or country concentrates on the production of a limited range of goods/services
- However = if demand decreases = structural employment
Define division of labour
The breaking down of production into a series of tasks conducted by different workers
What are the advantages of division of labour?
- Increased productivity (lower cost per unit of output = increased efficiency of resources)
- Productivity increases = workers more skilled, higher total production cost but a decrease in cost per unit of output
What are the disadvantages of division of labour?
- Repetition = monotony and boredom (high turnover of staff)
- Easier to replace human with capital (structural unemployment)
- Creates interdependence in production (if one group strike = all production has to stop)
What are the functions of money?
- Medium of exchange
- Measure of value
- Store of value
- Method of deferred payment
What are the different types of economies?
- Free market
- Mixed
- Command
Define free market economy
All resources are privately owned and allocated via the price mechanism. Minimal government intervention
What are the advantages of a free market economy?
- Economic efficiency and lower prices (very competitive)
- Good quality
- Consumers benefit from lower price and more choice
What are the disadvantages of a free market economy?
- Monopolies
- Unequal distribution of income and wealth (lack of welfare support)
- More demerit goods (negative externalities)
- Very few public goods
Define a mixed economy
An economy where some resources are owned and allocated by the private sector and some by the public sector (e.g. UK, Germany, Australia)
Define command economy
An economy where there is public ownership of resources and these are allocated by the government = no role for price mechanism (e.g. North Korea)
What are the advantages of a command economy?
- High levels of output
- Less inequality (government controls wages)
- Government can limit negative externalities easier
- Smaller swings in business cycle (controlled)
- More merit and public goods = better education/healthcare = LR benefits
What are the disadvantages of a command economy?
- Price mechanism cannot operate = ALLOCATIVE INEFFICIENCY (demand shortage or surplus)
- Lack of competition = less efficiency = less output
- Consumers suffer from higher prices and less choice
- Underperformance = economic growth and living standards grow at slower rate
- Poor quality goods/services (no competition)
