Yr1 Economic Methodology and the Economic Problem Flashcards
PART 1
ECONOMIC METHODOLOGY
What is a positive statement?
A hypothesis that can be justified using statistical information
What is a normative statement?
An opinion based statement
Definition of economic welfare?
Financial well-being of an individual/group
What does productive efficiency mean?
Optimal method of producing goods (low costs > 100% efficient)
What does allocative efficiency mean?
Optimal distribution of goods and services
PART 2
THE NATURE AND PURPOSE OF ECONOMIC ACTIVITY
What’s the economic problem?
Scarcity > unlimited wants + finite resources
PART 3
ECONOMIC RESOURCES
What are the 4 factors of production?
- capital
- enterprise / entrepreneurship
- land
- labour
What is gained by the 4 factors of production?
Capital > interest
Enterprise > profit
Labour > wages
Land > rent
PART 4
SCARCITY, CHOICE AND THE ALLOCATION OF RESOURCES
What are the characteristics of a free market + give 3 examples?
- market allocated resources
- driven by profit motive
- limited role of state government (gov intervention)
- private sector economies
SINGAPORE, SWITZERLAND, IRELAND
What are the characteristics of a mixed economy + give 4 examples?
- gov intervention in markets
- mix of state and private ownership
- mix will vary country to country
USA, UK, GERMANY, CHINA
What are the characteristics of a command economy + give 2 examples?
- most resources are state owned
- planning allocated resources
- little role for market prices
CUBA, NORTH KOREA (communism)
Pros of a mixed economy? (4)
- Competition drives innovation and intervention
- Profit motive stimulates capital investment
- Competitive prices for consumers and suppliers
- An efficient allocation of resources
Cons of a mixed economy? (4)
- Some firms grow so large they gain significant monopoly power
- Firms tempted to cut costs and so exploit labour
- Goods that are bad for use may be overproduced
- Some members of society are unable to work
Pros of command economy?(4)
- Lower levels of inequality
- Mass unemployment unlikely
- Resources allocated for common good
- Faster to get large scale infrastructure projects built
Cons of command economy? (4)
- Low productivity
- State can suffer from information failures and corruption
- Absence of incentives for workers and businesses
- Problems in choosing prices of goods and services
Definition of opportunity cost?
The next best alternative foregone
PART 5
PRODUCTION POSSIBILITY DIAGRAMS
What is meant by production possibility?
- how different combinations of goods and services can be produced
- demonstrate economic growth and opportunity cost
What causes a shift in the PPC/PPF? (5)
- Higher productivity/ efficiency in the factor of inputs
- Better management of FofP
- Incr supply of capital/labour
- Innovation and wanting of new products/resources
- Discovery/extraction of new natural resources
What does it mean if the point is inside the PPF?
The firm is inefficient and underutilising resources
