1.1 Nature of Economics Flashcards
(49 cards)
Economics
The study of the allocation of scarce resources.
‘Ceteris Paribus’
‘all other things being equal’ - all other variables are held constant
Why is Econ considered a social science?
-inability to conduct scientific experiments due to complexity of human nature and significant number of social interactions that are taking place in an economy
Economic models
-simplified version of reality
-due to complexities economists build models
-based on range of assumptions
-social scientific method - models are developed by economists, once a hypothesis has been repeatedly proven or rejected in different circumstances
Positive statement
A statement based on facts which can be proved or disproved
Normative Statement
A statement based on value judgements and are subjective so cannot be tested true or false.
Basic Economic Problem
Resources are scarce but wants are infinite, therefore choices must be made.
Choices to make by societies to face problem of scarcity
-What to produce and how much to produce it?
-How should the goods and services be produced?
-How should the goods produced be allocated?
Factors of Production
Land, Labour, Capital, Enterprise
Renewable resources
A resource whose stock level can be replenished naturally over a period of time.
Non-renewable resources
A resource whose stock level decreases over time as it is consumed.
Opportunity cost
The next best alternative foregone.
-scarcity means choices and each choice involves an opportunity cost.
-real cost measured
Economic goods
-goods created from resources that are scarce (limited in supply)
Free goods
Goods that are unlimited in supply and therefore have no opportunity cost.
Production Possibility Frontier
The maximum potential output of a combination of goods an economy can produce when all its resources are fully and efficiently employed
Capital Goods
goods required to produce other goods
Consumer goods
Goods designed for use by final consumers/give satisfaction (utility).
Any point on or inside the PPF is
obtainable - all resources fully employed
outside PPF is
unobtainable , because PPF shows the maximum potential output using all available resources
Inside PPF
-unemployed resources or resources not being allocated efficiently
marginal increase in the output of capital goods
means some consumer goods must be sacrificed
if PPF were a straight line
then opportunity cost would be constant
More Fop shown by
rightward shift of PPF - increase in productive capacity of economy - economic growth
movement along PPF
-change in combination of the two goods being produced - causes opportunity cost
