1.1 Nature of economics Flashcards

Question

What is opportunity cost

Answer 1

Opportunity cost is the loss of the next best alternative when making a decision

Answer 2

The different elements that are required to produce goods and services

Answer 3

Capital (working and fixed) Enterprise Labour Land

Answer 4

Specialisation is the production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way they are able to access all that they need. The division of labour is when labour becomes specialised in a particular part of the production process- each person is allocated a specific job

Answer 5

Adam Smith stated the concept of specialisation and the division of labour and showed how it can increase labour productivity (output per worker), allowing firms to increase efficiency and lower their costs of production. He visited a factory and observed that the pin making process had been split into 18 different operations. As a result, the company were able to produce 5,000 pins per person employed. If the work had been carried out by workers making the whole pin from start to finish, it would have been less a few dozen.

Answer 6

The division of labour enables labour productivity to be increased . Workers will be quicker, better and more efficient as they are concentrating on one thing and so can quickly develop their skills. It also is likely they will have natural abilities or talents in their task. ● This may also lead to a higher quality of goods and services, since workers are more skilled at their jobs. ● It is more cost effective to develop specialist tools, improving speed or quality. ● Time is not wasted moving between jobs and getting out tools etc. ● Workers only need to be trained to do one specific task , rather than many, saving time and money. specialised workers get higher pay more motivation from job satisfaction workers focus on what they are better suited to economies of scale increases (ouput increases, cost decreases)

Answer 7

If someone is only doing one specific task, it can make work very boring which will lead to poor quality of work and people leaving the business. Firms can take some action to reduce this, for example by playing music. ● There is a reduction of craftsmanship and a much more standardised product because of mechanisation. ● If for some reason production in one process is delayed, every other task has to stop until that problem is solved. ● The workforce do not have wide industrial training and could therefore suffer from structural unemployment. greater cost of training workers more expensive raw materials and environmental degradation as global output rises over reliant on every worker

Answer 8

The theory of comparative advantage states countries should specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing. This will help them boost their economy. On the whole, there is greater output globally.

Answer 9

Countries may become over-dependent on one particular export and if this fails their economy may collapse. For example, many developing countries specialise in farming and if crops fail due to weather they will have no income . Areas such as Manchester suffered high unemployment as traditional areas of employment, like shipbuilding, became less important. ● Other countries specialise in non-renewable resources and these could run out, which will result in a huge loss of income for that country. It will also mean the loss of these resources. ● There will be high interdependence and this will cause problems if trade is prevented, for example because of war

Answer 10

output/input

Answer 11

anything that fufills the four functions of money

Answer 12

A medium of exchange: It can be used to buy and sell goods and services and is acceptable everywhere. The problem with barter was that people could only trade if there was a double coincidence of wants: where both parties want the good the other party offers. Since money can be used to buy all goods and services, everyone will accept money as they know they can use it to buy what they want. ● A measure of value: It can compare the value of two goods/services/work, such as a table and a skirt. It is also able to put a value on labour. ● A store of value: It is able to keep its value and can be kept for a long time. With barter, goods such as fruits often went out of date and so could not keep their value. ● A method for deferred payment: Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. This relies on money storing its value.

Answer 13

a situation in which two people each want some good or service that the other person can provide

Answer 14

durability portability divisibility uniformity limited supply acceptability

Answer 15

highly liquid and very stable

Answer 16

not very liquid value fluctuates

Answer 17

how quickly you can turn it into cash

Answer 18

all combinations of maximum output of two goods/services that can be produced when an economy is being productively efficient- all factors of production are fully employed

Answer 19

linear and curved

Answer 20

output is produced using the fewest possible resources/ at the lowest possible where it is not possible to produce more of one good without reducing the production of another

Answer 21

assumes all factors of production are homogenous

Answer 22

because factors of production are specialised. as such, the opportunity cost of production increases

Answer 23

if the quantity/ quality of factors of production increases

Answer 24

label consumer and capital

Answer 25

any point on the curve

Answer 26

any point below the curve

Answer 27

any point above above the curve

Answer 28

A shift of the curve indicates a change in the productive potential of the economy: more consumer and capital goods can be produced or less consumer and capital goods can be produced. There has been a change in the number of resources and/or the technology available to the country and so their potential output has changed.

Answer 29

where resources are allocated through market forces (supply and demand) n a free market economy, individuals are free to make their own choices and own the factors of production without government interference. Resources are allocated through the price mechanism. The consumer determines what is produced by their willingness to spend their money on a good. Consumers make decisions based on satisfaction and producers based on profit. There are no completely free markets in the world today ,because the government has to intervene at least to an extent, for example by issuing money, protecting property rights and breaking up monopolies. Without this, the market mechanism could not work.

Answer 30

Adam Smith (1723-1790) believed in the free market economy and the laissez-faire approach by governments. He explained how there was an ‘invisible hand’ in the market which allocated resources to everyone’s advantage, allowing the greatest good for the greatest number of people. He believed competition in the market caused lower prices as firms wanted to be competitive and so this benefits the consumer as they can get goods cheaply. Smith concluded that each individual’s self-interest managed to produce and purchase the goods and services that society needed. However, he did argue that the state needed to provide goods/services which free markets wouldn’t such as. the laws, property rights and goods such as bridges and roads.

Answer 31

Friedrich Hayek (1899-1992) argued that state control of the economy leads to the loss of freedom. He believed that the poor in free market (or freer market) countries were better off than those in command economies because at least they had personal freedom. Also, he said that central planning by governments led to what a small minority wanted being forced on the whole of society. Hayek believed that, although individuals don’t make supply and demand decisions based on perfect information, they best know what they need in their own situation i.e. a consumer knows how much bread they need and a manager knows how many raw materials they need.

Answer 32

The system is automatic due to the invisible hand; resources are moved out of production of a good when people stop wanting it or costs are too high. ● Consumers have freedom of choice, called consumer sovereignty. ● There is high motivation as people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish. ● There is political freedom. ● Because firms are in competition, they will produce goods at the lowest cost they can, ensuring productive efficiency. ● In general, freer market economies tend to have higher growth.

Answer 33

There tends to be high levels of inequality, since the rich own more factors of production and so can grow richer. ● There may be a lack of merit goods (goods considered as intrinsically good) and little control of demerit goods (intrinsically bad). ● Resources could be wasted on unproductive expenses such as advertising, switching the factors of production and providing competitive services. ● If competition disappears then there may be monopolies, who charge high prices and offer low quality of service. ● There is the problem of externalities.

Answer 34

In a command (planned) economy, all factors of production, except labour, is owned by the state and labour is directed by the state. There is no private property and everyone is assumed to be selfless, working for a common good. Resource allocation is carried out by the government, rather than the price mechanism. The government’s allocation may represent the wishes of the consumer and often focuses on the need to expand certain areas of the economy, such as weapon building. However, planning is so complex that some decisions are left up to the consumer. Workers receive wages and can spend this on what they want, within limits. Some goods can be purchased whilst others, such as houses, are allocated. Income distribution is determined by the government and all workers, no matter their job, tend to receive the same wage, products are standardised and prices are limited causing excess demand and queueing.

Answer 35

Karl Marx (1818-1883) believed in the command economy and criticised capitalism. Marx believed that capitalist’s profit came from exploiting labour as they underpaid workers for the value that they actually created. He wanted remove the difference between the incomes of owners and workers and believed that capitalism would collapse leading to communism. Marx saw businesses growing and workers getting poorer, creating a two class system with a few wealthy capitalists and many underpaid workers. He thought more firms would fail because of competition causing unemployment, lower wages and higher prices and this would lead to discontent amongst the working class. His theory stated that these workers would inevitably rise against property owners and seize control of the means of production. This would lead to a democratic society where everything would be owned by everyone i.e. the fall of capitalism to begin communism.

Answer 36

The state provides a minimum standard of living , ensuring no one is extremely poor as there is less inequality. ● There is less wastage of resources as there is no need for competitive services nor advertising, which is very expensive. ● Long term planning means that the industry doesn’t have to keep changing and shifting resources. This is important as some industries may take a number of years to get established and would fail if planning was short term. ● Standardised products means that they are produced cost effectively. ● As the government, who are generally motivated by the wellbeing of the country, rather than the companies, who are motivated by profit, decide resource allocation, objectives other than profit can be followed: merit goods are encouraged and increased whilst demerit goods aren’t produced.

Answer 37

It is impossible for the state to make so many decisions correctly, which could lead to over or under supply and a waste of resources. ● Decision making will be slow as it has to go through various stages and there could be an increase in bribery and corruption (an increase in bureaucracy). ● As everyone receives the same wage, there is less motivation and efficiency because people know that working harder will not increase their standard of living. ● Consumers lose their freedom and it is often led by dictators

Answer 38

Both types of economies have benefits but also major problems so most economies have tried to move towards some form of compromise economy , called a mixed economy. This is an economy where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country . Each country will have a different amount of control by the government, but it is usually between 40-60%.

Answer 39

Creating a framework of rules: They prevent the abuse of monopolies: a company with more than 25% of market share can be considered as having monopoly power so can take advantage of their customers due to the lack of competition and charge higher prices/provide a poorer service. They can protect customers as they pass a large amount of consumer protection laws to protect the consumers from poor quality products or services. They protect property rights, ensuring whatever a person owns cannot be taken away by someone else. Also, they ensure safety standards, protecting employers and employees. ● Supplements and modifies the price system: They produce public and merit goods, such as emergency services and transport, and limit the production of demerit goods like child pornography. Government action ensures the consideration of externalities. ● Redistributes income: They move income from one group of people to another, from the rich to the poor. They use tax, such as income tax, to take money away from one group then give the money to the poor. This is in the form of benefits for those who are out of work or on low incomes, and in the provision of services for all, such as education and the NHS, allowing the poor to access these services when they might not have been able to afford to. ● Stabilises the economy: The government will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand. They do this through fiscal and monetary policy

Answer 40

percentage of government spending size of public sector work force political and economic freedom

1.1 Nature of economics Flashcards

(64 cards)