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economics > 1.1 nature of economics > Flashcards

1.1 nature of economics Flashcards

1
Q

what are the two factors that determine demands?

A
  • one’s utility
  • your wealth - whether you can afford it or not
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2
Q

what are scarce resources?

A

resources are limited in supply so choices have to be made about their uses

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3
Q

what is the economic problem?

A

as humans we have infinite wanted but finite resources
therefore, resources have to be allocated between competing uses because wants are infinite and resources are not

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4
Q

what are renewable resources?

A

resources which can be exploited over and over again because they have the potential to renew themselves

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5
Q

what are non-renewable resources?

A

resources like coal and oil, which once exploited cannot be replaced

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6
Q

what are sustainable resources?

A

renewable resource which are being economically exploited in such a way that they can be replaced

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7
Q

what is an opportunity cost?

A

the benefits of the next best alternative which has been given up due to a choice being made. it exists as a product of every choice, as a result of the economic problem

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8
Q

what are the 4 factors of production?

A
  • land: the space required for any physical business
  • labour: work force
  • capital: physical things required to operate a business eg. machinery
  • enterprise: someone who is willing to take a risk on their capital to start a business, based on an incentive
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9
Q

what are the rewards for production?

A
  • land // rent
  • labour // salary
  • capital // interest
  • enterprise // profit
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10
Q

what is a positive statement?

A
  • factual statements - that can be proved true or false
  • they can be proven - objective
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11
Q

what is a normative statement?

A
  • an opinion based on judgement - subjective
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12
Q

what is a production possibility frontier?

A

the frontier in which all factors of production are being used to their full potential

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13
Q

what is the shape of a PPF curve?

A
  • usually concave to the origin -> as more resources are allocated, extra output gets smaller, less profit
  • the shape is explained by increasing marginal opportunity cost -> occurs because not all factors of production are equally suited to producing certain goods
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14
Q

what is the marginal tax rate?

A

being taxed for every extra £ that one earns

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15
Q

what does marginal mean?

A

at the next unit

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16
Q

what is the law of diminishing returns?

A

the law that the more factors of production you deploy at the margin, the less you will get in terms of returns

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17
Q

what would cause a right shift in PPF?

A

any improvement in one or more of the factors of production:
- technological advancements -> improvement of capital
- labour - more skills

18
Q

what may cause a left shift in PPF?

A
  • people in the workforce emigrating from the country aka ‘brain drain’
  • depletion of resources due to war or natural disasters
19
Q

what is specialisation?

A

refers to a worker only performing one task or a narrow range of tasks- this happens at all levels of economic activity

20
Q

what is the division of labour?

A

refers to different workers performing different tasks in the course of producing a good or service.

21
Q

what are the advantages of a division of labour?

A
  • increased output per person
  • reduced supply cost -> in theory leads to lower prices for consumer goods and services -> causes gains in economic welfare + productivity
    • lower prices = higher GDP and real income
  • more labour productivity and business profits
  • specialisation creates surplus output that can then be traded internationally
22
Q

what are the disadvantages of specialisation?

A
  • workers may get bored because the task is unrewarding and repetitive, which leads to lower motivation and eventually productivity
  • workers have less pride in their work so the quality of the product suffers
23
Q

what are capital goods?

A

goods that are used to make consumer goods and services

24
Q

who popularised the concept of division of labour?

A

Adam Smith - he used a metaphor pins to describe how specialization would work
- the concept was first used by Ford in the 1920s

25
Q

what are the different functions of money?

A
  • it is used as a universal medium of exchange
  • a store of value
  • a method of deferred payment
26
Q

what are the three different types of economy?

A
  • free market
  • mixed
  • command
27
Q

what is a free market economy?

A
  • resources are allocated through the price mechanism -> the consumer determines what is produced and their willingness to spend money on a good
  • consumers make decisions based on satisfaction and producers make decisions based on profit
  • individuals are free to make their own decisions and own the factors of production, without government intervention and regulation
28
Q

what are some examples of nations that are close to having free market economies?

A
  • hong kong
  • switzerland
  • monaco
  • singapore
29
Q

what is a mixed economy?

A
  • includes both a free market mechanism and government allocating a significant amount of resources in the country d b- although control of gov varies usually between 40-60%
  • mixed resources provided by both public and private sectors
30
Q

what are some examples of nations that have mixed economies?

A
  • UK
  • france
  • germany
31
Q

what is a command economy?

A
  • all factors of production, except labour, owned by the state. labour remains 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 gov
  • gov’s allocation may represent the consumer but also focuses on the need to expand certain sectors of the economy
  • workere receive wages but income is distributed by the gov but they can spend this on what they want (within limits) -> houses are allocated but some goods are purchased
  • wages are the same overall and product price is standardised
32
Q

what are some examples of countries with command economies?

A
  • north korea
  • iran
  • cuba
33
Q

what are the advantages of a free economy?

A
  • prices are determined by market forces (supply and demand); competition brings down prices
  • consumers can buy whatever they want in whatever amounts they please
  • easily adjusts to change
  • little to no government intervention
  • great variety of goods and resources
  • capital flows to where it will get the greatest return
34
Q

what are the disadvantages of a free economy?

A
  • there is a risk of market failure (inefficient allocation of goods and services) and consequences can be severe like in the 2008 market crash
  • many argue against the excessive power of firms because they may always work toward the benefit of the consumer
  • does not always provide the basic needs of everyone in society, which can lead people to slip into poverty - may result in unemployment and inequality
  • may make it difficult for the government to provide adequate social services
35
Q

what are the advantages of a command economy?

A
  • low or non-existent unemployment
  • ‘equality’ among citizens because the government allocates jobs and homes
  • the government can direct businesses to invest in certain sectors of the economy
  • serves people collectively instead of individuals; focus on equality
  • distributes wealth among all of society
  • products produced fulfill needs
36
Q

what are the disadvantages of a command economy?

A
  • lack of incentive for innovation and competition
  • infringes on freedom for the workers -> leads to mediocre quality workers
  • less flexibility for businesses and workers
  • often there is insufficient resource distribution ie. shortages and surpluses
  • cannot determine society’s objectives and consumer preferences as well as the market can
  • cannot easily adjust to change
37
Q

what are the advantages of a mixed economy?

A
  • acts a midway between a free and command economy - efficient production but also strategic allocation of resources, as well as the improvement of social welfare
  • the government provides incentive for people to work -> safeguards personal freedom
38
Q

which economist supported the theory of a command economy? and why?

A

karl marx:
- he believed in a big government because he saw capitalism as something that alienated the working class (proletariat)

39
Q

which economists supported the theory of a free economy? and why?

A

adam smith:
- believed in little to no government
- argued that a free market system alongside free trade, would produce true national wealth that benefits all social classes

friedrich hayek:
- believed that free market allowed for creativity, innovation and entrepreneurship, all of which are necessary for societies to prosper

milton friedman:
- believes there should be limited involvement in the free market where resources can be freely allocated

39
Q

which economist supported the theory of a mixed economy? and why?

A

john maynard keynes: believed that governments should play an active part in their countries’ economies

39
Q

what are the disadvantages of a mixed economy?

A
  • may not lead to optimal use of resources
  • government intervention can hinder progress

economics (21 decks)

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