1.1 - Nature of Economics Flashcards
What are the 3 questions of the economic problem
What goods / services are produced
How do we produce them
Who do we produce them for
What decisions do each economic agent make
Producers- what to produce and their price
Consumers- what to purchase and how much to spend
Government- how much they will involved in consumption and production
What is the definition of opportunity cost
‘The value of the next best alternative foregone’
What is the law of diminishing returns
As you increase units of one resource and keep other factors constant, the marginal benefit form the extra units will eventually start to decline
What type of efficiency are all points on a PPF
Productively efficient
What are the types of static efficiency
Allocative and productive
What is productive efficiency
With all available inputs and technology it is impossible to produce more of one good without decreasing the quantity of anther good
What is allocative efficiency
When a specific combination of goods is efficient for society (maximises social welfare)
What does economies of scale mean
As production increases, average unit cost decreases
What book did Adam Smith prove that division of labour boosts productivity
The Wealth of Nationa
What are advantages of specialisation
Economies of scale lowers long run average costs
Reduces cost of training
Increases labour productivty
What are disadvantages of specialisation
Not flexible
Boredom
Lack of self sufficiency
What are the functions of money
Unit of account
Deferred payment
Medium of exchange
Store of value
What is Adam Smith’s view
Advocate for free market and power of invisible hand
Consumers and producers lead to mutually beneficial allocation of resources
No monopolies
Low barrier to entry
What is Karl Marx’s view
Free market creates inequality and exploits the working class
Revolutions would seize production
Communism
