1.1: Nature of Economics Flashcards
(30 cards)
What is the key assumption made by economists?
Economists assume that events occur with ceteris paribus, meaning other things are held equal or constant.
What are positive statements?
Positive statements are objective and can be tested with factual evidence.
Example: “Raising the tax on alcohol will lead to a fall in the demand for alcohol.”
What are normative statements?
Normative statements are based on value judgements and are subjective.
Example: “The free market is the best way to allocate resources.”
What is the basic economic problem?
The basic economic problem is scarcity, where wants are unlimited but resources are finite.
What is opportunity cost?
Opportunity cost is the value of the next best alternative forgone when a choice is made.
What are the factors of production?
The factors of production are Capital, Entrepreneurship, Land, and Labour.
What are renewable resources?
Renewable resources can be replenished over time, such as oxygen and solar power.
What are non-renewable resources?
Non-renewable resources cannot be renewed and decrease over time, such as fossil fuels.
What do Production Possibility Frontiers (PPFs) depict?
PPFs depict the maximum productive potential of an economy using a combination of two goods or services.
What does an outward shift in the PPF indicate?
An outward shift in the PPF indicates economic growth due to an increase in the quantity or quality of resources.
What is specialisation in economics?
Specialisation is when a firm/region focuses all of it’s factors of production in order to produce one type of good or service.
What are the advantages of specialisation? (4)
- Higher output
- Potentially higher quality
- Greater variety of goods through trade
- Economies of scale.
What are the disadvantages of specialisation? (4)
- Repetitive work
- Potential structural unemployment
- Decreased choices for consumers
- Higher worker turnover.
What are the functions of money? (4)
- Medium of exchange
- A measure of value
- A store of value
- A method of deferred payment.
What characterizes free market economies?
- Minimal government intervention, where supply and demand allocate resources.
What are the advantages of free market economies? (2)
- Efficiency in resource allocation
- Avoidance of bureaucratic government intervention.
What are the disadvantages of free market economies? (4)
- Inequality
- Potential monopolies
- Overconsumption of demerit goods
- Underprovision of public goods.
What is a disadvantage of a free market? (2)
- Ignores inequality and tends to benefit those who hold most of the wealth.
- There are no social security payments for those on low incomes.
What is a potential issue with monopolies in a free market?
Monopolies could exploit the market by charging higher prices.
What is a concern regarding demerit goods in a free market?
There could be overconsumption of demerit goods, which have large negative externalities, such as tobacco.
What types of goods are not provided in a free market?
- Public goods - national defense
- Merit goods - education
What is a command economy?
A command economy is where the government decides what to produce, how to produce is, and where resources are allocated.
What did Karl Marx believe about the free market?
Karl Marx saw the free market as unstable and believed profits came from the exploitation of labor, advocating for the common ownership of the means of production.
How does a command economy determine what to produce?
What to produce is determined by what the government prefers.
