1.1 Nature of Economics Flashcards
(31 cards)
Economic Models
A theoretical concept that looks at how different variables interact
Economic Assumptions
Economic Agents are rational and choices reflect this
Consumers want to maximize utility
Producers want to maximize profits
Ceteris Paribus
All other factors remain the same
Positive Statements
Statements are objective, factually based comments which can be scientifically tested
Normative Statements
Statements are subjective, opinion-based comments which cannot be scientifically tested
Opportunity Cost
The benefit lost (cost) of the next best alternative when making a choice
Trade-Offs
The cost of foregoing all other alternatives after the opportunity cost
Renewable Resources
Goods that can be replenished (e.g replanted)
Non-Renewable Resources
Goods that are in a finite supply and therefore will run out
Sustainable Resources
Goods that are used for economic activities in a way so that they will not run out
The 3 economic questions
What to produce
How to produce
For whom to produce for
The economic problem
There are infinite wants but only a finite amount of resources available (scarcity)
Choices need to be made to allocate resources
Production Possibility Frontiers (PPF)
Show different combinations of output for two products
PPF for economic output
Shows the maximum possible output combination for two goods or services an economy can produce when resources are fully employed
Consumer Goods
Goods that are used by people to satisfy needs and wants
Capital Goods
Goods which are used to produce other goods (e.g roads, machinery and factories)
Economic Growth
The percentage change of total output (GDP) of a country
Causes for an outward shift in the PPF
- Technological Advancements
- Growth in the population (immigration)
- Increased Productivity
- Increased factors of production (long term)
Causes for an inward shift in the PPF
- Natural disasters
- Civil unrest
- Emigration
- Ageing population
- Obsolete equitment
Specialisation
When economic units concentrate on producing a specific good or service
Specialisation advantages
Increases output as economic units become more effective and efficient in what they produce
- No switching between tasks
- Allows trade between economic units
- Can exchange for goods and services that the economy is not good at producing
Specialisation disadvantages
Work becomes monotonous (repetitious)
- Can increase absenteeism and affect productivity
Prone to structural unemployment
Reduces flexibly of workforce
- Changes in demand cannot be met quickly
Free market economy
Resources are allocated through the market than through the government and planning
- Private sector ownership
- Limited government intervention
Command economy
Resources are allocated, including labour, by the government and market mechanics play a small part
- Greater equality
- A greater supply of merit goods
