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Economics > 1.1 Nature of economics > Flashcards

1.1 Nature of economics Flashcards

1
Q

Ceteris Paribus

A

The assumption that other things are being held equal or constant, so nothing else changes.

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2
Q

What type of statement is a positive statement?

A

Objective

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3
Q

Why are positive statements objective?

A

Because they can be tested with factual evidence

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4
Q

What are normative statements based on?

A

Value judgements

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5
Q

What is the basic economic problem?

A

Scarce resources, as wants are unlimited but resources are finite, so choices need to be made.

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6
Q

What is the opportunity cost?

A

The value of the next best alternative forgone.

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7
Q

4 factors of production

A

Capital, Entrepreneurship, Land and Labour

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8
Q

Description of Capital

A

The equipment, factories and schools that are needed to produce goods and services.

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9
Q

How is capital different from land?

A

Capital needs to be produced first.

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10
Q

Who pays for capital?

A

Much of capital is paid for by governments.

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11
Q

What is enterprise?

A

willingness to take a risk to make a profit.

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12
Q

What is Land?

A

Territory and natural resources.

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13
Q

What is Labour?

A

Human capital

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14
Q

What does a PPF show?

A

What is possible using a particular level of resources.

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15
Q

What can shift the PPF curve?

A
  • Increased resources

- Improved technology or improvement to labour.

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16
Q

How to find out if there was economic growth from a PPF?

A

An outward shift

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17
Q

Difference between capital goods and consumer goods

A

Capital goods are goods that can be used to produced others goods. E.G. Machinery
Consumer goods are goods which cannot be used to produce other goods e.g. clothing.

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18
Q

Specialisation

A

When each workers completes a specific task in a production process

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19
Q

Who stated specialisation?

A

Adam Smith.

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20
Q

How does a division of labour lower average costs of production?

A

(1) Through the division of labour,
(2) Each workers’ productivity increases
(3) Firms then take advantage of this increased efficiency
(4) lower their costs of production.

21
Q

Advantages of specialisation

A
  • Higher output and higher quality, because production focuses on what people and businesses are best at.
  • Greater variety of goods and services produced
  • More opportunities for economies of scale, so the size of the market increases
  • More competition gives an incentive for firms to lower their costs, which helps keep their prices down.
22
Q

Disadvantages of specialsiation

A
  • Repetitive work, lowers motivation of workers affecting quality and productivity.
  • Structural unemployment since skills aren’t transferable
  • Higher worker turnover for firms.
  • Increased specialisation may decrease variety for consumers.
23
Q

4 functions of money

A

Medium of exchange
Measure of value
Store of value
Method of deferred payment

24
Q

Money as a medium of exchange

A

Without money, trade was done through bartering. However people didn’t always get exactly what they wanted or needed, and goods and services exchanged weren’t always of the same value. Exchange could only occur if there is a double coincidence of wants. Money defeats this issue.

25
Q

Money as a store of value

A

Money is able to keep its value and doesn’t expire. With bartering, goods may expire and would therefore lose their value.

26
Q

Money as a measure of value

A

Money places a value of different goods and services, money also places a value on labour

27
Q

Money as a method of deferred payment

A

Money can allow for debts to be created so that people can pay later, however this relies on money keeping its value.

28
Q

What are markets?

A

A way of allocating resources

29
Q

How does a free market economy work?

A

Resources are allocated based on supply and demand and the price mechanism.

30
Q

Under a free market economy who makes economic decisions?

A

Private individuals and firms.

31
Q

How does a government intervene in a free market economy?

A

They implement laws and public services.

32
Q

Examples of free market economists

A

Adam Smith and Hayek

33
Q

Free market economy: What to produce?

A

Determined by consumer preference

34
Q

Free market economy: How to produce it?

A

Producers seeking profit

35
Q

Free market economy: For whom to produce it for?

A

Anyone who has the purchasing power to buy the good.

36
Q

Advantages of a free market economy

A
  • Efficiency - as any product can be sold only those with the best value will be demanded so firms are encouraged to be efficient.
  • Entrepreneurship - the reward for new ideas can make entrepreneurs good money. This would encourage risk-taking and innovation.
  • Choice - incentive for innovation can lead to an increase in choice for consumers
37
Q

Disadvantages of a free market economy

A
  • Inequality - large differences in wealth, anyone that is unable to work would receive no income.
  • Non-profitable goods may not be made - E.g. drugs to treat rare conditions may not be produced as there isn’t potential profit.
  • Monopolies, successful businesses may become the only suppliers of a product
38
Q

How does a command economy work?

A

Where the government allocates all of the resources in an economy to where they think they’re most needed.

39
Q

Economists who support command economies

A

Karl Marx

40
Q

Command economy: What to produce?

A

Determined by government preference

41
Q

Command economy: How to produce it?

A

Government and their employees

42
Q

Command economy: For whom to produce it:

A

Who the government prefers.

43
Q

Advantages of a command economy

A
  • Maximise welfare - prevent inequality by redistributing income fairly.
  • Low unemployment - the government can try and provide all with a job + salary.
  • Prevent monopolies
44
Q

Disadvantages of a command economy

A
  • Poor decision making - lack of information makes decisions poor and slow.
  • Restricted choice - consumers have limited choice.
  • Lack of innovation - no incentives to take risks as there is no profit.
45
Q

Role of state in a mixed economy

A

Provide public goods and merit goods.

46
Q

Adam Smith

A
  • Believes in free market
  • ‘Invisible hand’, would allocate resources in society’s best interests. This is because of self-interest, consumer want to maximise own benefits, producers want to maximise profits.
  • Believed in order for free market to work properly, there can be monopolies.
  • Monopolies can be prevented through low barriers to entry which would increase competition.
  • Also wrote about specialisation of labour
47
Q

Karl Marx

A
  • Critical of FM as small rling class would dominate and exploit the larger working class.
  • Exploitation would lead to revolution , where proletariat would take over and control production, giving everyone a share in ownership of resources
  • Led to communism in 20th, but collapse of communism led to him being discredited.
48
Q

Friedrich Hayek

A
  • Supports FM.
  • Govs shouldn’t intervene to allocate resources because govs lack information in allocating them to most benefit society
  • Individual consumers + producers have the best knowledge and therefore allocation of resources should be left to them and price mechanism.
  • P. Mechanism is a signalling device between consumers and producers and will allocate resources efficiently.

Economics (3 decks)

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