Flashcards in Chapter 1: The basic economic problem Deck (57):
What is the basic economic problem?
Scarce finite resources and infinite wants.
What does a society have to decide as a result of the basic economic problem?
What goods to produce, how to make them and who should receive them.
What are the four factors of production?
Land, labour, capital and entrepreneurship.
What does land entitle?
All natural resources such as land, minerals, rivers, oil and the sea.
What does labour entitle?
The quantity and quality of people available for work.
What does capital entitle?
Anything made for the purpose of further production such as tools, machines and factories.
What does entrepreneurship entitle?
It is entrepreneurs who take risks in the pursuit of profit.
What is the definition of opportunity cost?
The cost of the next best forgone alternative.
What does the PPC show?
It shows all the maximum combinations of two goods that an economy can produce with a given set of resources.
Why is a point outside the PPC completely unattainable unless what occurs?
A point outside the PPC is unattainable due to scarcity unless the PPC were to shift outwards.
Why is a point inside the frontier wasteful?
Not all the resources are being used which is inefficient.
What is the opportunity cost of moving onto the frontier?
The opportunity cost of producing more of either good is zero as nothing has to be forgone in order to produce more.
Why does technology allow for the PPC to shift outwards?
It allows us to make more goods with the same set of resources.
What happens to the PPC if there is a technological advance in one industry alone?
The PPC pivots outwards rather than moving parallel to the old PPC.
What is another factor (other than technology) that can push the PPC outward?
The discovery of new resources.
What can PPC's be used to show the concept of?
Opportunity cost (as well as scarcity and choice).
What is referred to as constant returns?
Giving up constant amounts of resources in one industry and getting constant amounts of resources used in another industry in return.
What does a straight-line PPC show?
A constant opportunity cost.
Why is a curved PPC more realistic?
Resources can't be switched between industries with perfect ease in real life.
What yields diminishing returns?
The returns we get from switching resources get lower and lower.
What are some examples of natural advantages that a country might have that allows them to specialise in the production of something?
Climate, raw materials, cheap labour, skills or technology.
What are the advantages of specialisation?
Total output of goods and services is raised, quality can be improved, more wants and needs may be satisfied (due to a higher output at a lower cost), consumers have improved access to to a greater variety of higher quality products, it increases the size of the market and increases competition.
Why is competition good?
It helps to keep prices down and it maintains low inflation.
What are the disadvantages of specialisation?
It may eventually reduce efficiency and increase unit costs as unrewarding and repetitive work lowers worker motivation and productivity, workers begin to take less pride in their work and quality suffers, some workers receive narrow training and may not be able to find an alternative job (structural unemployment), mass-produced standardised goods tend to lack variety and if one machine breaks down then the entire factory stops.
What is an economic system?
A particular set of social institutions which deals with the production, distribution and consumption of goods and services in a particular society.
What is a market economy?
Individuals own private property, consumers are free to choose what products they buy and privately owned firms compete against each other to make goods for profit.
What is a planned economy?
The state owns the factors of production and all the decisions of what, how and for whom are made by the government.
What is a mixed economy?
An economy which adopts a mixture of the two systems.
What has trade and technology allowed us to do?
Make and consume more goods.
What is the price system?
When prices are determined by the interaction of supply and demand.
What happens when demand exceeds the available supply?
Prices are driven upward.
What is the equilibrium price?
The final price at which demand is equal to supply.
What functions do prices serve?
Rationing, providing incentives and signalling.
What are the advantages of a free market economy?
Choice, efficiency (as prices are determined solely by the forces of supply and demand), firms are provided with an incentive to innovate and produce high quality goods and services as consumers are sovereign - pressures of competition drive inefficient producers out of the market.
When do the disadvantages of the free market system occur and why?
When the market fails and this happens due to issues of inequality, asymmetric information and externalities.
What are incomes determined by?
Ownership of the four factors of production.
What are normative statements?
Subjective statements/opinions about what ought to be or what should be happening, they are said to carry value judgements.
What are positive statements?
Objective statements that can be tested or rejected by referring to the available evidence
What is division of labour?
The assignment of different parts of a manufacturing process or task to different people who have skills for that certain task (they are specialised) in order to improve efficiency.
How can the PPC shift outwards?
By increasing the quantity of factors of production (land, labour, capital and entrepreneurship) or by increasing the quality of factors of production (education and technology).
Give examples of different types of technology that have allowed for the agricultural industry to produce more food with a fraction of the resources we once used.
Increased mechanisation, improved skills and biotechnology.
What does a straight-line PPC imply?
Resources are perfect substitutes.
What does a curved PPC imply?
Resources are imperfect substitutes.
What is the division of labour?
When individuals are allowed to perform tasks in which they have skills for.
Other than technology, what has led to an increase in our living standards?
What is the advantage of dividing up labour and specialising?
The welfare of the group is higher than if everyone attempts to be self-sufficient as long as everyone swaps their gains.
What is the central feature of a free market system?
Its reliance on the price system.
What are the advantages of mixed economies?
People are able to reap the benefits of the taxes they pay through social security programs, roads and other government services.
What are the disadvantages of mixed economies?
People have no say over the taxes they pay and often complain about them.
What indicates whether a supplier should make more or less of a product?
The signals coming from the market.
What causes suppliers to respond to market signals?
Their desire to maximise their profits.
Why are consumers in an economic democracy in a market system?
They vote with their money for the products that they want.
Why does consumer sovereignty prevail in the market system?
Any producer that fails to respond to consumer demand will go out of business.
What is the effect of firms trying to maximise their profits and what does this lead to?
They want to reduce their costs of production as much as possible and this leads to an efficient use of resources.
What is the distribution of income?
This shows how evenly incomes are distributed within the population.
Why is inequality a significant failure of the market system?
It leads to the provision of luxuries for the rich before others have the basic necessities of life.