Introduction to Microeconomics Flashcards
(12 cards)
What is the definition of economics?
Economics is the study of the social relations of production and distribution and how different societies cope with the basic economic problem of scarcity. It also examines how humans make rational decisions to satisfy their needs and wants.
What is the difference between economic goods and free goods?
Free goods are abundant and do not have a market value, e.g. oxygen or sand. Economic goods are scarce and have a market value because they are limited in supply, e.g. books or cars.
What is the fundamental economic problem that all societies face?
The fundamental economic problem is scarcity. This arises because human wants are infinite, but resources are limited. This forces societies to make choices about what to produce, how to produce, and for whom to produce.
What are the four factors of production and their corresponding factor payments?
Land - Natural resources (e.g. minerals, agriculture) - Payment: Rent
Labour - Human effort and skill - Payment: Wages
Capital - Physical tools, machinery, and buildings - Payment: Interest
Enterprise - Entrepreneurial ability to organize production - Payment: Profits
Explain the concept of opportunity cost with an example.
Opportunity cost is the value of the next best alternative that is forgone when making a decision.
Example: If you have £10 and spend it on a book, the opportunity cost is the 10 music tracks you could have bought instead.
Who are the three key economic agents, and what decisions do they make?
Households - Make decisions on consumption and supply of labour.
Firms - Make decisions on production, pricing, and supply.
Government - Makes decisions on taxation, regulation, and public goods provision.
What is marginal analysis in economic decision-making?
Marginal analysis involves evaluating the additional (marginal) benefits and costs of a decision. People or firms assess whether the extra benefit of an action justifies its additional cost.
What does the Production Possibility Curve (PPC) show, and what does a movement along the curve indicate?
The PPC shows the maximum combination of two goods that can be produced with the available resources. A movement along the curve indicates an opportunity cost as resources are reallocated between goods.
What are the key differences between a free market economy, a mixed economy, and a planned economy?
Free Market Economy: Resources are allocated by market forces (supply and demand) with minimal government intervention.
Mixed Economy: Combines elements of both market and government intervention.
Planned Economy: The government makes all decisions regarding the allocation of resources.
How does specialisation and the division of labour help address the problem of scarcity?
Specialisation increases productivity as firms (or countries) to focus on specific production / output therefore using resources more efficiently. This leads to greater output and lower costs, helping to make better use of scarce resources. Division of labour is when tasks are broken down into smaller parts so workers become more skilled and can work more quickly, increasing productivity. Wastage is reduced and so allocate efficiency improves.
How do incentives influence the behaviour of economic agents?
Incentives, such as prices and profits, drive decisions in a market economy. For example, falling prices can encourage consumers to buy more of a product, and high profits can incentivise firms to increase production or enter a market. In planned economies, government incentives replace market signals.
What is resource allocation and how does it relate to economic growth?
Resource allocation decisions, such as investing in capital for future production or focusing on current consumption, impact long-term growth. A shift outward in the PPC indicates long run economic growth, often due to improvements in resources, technology, or efficiency.
