microeconomics 1.1 Flashcards
(19 cards)
What does ceteris paribus mean?
‘For all things equal.’
What’s the difference between a positive and normative statement?
a positive statement is factual and can be tested off of evidence; whereas, a normative statement is based off of opinions.
What is the economic problem?
We have finite resources so will need to make a choice.
What is opportunity cost?
The next best alternative forgone.
What are the factors of production?
Land, Labour, Capital and Entrepreneurship .
What is a PPF
Production possibility frontiers (PPFs) depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed. PPF curves can show the opportunity cost of using the scarce resources. For example, if the scare resource is milk, there is a trade-off between producing more cheese or more yoghurt from the milk. The PPF can show this.
How does a PPF show economic growth and decline?
Growth = outward shift. Decline = Inward shift.
What is specialisation?
Specialisation occurs when each worker is completes a specific task in a production process. The concept was famously stated by Adam Smith, who showed how, through the division of labour, worker productivity can increase. Firms can then take advantage of increased efficiency and lower average costs of production.
Advantages and disadvantages of specialisation?
Adv:
- Higher output and quality as workers focus on what they’re good at doing.
- Can be a greater variety of goods and services produced.
- There are more opportunties for economies of scale so the size of the market increases.
- There’s more competition, giving firms incentive to lower their costs and therefore keep prices low.
Dis:
- Work becomes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity. Workers could become dissatisfied.
- There could be more structural unemployment, since skills might not be transferable, especially because workers have focused on one task for so long.
- By producing a lot of one type of good through specialisation, variety could in fact decrease for consumers.
- There could be higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly.
What are the four functions of money?
- Medium of exchange.
- A measure of value.
- A store of value.
- A method of deferred payment.
What is meant by ‘a medium of exchange’?
Without money, transactions were conducted through bartering. Goods and services were traded with other goods and services, but people did not always get exactly what they wanted or needed. The goods and services exchanged were not always of the same value, which also posed a problem. Exchange could only take place if there was a double coincidence of wants, i.e. both parties have to want the good the other party offer. Using money eliminates this problem.
What is meant by ‘a measure of value’?
Money provides a means to measure
the relative values of different goods and services. For example, a piece of
jewellery might be considered more valuable than a table because of the
relative price, measured by money. Money also puts a value on labour.
What is meant by ‘a store of value’?
Money has to hold its value to be used for payment. It can be kept for a long time without expiring. However, the quantity of goods and services that can be bought with money fluctuates slightly with the forces of
supply and demand.
What is meant by ‘a method of deferred payment’?
Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. This relies on money storing its value.
What is a free market?
Where governments leave markets to
their own devices, so the market forces of supply and demand allocate scarce resources.
Adv and Dis of free market?
Advantages:
o Firms are likely to be efficient because they have to provide goods and services demanded by consumers. They are also likely to lower their average costs and make better use of scarce resources. Therefore, overall output of the economy increases.
o The bureaucracy from government intervention is avoided.
o Some economists might argue the freedom gained from having a free
economy leads to more personal freedom.
o Disadvantages:
o The free market ignores inequality, and tends to benefit those who hold most of the wealth. There are no social security payments for those on low
incomes.
o There could be monopolies, which could exploit the market by charging
higher prices.
o There could be the overconsumption of demerit goods, which have large negative externalities, such as tobacco.
o Public goods are not provided in a free market, such as national defence. Merit goods, such as education, are underprovided.
What is a ‘Command Economy’ (Adv and Dis)?
This is where the government allocates all of the scarce resources in an economy to where they think there is a greater need. It is also referred to as central planning.
o Karl Marx saw the free market as unstable. He saw profits created in the free market as coming from the exploitation of labour, and by not paying workers to cover the value of their work. He argued for the “common ownership of the means of production”.
o What to produce: determined by what the government prefers
o How to produce it: governments and their employees
o For whom to produce it: who the government prefers
o Advantages:
o It might be easier to coordinate resources in times of crises, such as wars.
o The government can compensate for market failure, by reallocating
resources. They might ensure everyone can access basic necessities.
o Inequality in society could be reduced, and society might maximise welfare rather than profit.
o The abuse of monopoly power could be prevented.
o Disadvantages:
o Governments fail, as do markets, and they may not be fully informed for what to produce.
o They may not necessarily meet consumer preferences.
o It limits democracy and personal freedom.
What is a ‘Mixed Economy’ (Adv and Dis)?
This has features of both command and free economies and is the most
common economic system today. There are different balances between
command and free economies in reality, though. The UK is generally considered quite central, whilst the US is slightly more free (although the
government spends around 35% of GDP) and Cuba is more centrally planned.
o The market is controlled by both the government and the forces of supply and demand.
o Governments often provide public goods such as street lights, roads and the police, and merit goods, such as healthcare and education.
o What to produce: determined by both consumer and government
preferences
o How to produce it: determined by producers making profits and the
government
o For whom to produce it: both who the government prefers and the
purchasing power of private individuals.
