Nature of economics Flashcards
(33 cards)
What does ceteris paribus mean?
It means “all other things being equal” – used to isolate the effect of one variable in an economic model.
Why can’t economists carry out scientific experiments like in natural sciences?
Because it is often impossible to control all variables in real-world economic scenarios.
What is a positive economic statement?
A statement based on facts and can be tested or proven true/false.
What is a normative economic statement?
A value-based opinion that cannot be tested or proven.
What is the basic economic problem?
Scarcity – unlimited wants with finite resources.
What is the difference between renewable and non-renewable resources?
Renewable resources can replenish naturally over time; non-renewable ones cannot.
What are opportunity costs?
The next best alternative foregone when a choice is made.
What does a Production Possibility Frontier (PPF) show?
The maximum productive potential of an economy when all resources are fully and efficiently used.
How is opportunity cost shown on a PPF?
As the trade-off between two goods – producing more of one means producing less of the other.
What does a shift outward of the PPF represent?
Economic growth – the economy can now produce more of both goods.
What does a shift inward of the PPF represent?
Economic decline – possibly due to war, natural disasters, or loss of resources.
What indicates efficient vs. inefficient allocation on a PPF?
• Efficient: Any point on the curve.
• Inefficient: Any point inside the curve (resources underutilized).
• Unobtainable: Any point outside the curve (not possible with current resources).
What causes a movement along the PPF?
A reallocation of resources from one good to another.
What causes a shift of the PPF?
A change in the quantity or quality of resources or technology.
What is the difference between capital and consumer goods?
• Capital goods: Used to produce other goods (e.g. machinery)
• Consumer goods: Used by consumers for personal use (e.g. food, clothing)
What is specialisation in economics?
When individuals, firms, regions, or countries focus on producing a limited range of goods or services to increase efficiency.
What is the division of labour?
The breaking down of the production process into smaller tasks, each performed by a different worker.
What did Adam Smith say about the division of labour?
In The Wealth of Nations, he argued that division of labour increases productivity and efficiency, using the example of a pin factory.
What are the advantages of specialisation and division of labour in production?
• Increased efficiency and output
• Workers become more skilled
• Lower production costs
• Time saved switching tasks
What are the disadvantages of specialisation and division of labour?
• Work can become repetitive and boring
• Greater risk of structural unemployment
• Interdependence can cause problems if one part of the chain fails
What are the four functions of money?
- Medium of exchange – used to buy and sell goods
- Measure of value – compares the worth of goods and services
- Store of value – retains value over time
- Method of deferred payment – used to settle debts in the future
What is a free market economy?
An economy where resources are allocated by the forces of supply and demand, with minimal government intervention.
What is a command economy?
An economy where the government makes all decisions about resource allocation and production.
What is a mixed economy?
An economy that combines elements of both free market and command systems – the government and market both play a role.
