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ECONOMICS REVISION GUIDE > Section 1 - The Economic Problem > Flashcards

Section 1 - The Economic Problem Flashcards

1
Q

What is the order of methodology in economics?

A
  1. Develop theories and create economic models
  2. Use simplifying assumptions to limit the number of variables
  3. Test theories against relevant known facts (making use of observations, deduction, graphs, stats and other tools)
  4. Use of empirical data
  5. Use economic models to make predictions
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2
Q

What does ‘ceteris paribus’ mean?

+ how does it link to economics

A

“All other thing remain equal”

When looking at two variables, we assume they are the only 2 factors that change

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3
Q

What are the 4 things which economic decisions may be based on?

A
  1. Normative statements
  2. Moral view and value judgement
  3. Political judgment
  4. Short term positive consequences
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4
Q

What are the 2 types of statements?

A
  • positive
  • normative
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5
Q

What are positive statements? + example

A

Are objective statements that can be tested by referring to the available evidence

  • “ A reduction in income will increase the amount of people shopping in pound shops”
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6
Q

What is a normative statement? + example

A

Are subjective statements which contain a value judgement - they’re opinions

  • “The use of fossil fuels should be taxed more highly than the use of renewable fuels”
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7
Q

What is the basic economic problem?

A

Infinite wants but finite resources

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8
Q

What are the 4 factors of production and their rewards?

A
  1. Capital
    - interest
  2. Enterprise
    - profit
  3. Land
    - rent
  4. Labour
    - wages
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9
Q

LAND AS A FACTOR OF PRODUCTION

  1. What is it
  2. What natural resources are included
  3. What are all natural resources on land considered to be
  4. What’s the one exception
  5. Their reward
A
  1. The territory and all the earths natural resources on it
    • non renewable resources e.g. natural gas
    • renewable resources e.g. wind or wood
    • materials e.g. gold
    • water
    • animals
  3. Finite
  4. Air
  5. Rent
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10
Q

LABOUR AS A FACTOR OF PRODUCTION

  1. Definition
  2. Name if people have more value or productive in a workplace
  3. Their reward
A
  1. The work done by those people who contribute to the production process
  2. Human capital
  3. Wages
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11
Q

CAPITAL AS A FACTOR OF PRODUCTION

  1. Definition
  2. Why is capital different from land
  3. Who pays for most of the economies capital + give an example
  4. Their reward
A
  1. The equipment, factories and schools that help produce goods and services
  2. Because capital has to be made first
  3. Governments e.g. a country’s road network
  4. Interest
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12
Q

ENTERPRISE AS A FACTOR OF PRODUCTION

  1. Definition
  2. Their reward
A
  1. Refers to the people (entrepreneurs) who take risks and create things from the other 3 factors of production
  2. Profit
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13
Q

What is the purpose of an economic activity?

A

To increase people’s economic welfare

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14
Q

What is the definition of ‘goods’?

A

Physical products you can touch e.g. books

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15
Q

What is the definition of ‘services’?

A

Intangible things e.g. teaching

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16
Q

What are the 3 fundamental questions linked to producing goods and services?

A
  • what to produce?
  • how to produce it?
  • who to produce it for?
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17
Q

What are the 3 agents within an economy?

A
  • producers
  • consumers
  • governments
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18
Q

What are producers?

A

Firms or people that make goods or provide services

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19
Q

What are consumers?

A

People or firms who buy the goods or services

20
Q

What are governments?

A

A government sets the rules that other participants in the economy have to follow, but also produces and consumes goods and services

21
Q

What is assumed about agents of an economy?

A

It is assumed they are rational and make decisions which are best for themselves. These decisions will be based on economic incentives

22
Q

What does a production possibility frontier/curve (PPF/C) represent?

A

Shows the maximum amount of two goods or services an economy can produce

23
Q

What is a trade off linked to PPF’s?

A

When you have to choose between conflicting objectives because you cant achieve all your objectives at the same time. It involves compromising and aiming to achieve each of your objectives a bit.

24
Q

Are all points on a PPF curve productively efficient or allocatively efficient?

A

Productively efficient because all resources are being used efficiently as possible to produce the maximum possible output.

It wouldn’t be allocatively efficient as not all points will reflect the production of goods and services that people want or need

25
Q

What does a point inside the PPF represent?

A

An economy that is productively inefficient

26
Q

Definition of opportunity cost of a decision?

A

The next best alternative forgone

27
Q

Why is opportunity cost so important to be represented in economics?

A

It is used to ensure a more efficient allocation of resources

28
Q

What are some problems with using the concept of opportunity cost? (4)

A
  1. Often not all alternatives are known
  2. Some factors don’t have alternative uses
  3. There may be a lack of information on alternatives and their costs
  4. Some factors (e.g. land) can be hard to switch to an alternative use
29
Q

What 3 main things could cause an increase in the PPF?

A
  1. Improved technology
  2. Improvements to labour
  3. Increased resoruces
30
Q

What is the thing most likely to cause a decrease in the PPF?
+ what does it show about the economy

A

A natural disaster where factors of production are lost

+ negative economic growth

31
Q

What is a free market?

A

A market that allocates resources based on supply and demand and the price mechanism. Anything can be sold at any price that people will pay for it

32
Q

What are the pros of a Free Market Economy? (3)

A
  1. Efficiency
    - any product can be bought or sold, only those of the best value will be in demand. So firms have an incentive to try and make goods in as efficient a way as possible
  2. Entrepreneurship
    - the rewards for good ideas (e.g. new products) can make entrepreneurs a lot of money. Encourages risk taking and innovation
  3. Choice
    - incentives of innovation can lead to an increase in choice for consumers
33
Q

What are the con of a Free Market Economy? (3)

A
  1. Inequalities
    - market economies can lead to huge differences in income. Controversial as large differences can be viewed as unfair > in a completely free market, anyone not working would receive no income
  2. Non profitable goods may not be made
    - e.g. drugs for rare medial conditions as not many are needed
  3. Monopolies
    - market dominance occurs
34
Q

What is a Command Economy?

A

In a command (or planned) economy, its the government (not market) that decides how resources should be allocated

E.g. communist countries > USSR

35
Q

What are the pros of a Command Economy? (3)

A
  1. Maximise welfare
    - govs have more control so can prevent inequality and redistribute income fairly. Ensure production of goods which are needed and beneficial for society
  2. Low unemployment
    - gov can try to provide job + salary to everyone
  3. Prevent monopolies
    - market dominance prevented
36
Q

What are the cons of a Command Economy? (3)

A
  1. Poor decision making
    - a lack of info means govs may make poor and slow decisions about what needs to be produced
  2. Restricted choice
    - consumes have limited choice in what they can consume + firms will make what they’re told to make
  3. Lack of risk taking and efficiency
    - no incentive to incr efficiency, take risks or innovate because they don’t need to make profit
37
Q

How does market failure occur?

A

When free markets result in undesirable outcomes

38
Q

How can governments intervene in market failure (not in depth)?

A
  • change law
  • offer tax breaks
  • create incentives
  • can buy or provide goods and services
39
Q

What are privately owned businesses and the government know as in a mixed economies?

A

Privately owned businesses > private

Gov > public

40
Q

Definition of a mixed economy?

A

An economic system combining private and state enterprise

41
Q

Key ideas of Adam Smith? (1723-1790)

A
  • big believer of a free market +
    ‘invisible hand’
  • consumers + producers motivated by self interest
  • for free market to work, cannot be monopolies + barriers to entry must be low
  • wrote about specialisation + the division of labour
42
Q

Key ideas of Karl Marx? (1818-1883)

A
  • critical of free market + argued created a small ruling class of producers (the bourgeoisie) that exploited the larger working class (the proletarial)
  • led to rise of communism in 20th century
43
Q

Key ideas of Friedrich Hayek? (1899-1992)

A
  • keen supporter of a free market + critic of command economies
  • govs shouldn’t intervene
44
Q

P12

A
45
Q

P13

A
46
Q

P14

A
47
Q

P15

A

ECONOMICS REVISION GUIDE (14 decks)

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