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Economics - Introduction to markets and market failure > The nature of economics > Flashcards

Flashcards in The nature of economics Deck (32):

What are positive economic statements?

Positive economic statements are based on facts that can be proved and disproved. They can be verified as true by reference to the date or by a scientific approach.


What are normative economic statements? (3)

Normative economic statements are statements based on value judgements meaning they are impossible to prove or disprove.
They are usually associated with economic policy discussions and relate to what:
1) Might be good or bad.
2) Might be fair or unfair.
3) Should be or ought to be.


What is the basic economic problem?

The basic economic problem is that people's wants are infinite while resources are limited. This is the reason for the economic problem of scarcity.


What choices must be made about resources? (3)

1) What to produce and how much to produce?
2) How should the goods and services be produced?
3) How should the goods published be allocated?


What are the resources of a country referred to as?
Name all four.

The resources of a country are referred to as the factors of production. Four factors of production may be identified:
1) Land - includes all natural resources, ra w materials, the fertility of the soil and resources found in the sea.
2) Labour - this refers to the physical and mental effort that goes into the production of goods and services.
3) Capital - any man-made aid to production including factory buildings, machinery, offices and It equipment which are used to make other goods and services.
4) Enterprise - The entrepreneur performs two essential functions:
a) Bringing together the factors of production so that goods and services can be produced.
b) Taking the risks involved in production.


What are renewable resources?

Renewable resources are resources that can be replaced naturally after use, they are sustainable unless they are consumed quicker than they can be replaced.


What are non-renewable resources?

Non-renewable resources are resources that will eventually be completely depleted.


Define opportunity cost.

Opportunity cost is the benefit that would have arise if resources had been used to produce the next best alternative when a choice is made.


What are economic goods?

Economic goods are goods that are made from resources that are scarce in supply, so that the goods themselves are scarce and therefore command a price.


What are free goods?

Free goods are goods which are unlimited in supply, consumption by one person does not limit consumption by another. The opportunity cost of consuming these goods is zero.


What does a PPF show?
What can be said about points inside and outside of the PPF curve.

A PPF shows the maximum potential output of an economy when all resources are fully and efficiently employed.
Any points inside the PPF curve represent levels of output which are obtainable.
Any points outside the PPF curve represent levels of output which are currently unobtainable.


What are capital goods?
What are consumer goods?

Capital goods are goods required to produce other goods, both capital and consumer.
Consumer goods are goods that give satisfaction or utility to consumers.


What is marginal analysis concerned with?

Marginal analysis is concerned with the impact of additions and subtractions from the current situation, the rational decision maker will only decide on an option if the marginal benefit outweighs the marginal cost.


In the instance of PPFs what is economic growth.

In terms of PPF analysis, economic growth is referred to as an increase in the productive potential of the economy or output of the economy, indicating an increase in real output.


What is economic decline?

Economic decline refers to decrease in the productive potential or output of the economy, indicating a decrease in real output. This is shown by an inward shift of the PPF.


What will be the impacts of reducing production of consumer goods in order to produce more capital goods?

A reduction in the production of consumer goods will lead to a fall in current living standards. However, in the long run, the increased production of capital goods will cause an increase in the productive potential of the economy resulting in an eventual rightward shift of the PPF. In the long run there could be an increase in the production of capital and consumer goods leading to a rise in future living standards.


What factors may cause an outward shift of the PPF curve? (5)

1) Discovery of new natural resources, e.g. oil.
2) Development of new methods of production which increase productivity.
3) Advances in technology.
4) Improvement in education and training which increase the productivity of the workforce.
5) Factors which lead to an increase in the size of the workforce, e.g. immigration, or an increase in the retirement age.


What factors may cause an inward shift of the PPF? (4)

1) Natural disasters.
2) Depletion of natural resources.
3) Factors causing a reduction in the size of the workforce, e.g. emigration.
4) Deep recession, resulting a loss of productive capacity, such as factories closing down.


What is the meaning of the division of labour?

The division of labour is when workers specialise in very specific tasks, the work is divided into smaller parts so that each worker is responsible for a very small part of the product or service being provided.


What are the advantages of the division of labour? (5)

1) Each worker specialises in tasks for which he/she is best suited.
2) Therefore, each worker only has to be trained to complete one task.
3) Less time is wasted because a worker no longer has to move from one task to another.
4) In manufacturing this allows a production line to be set up and allows for increased use of machinery.
5) In turn, this helps to increase the productivity and to reduce the average costs of production.


What are the disadvantages of the division of labour? (4)

1) Monotony and boredom for workers which could result in a fall in productivity.
2) Loss of skills: workers trained in one particular task have only limited skills, this could be a problem if they are made redundant.
3) A strike by one group of workers could bring the whole production process to a standstill.
4) There is lack of variety because all produced on a production line are the same.


What are the advantage and disadvantages to the specialisation of trade?

If a country specialises in the production of certain goods and services and then trades these in exchange for goods and services that it does not produce, then it can benefit from increased output, greater choice and lower prices.
This could mean that a country becomes overly dependent on imported goods and services. If its goods and services are not competitive then there could be unemployment and the country's value of imports may persistently exceed the value of exports.


Give three reasons why the division of labour may be limited.

1) The size of the market - if there is only a small market then it will be difficult to specialise.
2) The type of the product - for example designer fashion products are likely to be unique and not suitable for the division of labour.
3) Transport costs - if these are high then large-scale production and the division of labour may not be possible.


What are the functions of money?

1) As a medium of exchange - enabling people to specialise, exchanging money earned from doing a specialist job for the goods and services they wish to buy.
2) A store of value - enabling people to save in order to buy goods in the future.
3) A measure of value - enabling people to assess the value of different goods and services.
4) A means of deferred payment - enabling people to buy goods and pay for them on credit.


What is a free market economy?
What are the characteristics of a free market economy? (5)

The free market economy is one in which the questions about how to produce and allocate resources are determined by market forces.
The main characteristics are:
1) Private ownership of resources.
2) Market forces, i.e. supply and demand determine prices.
3) Producers aim to maximise profit.
4) Consumers aim to maximise satisfaction.
5) resources are allocated by the price mechanism.


What is a command economy?
What are the main characteristics of a command economy? (5)

The command or centrally planned economy is one in which the questions about scarcity are determined by the state.
The main characteristics are:
1) State ownership of resources.
2) Price determination by the state.
3) Producers meet production targets set out by the state.
4) Resources are allocated by the state.
5) There is greater equality of wealth and income than in a free market economy.


What is a mixed economy?

The mixed economy is a mixture of the command economy and the free market economy. In these economies some resources are allocated by the price mechanism and some are allocated by the state. What differs between countries is the degree of the mix.


What are the advantages of free market economies? (6)

1) Consumer sovereignty - spending decisions by consumers determine what is produced.
2) Flexibility - the free market system can respond quickly to changes in consumer wants.
3) No officials are ned to allocate resources.
4) Competition and profit motive help to promote an efficient allocation of resources.
5) Increased choice for consumers compared with a command economy.
6) Economic and political freedom for consumers and producers to their own resources.


What are the disadvantages of free market economies? (5)

1) Inequality - those who own resources are likely to become richer than those who don't.
2) Trade cycles - free market economies may suffer from instability in the form of slumps and booms.
3) Imperfect information - consumers may be unable to make rational decisions if they have inadequate information or if there is asymmetric information.
4) Monopolies - There is a danger that a firm may become the sole supplier of a product and then exploit consumers by charging prices higher than the free market equilibrium.
5) Externalities - these are costs and benefits which are not taken into account when goods are produced and consumed.


What are the advantages of a command economy? (5)

1) Greater equality - the state is able to ensure that everyone enjoys a minimum standard of living and that no one is rich.
2) Macroeconomic stability - the state can ensure that booms and slumps are smoothed out.
3) External costs and benefits may be taken into account when planning production.
4) No exploitation - there is no exploitation of workers and consumers by privately owned monopolies.
5) The state can ensure that all workers are employed.


What are the disadvantages of the command economy? (4)

1) The absence of the profit motive and competition may make the allocation of resources inefficient.
2) The absence of the profit motive may reduce incentives for investment.
3) Restrictions on freedom of choice, people would be directed into the jobs deemed to be needed by the state.
4) Shortages and surpluses - if the state miscalculates supply and demand then there may be excess supply/demand of goods and services.


What is the role of the state in mixed economies?

1) Defence and internal security.
2) Provision of public goods.
3) Provision of essential public services - e.g. education and health.
4) Redistribution of income from the rich to the poor.