Theme 1 Flashcards
What was Adam Smith known for? (specialisation)
Adam Smith stated the concept of specialisation and the division of labour and
showed how it can increase labour productivity (output per worker), allowing firms
to increase efficiency and lower their costs of production.
Advantages of division of labour
● The division of labour enables labour productivity to be increased . Workers will be
quicker, better and more efficient as they are concentrating on one thing and so can
quickly develop their skills.
● This may also lead to a higher quality of goods and services, since workers are
more skilled at their jobs.
● Time is not wasted moving between jobs and getting out tools etc.
● Workers only need to be trained to do one specific task , rather than many, saving
time and money.
Disadvantages of division of labour
● If someone is only doing one specific task, it can make work very boring which will
lead to poor quality of work and people leaving the business. Firms can take some
action to reduce this, for example by playing music.
● If for some reason production in one process is delayed, every other task has to stop
until that problem is solved.
● The workforce do not have wide industrial training and could therefore suffer from
structural unemployment.
Disadvantage of specialising in the production of goods and services to trade
● Countries may become over-dependent on one particular export and if this fails their
economy may collapse. For example, many developing countries specialise in
farming and if crops fail due to weather they will have no income . Areas such as
Manchester suffered high unemployment as traditional areas of employment, like
shipbuilding, became less important.
● Other countries specialise in non-renewable resources and these could run out,
which will result in a huge loss of income for that country. It will also mean the loss of
these resources.
● There will be high interdependence and this will cause problems if trade is
prevented, for example because of war.
● Some say that increased specialisation means there will be more competition to cut
costs and therefore wages will fall, but this is not necessarily true.
What are the functions of money?
- A medium of exchange: It can be used to buy and sell goods and services and is
acceptable everywhere. - A measure of value: It can compare the value of two goods, such as a table and a
skirt. It is also able to put a value on labour. - A store of value: It is able to keep its value and can be kept for a long time. With
barter, goods such as fruits often went out of date and so could not keep their value - A method for 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.
What was Adam Smith known for?
Adam Smith believed in a free market economy as competition would benefit consumers through lower prices
However he stated that the Government should also intervene through the provision of goods/services the free market wouldn’t provide e.g. laws, roads, property rights.
What was Friedrich Hayek known for?
He argued that state control of the economy leads to the loss of
freedom. He believed that the poor in free market (or freer market) countries were better off
than those in command economies because at least they had personal freedom
Advantages of a free market economy
● Consumers have freedom of choice, called consumer sovereignty.
● There is high motivation as people know working hard could lead to high potential
rewards, creating conditions where initiative and enterprise flourish.
● There is political freedom.
● Because firms are in competition, they will produce goods at the lowest cost they
can, ensuring productive efficiency.
● In general, freer market economies tend to have higher growth.
Disadvantages of a free market economy
● There tends to be high levels of inequality, since the rich own more factors of
production and so can grow richer.
● If competition disappears then there may be monopolies, who charge high prices
and offer low quality of service.
● There is the problem of externalities.
Command economy
In a command (planned) economy, all factors of production, except labour, is owned by
the state and labour is directed by the state
What was Karl Marx known for?
believed in the command economy and criticised capitalism. Marx
believed that capitalist’s profit came from exploiting labour as they underpaid workers for the
value that they actually created. He wanted remove the difference between the incomes of
owners and workers and believed that capitalism would collapse leading to communism.
Advantages of a command economy
● The state provides a minimum standard of living , ensuring no one is extremely
poor as there is less inequality.
● There is less wastage of resources as there is no need for competitive services nor
advertising, which is very expensive.
● Standardised products means that they are produced cost effectively.
● As the government, who are generally motivated by the wellbeing of the country,
rather than the companies, who are motivated by profit.
Disadvantages of a command economy
● Decision making will be slow as it has to go through various stages and there could
be an increase in bribery and corruption (an increase in bureaucracy).
● As everyone receives the same wage, there is less motivation and efficiency
because people know that working harder will not increase their standard of living.
● Consumers lose their freedom and it is often led by dictators.
Mixed economy
both the free market mechanism and the government allocate a significant amount of the total resources in the country
Roles of the Government in a mixed economy
- Creating a framework of rules: They prevent the abuse of monopolies
- They produce public and merit
goods, such as emergency services and transport, and limit the production of demerit
goods - Redistributes income: They move income from one group of people to another,
from the rich to the poor e.g. income tax - Stabilises the economy: The government will attempt to manage the level of
demand in the economy to prevent extremes of too much or too little demand. They
do this through fiscal and monetary policy
