Theme 1.1: Nature of Economics Flashcards
(23 cards)
Positive statement
Statements that are objective and can be tested with factual evidence.
Normative statements
Based on value judgements that are subjective and based on opinion rather than factual evidence.
Basic economic problem
Wants are unlimited and resources are finite, so choices have to be made.
opportunity cost
The opportunity cost of a choice is the value of the next best alternative forgone.
Capital description
goods, machines and buildings
Entrepreneur
Someone who takes risks, innovates and uses FOP.
What 2 things can PPFs show?
-The maximum potential of an economy
-The opportunity cost of using scarce resources.
The law of diminishing returns
When additional units of a variable input (usually labour) are added to fixed inputs (usually land and capital), and after a certain point, the marginal product will fall.
Who came up with the idea of specialisation?
Adam smith
What are 3 advantages of specialisation?
-Higher productivity and efficiency – e.g. rising output per person hour
-Lower unit costs leading to higher profits
-Encourages investment in specific capital, economies of scale
What are 3 disadvantages of specialisation?
-Risk of worker alienation and boredom
-Risk of disruptions to production process
-Risk of structural unemployment due to occupational immobility
What are the 4 functions of money?
medium of exchange, measure of value, store of value, method of deferred payment
Who are 2 free market economists?
Adam Smith and Friedrich Hayek.
What is a free market economy?
Where governments leave markets to their own devices, so the market forces of supply and demand allocate scarce resources. No government intervention.
Why is Adam smith a free market economist?
He believes in the invisible hand theory. That prices are determined by the spending votes of consumers and businesses.
Why is Friedrich Hayek a free market economist?
He believes that government intervention makes markets worse.
3 advantages of free markets
-Efficiency: Competition incentivizes firms to produce efficiently and innovate.
-Consumer Choice: Consumers have a wide range of choices in products and services.
-Economic Growth: Free markets can lead to rapid economic growth and higher living standards.
3 disadvantages of free markets
-Inequality: Income and wealth disparities can be significant.
-Lack of Public Goods: Some essential services may be underprovided without government intervention (e.g., public healthcare).
-Boom-Bust Cycles: Free markets can be prone to economic cycles of booms and busts.
What is a command economy?
Where governments allocates all of the scarce resources in an economy to where they think there is a greater need.
What did Karl Marx believe?
The free market is unstable. Profits created come from the exploitation of labour.
3 advantages of command economy?
-Equality: Command economies aim to reduce income inequality through central planning.
-Stability: Central control can provide stability during crises.
-Prioritizing Social Goals: Resources can be directed toward public services and social welfare.
3 disadvantages of a command economy?
-Lack of Incentives: Central planning may discourage innovation and individual initiative.
-Resource Misallocation: Inefficient allocation of resources can lead to shortages or surpluses.
-Bureaucracy: Command economies often involve complex bureaucracies.
What is a mixed economy?
A balance between command and free market economies.
