1.1 Nature of Economics

Cards (76)

  • economic models
    a simplified representation of a real-world economic situation that is used to analyse + understand the underlying economic principles at work
    built on assumption about how people, firms and markets behave, use mathematical + statistical techniques to make predictions + and test hypotheses about economic phenomena
  • economic assumption
    a simplified statement about how people. firms or markets are expected to behave in a given situation
  • ceteris paribus
    all other factors remain equal
  • factors of production
    an input that allows production to take place
    • land - use of world's resources, reward is rent
    • labour - people's efforts, reward is wages
    • capital - machinery (or possible financial assets), reward is interest
    • enterprise - the ability to bring them all together, reward is profit
  • a good
    anything that brings you some benefit even if it has negative elements
  • a bad
    something that has no positives at all
  • opportunity cost
    what you give up by making another choice - the value of the next best alternative
  • basic economic problem
    unlimited wants for limited resources
  • allocative efficiency
    using resources as effectively as possible to meet the most highly valued needs and wants
  • economic objective
    an economic outcome that economic agents (individuals, firms, governments, not businesses or companies) want to achieve
  • individual economic objective
    higher income leading to a higher consumption of goods
  • firms economic objective
    maximise profits, satisficing profits
  • government economic objective
    economic growth, provision of services, low unemployment, low and stable inflation
  • positive statement
    a statement that you can test - doesn't necessarily have to be true
  • normative statement
    opinion based, is not a statement that can be tested
  • a market
    where two groups of people come together - buyers and sellers
    each has its own aims and each has its own theories that determine behaviour
  • the law of diminishing marginal returns
    if you keep adding more of the same thing without changing anything else, the impact will become less
    diminishing - getting smaller
    marginal - impact of the last unit
    returns - positive thing we get from the input
  • Production Possibility Frontier
    shows how much an economy can produce given the existing available resources, compares two different products to show the trade-off between production of the two products as resources are switched between them
  • assumptions of PPF
    all factors of production are variable (movable)
    all workers have the same skills and abilities
  • PPF shows the combinations of 2 goods (or type of good) that can be produced by an economy at a given time period
    illustrates the opportunity cost of producing each good
  • straight line PPF
    gradient = opportunity cost
  • curved PPF
    fixed factors - land and some capital
    variable factors - labour and some capital
    short run - fix some factors and keep others variable
  • curved PPF
    all resources are being used anywhere on the curve and productive efficiency is achieved
    anything outside of the curve is currently impossible given the current resources
    anything inside the curve means not all resources are being used
  • what causes a shift outwards in the PPF
    added capital and labour - increase training, demographic changes, immigration of skilled workers
    improvement in technology
    high productivity/efficiency
    better management
    discovers/extraction of new natural resources
    innovation and invention of new products
  • what causes a shift inwards in the PPF
    resource depletion - resources wearing out
    large scale net outward labour migration
    damaging effects of natural disasters
    trend decline in productivity
    destruction/loss of factor of production inputs (caused by civil wars)
  • division of labour
    individual people allocated to a specific task
  • specialisation
    being good at a specific task which makes their task be faster and have higher quality, improves/increases output
  • agglomeration
    the benefits that come when firms and people locate near one another - arts centre with museums, galleries, cafes etc
  • advantages of specialisation
    increased efficiency
    increased output
    PPF shifts outwards
    economy grows
    GDP growth
    surplus output - can be traded internationally
    higher profits for firms/businesses
    lowers unit cost of supply (high productivity)
  • disadvantages of specialisation
    no transferable skills
    product quality goes down when workers get bored (low productivity) - unrewarding, repetitive work
    mass produced standardised goods - lack of variety for consumers
    worker may take less pride in the work
    people may choose to move to less boring jobs, high labour turnover
    may receive little training and be unable to find alternative jobs
  • capital goods
    goods that are used to make consumer goods and services
    capital inputs include fixed machinery, hardware, software, new factories and other building
  • consumer goods
    goods and services which satisfy our needs and wants directly
    sub division between:
    • consumer durables
    • consumer non-durables
    • consumer services
  • production
    a measure of the value of the output of goods and services
  • productivity
    a measure of the efficiency of the factors of production measured by output per person employed or by output per person per hour - measures the efficiency of the production process
  • functions of money
    • store of value - remains as money, not a perfect store of value due to inflation
    • means of exchange - intermediary between buyers and sellers
    • unit of account - common denominator
    • standard of deferred payment - buy today and pay later (loans)
  • characteristics of money
    widely accepted
    hard to counterfeit
    durable
    holds its value over time
  • economic system
    a network of organisations used to resolve the problem of what, how much, how and for whom to produce
  • Command economy
    Also known as a centrally planned economy, the government has significant control over economic activities
  • Command economy
    • Government ownership of most resources and industries
    • Centralised decision-making by the government or central authority
    • Limited consumer choice, as production is geared towards meeting government-set priorities
    • Focus on collective goals rather than individual preferences
    • Little room for private entrepreneurship and innovation
  • Command economies have been associated with socialist and communist regimes, where the state takes a dominant role in economic planning and resource allocation